As Big Tech moves into banking and banks move into the direct channel, should third-party originators (TPOs) start looking for a new gig? Theresa Kabot says “no” and argues that brokers who know how to leverage their network and interpersonal skills will provide value-added financing services that even the best AI cannot deliver.
As the economy speeds along in overdrive, the need for financial products gears up, and the market is hot! The supply of money is plentiful, and everyone is looking for ways to invest and earn profitable yields. Money is the product and the internet is the delivery system. Quite a few banks are developing their own equipment finance divisions, and many are going direct. Let’s get right to it. Does this mean the end of the third-party originator (TPO) / broker?
The TPO has long been the fuel that feeds the financial products engine. The TPO’s ability to acquire and maintain numerous funding partnerships has been a vital service and product for both the manufacturer/vendor and the buyer. Not to mention the banks and private funding sources who use the TPO channel as their sales and marketing department to develop and close qualified leads. As per Paul Menzel, CEO, Financial Pacific Leasing, “Financial Pacific Leasing is particularly relevant because our TPO model allows us to outsource our sales and marketing overhead as a variable expense. As a result, we operate at a 27% efficiency ratio while most banks operate at close to 60%. We are happy to pay TPOs under this model.”
Banks continue to have large excess reserves and large amounts of capital for quality credits. I have seen multiple banks, national and community, looking for ways to diversify. Banks and funders that have long been considered ‘A’ credit lenders are venturing into the ‘B’ and ‘C’ world.
The number of banks developing equipment finance divisions has increased, and not all of them are using the TPO channel to develop this business. In fact, in 2019 our company experienced the end of two relationships with banks that shut down their broker channel to go 100% direct. This is not a fire alarm, just an observation worth noting. There is no shortage of private funding sources and banks looking to partner with trustworthy and knowledgeable TPOs. At the same time, if you are a TPO, don’t let your banks and funding sources mine your leads. Your company is not their free marketing department, and I encourage you to read my last article in the Monitor: “Bridging the Gap: Choose Your Partnerships Wisely.”
Is the internet going to put the TPO out of business? Online financing is becoming a key part of the chain. Everyone is using an online platform, portal or pipeline guaranteed to save time, save money and, more importantly, to collect and mine data. Technology ranging from web applications and social media to digital signatures, cloud-based servers, big data scoring tools and even artificial intelligence are leveling the playing field between TPOs, direct lenders, banks and Amazon. Yes, Amazon.
David vs. Goliath vs. Big Tech
So how should TPOs feel about banks going direct? The same way those banks should feel about Amazon Lending and Amazon Cash. In 2018 Amazon began collaborating with JP Morgan Chase and Capital One to take its Amazon Cash platform one step further toward a checking account product. Ron Shelvin, writing for Forbes, points out that the business model of big techs like Amazon, Facebook, Google and Alibaba rests on attracting many providers and consumers.1 The 2019 BIS Annual Economic Report 2019, states: “The essential by-product of this business is the large stock of user data which is utilized as input to offer a range of services that exploit natural network effects, generating further user activity. Increased user activity then completes the circle, as it generates yet more data.”2
Just as TPOs must find a way to differentiate themselves from banks and lenders that choose to go direct, banks and funding sources will have to find a way to differentiate themselves in the big tech arena.
Some may say these are the days of big banks, big finance, big tech, big grocery and big medicine. Are the days of the leasing and finance maverick over? I’m here to tell you that the days of the TPO are not over. True, an equipment finance TPO is going to have to work a lot smarter to differentiate itself and the value-added benefits that it brings to its customers, but the service it provides is still valued and needed.
Even with web applications, vendors don’t have the time to shop their transactions to the multiple finance companies who solicit them every day for business. They want to work with one company that can handle their start-up business as well as the challenged credits and established ‘A’ credit companies. Their expertise is in manufacturing and/or selling their equipment, not in figuring out how to finance it. Sure, they might have a bank that can offer a finance program and rubber stamp payment options, but the bank is not going to be the answer to the varied buyers that most equipment sellers deal with on a daily basis.
Banks & Funders
Banks cannot be everything to everybody. Not only can the TPO offer access to bank lines that would not otherwise be available, they do much more. Customers see value in the ability to contact a TPO with their financing needs, knowing that they have an intimate familiarity with their historical credit, present situation as well as a clear understanding of how they do business. A TPO is more than a broker; it is a trusted advisor. The TPO offers independent advice, which is not contingent on opening a checking account and has access to bank lines and sources of capital that would not otherwise be available. TPOs assist with everything from equipment financing to working capital, from receivables financing and commercial mortgages to retirement investment strategies. Of course, it is not advisable to try wearing all hats. Like banks, the TPO can’t be all things for all customers, but if it can’t provide the service or product, effective networking and technology gives it the ability to recommend someone who can.
Our digital world is rapidly changing, and so are the expectations of business owners. When I was getting impatient as a kid, my father would always say, “Theresa, the only place you can find instant pudding is in the grocery store.” Now, here I am living in an instant pudding world. Press a button and you’ve got it. Application-only products have gone from $50,000 to $500,000. However, these allow the TPO to be more efficient and build on marketing instead of focusing on selling. Some folks may say the internet is a force against the future of the TPO, but I contend that technology provides us all with the opportunity to improve communication and marketing effectiveness at a far lower cost than ever before. For a TPO who doesn’t have access to a large marketing department, this is a definite advantage.
Vendors that sell to a variety of credit qualities still rely on the TPO to place financing for their buyers. Savvy banks and independent funding sources still embrace the TPO network. They understand the TPO is out in the field talking to manufacturers, suppliers and end-users, investing the time needed to understand their customer’s business, how the equipment is used and their capital acquisition needs, which ultimately results in well-performing portfolios. They can rely on the TPO to conduct due diligence to submit and close the transactions that fit their footprint. Last, many argue the TPO will become extinct as a result of technology, but I contend that it levels the playing field. Nevertheless, it could be prudent to diversify. Successful TPOs who are it in for the long run take a holistic approach. They know how to leverage their network of contacts as well as their interpersonal skills to provide value-added financing services that even artificial intelligence like Watson cannot compute.