Long gone are the days when asset managers relied on Green Guides and paper documents were stored in fireproof filing cabinets. Dexter Van Dango examines data-driven processes, blockchain technology and the demise of traditionally documented transactions. He urges equipment finance companies to challenge their thinking about all aspects of the business before they are left behind.
Business as usual is a thing of the past. The demand for new ways of doing business is influencing people, processes and technology. If you are not adapting to these changes, then the world may pass you by.
What am I referring to? Nearly everything.
Let’s start with data-driven decisions. Whether you know it or not, you already use data-driven decisions if you rely on credit scoring, Dunn & Bradstreet business analytics or even your Outlook email program. For example, I wanted to send a friend an email commenting on his company’s recent acquisition by a regional bank. To my surprise, he wasn’t listed among my contacts. So I went to my personal email to look up his address. When I began typing it into Outlook, the system populated the address after a few letters. My friend was not listed among my contacts, but I had previously sent him emails, and Outlook had retained the data.
If that sounds too simple, here is another example. Monitor’s Jan/Feb issue usually features my TOP Picks article, in which I review trends, opportunities and predictions for the coming year. Late last year, I received an email from Rita Garwood, managing editor for Monitor, asking me to consider another topic this year. She said,
“Looking back over the last 12 months, your least popular article was TOP Picks. However, your most popular was the Uberization of Vendor Finance (our No. 2 article of the year in terms of popularity!).” The data doesn’t lie.
From Gut Instinct to Data-Driven Deductions
The theme of this issue is asset management. Years ago, when a sales person presented his or her asset management team with a deal for residual evaluation, old guys with pencils behind their ears and pocket protectors took a look at the selling price, gazed through the current Green Guide books to see their estimates, then made a ‘gut’ decision of what the residual value should be for a particular piece of construction equipment. Today’s remarketing analysts search electronic databases to learn what the current and trending auction prices reveal about the equipment. They weigh geographic and seasonal differences before deducing a data-driven decision on the estimated orderly liquidation value and fair market value for the piece of equipment.
The role of the asset manager has changed, driven by customer demand for usage versus ownership of equipment. In markets that keep and use equipment for long periods of time, such as machine tools, the process may not change as rapidly as markets like information technology and software. In the past, it was common to have a low percentage of fair market value leases in the technology space. In this changing market, we see more clients wanting to pay for what they use without owning the hardware or paying the full cost of a software license. The original equipment manufacturers and software developers have grown accustomed to this phenomena while banks and independent lessors are facing another challenge in this area. Are you prepared to deal with this changing customer behavior?
Call it the digitization of business information, the more information you collect, the more useful it becomes in making data-driven decisions.
To get a broader perspective on digitization, I asked Gary Amos, CEO Commercial Finance — Americas at Siemens Financial Services, who provided a well thought-out response: “Today’s equipment and leasing market finds itself entering a new era as more firms are moving toward financing business outcomes rather than financing a single technology investment directly. With the online convergence of the real and virtual worlds — through the Internet of Things (IoT) — financing models serve as the key to enabling the next generation of equipment and technology. The financing solutions of tomorrow will improve the connectivity of information across industries and support organizations adapting to the digital transformation. This will result in improved performance management of assets, monetized services that will drive better outcomes and a smarter, more digitalized approach to business.”
All Aboard the Blockchain Bandwagon
The methods businesses use to pay and account for commercial transactions are also changing. Are you ready to employ blockchain technology in your business? Despite the hype surrounding the concept of blockchain and ledger technologies, most people are not up to speed. If a client walked into your business and offered to close a lucrative financing arrangement for a lease or a loan but she insisted on paying with Bitcoin, Etherium or Ripple — the top three cryptocurrencies — would you know how to account for the transaction? Would you even know where to start or how to identify the value of the currencies?
It might be time to jump on the bandwagon and learn more about distributed ledger technology. Imagine worldwide distribution of U.S. dollars without the monitoring or control provided by the Federal Reserve and U.S. Treasury. According to Wikipedia, “distributed ledger technology is a consensus of replicated, shared and synchronized digital data geographically spread across multiple sites, countries or institutions. There is no central administrator or centralized data storage. One form of distributed ledger design is the blockchain system, which can be either public or private.” Blockchain was created to support Bitcoin using algorithms and distributed data structure to manage electronic cash without a central administrator — such as the Federal Reserve — among people who don’t know one another.
During one of the breakout presentations at the Equipment Leasing and Finance Association’s annual convention in October, one presenter encouraged the audience to consider blockchain to be the tracks and cryptocurrencies to be the trains. A simpler example, one that actually relies upon various bank regulators and administrators, is the global ATM network. When you need cash in local currency anywhere in the world, you simply visit your local ATM and withdraw available funds from your account. You don’t ask how it got there or how the network is constructed. You simply trust that for the amount tendered in local currency your account will be debited an equivalent amount of U.S. dollars. You trust the system.
“Blockchain should cause all of us to rethink ‘best’ practices and start focusing on ‘next’ practices,” says Kevin Bryant, CEO of Educated Change, a London-based firm which helps educate business leaders on the use of technology and social media. “The blockchain is the next market influencer, game changer, not just in leasing but across all industries. In today’s world, by the time something is considered a ‘best practice,’ it is out of date. Blockchain will put your ‘best’ practice out of existence, it will Uberize those who are not prepared.” Bryant recommends looking at IBM’s car leasing blockchain solution and beginning to rethink your “next best practice.”
I am no expert on distributed ledger, blockchain or cryptocurrencies. However, I am certain that each will play an active role in the equipment leasing and finance industry over the coming years. If you fail to learn about it or adapt to it, you may find yourself left behind.
Goodbye, Traditionally Documented Transactions
Our industry has grown comfortable with a number of standard transaction types. We use leases, loans, installment payment agreements, equipment finance agreements, cost per copy, fee per procedure and a number of customized variations of these documents to meet specific market needs. Some industry participants originate new business directly, while others buy deals through vendors or captives using purchase, assignment or discounting agreements. Whether acting as originator or buyer, we always expect a certain set of standard provisions will be present, including proof of acceptance by the obligor, a clear commencement date, a defined periodic payment amount and due dates, along with some form of hell or high water provision that represents a firm commitment from the customer to repay their obligations to the financing party.
Well, times are changing.
Customer behavior has noticeably shifted away from a desire to own equipment and toward a demand for products and services that enable customers to achieve desired outcomes. Industry leader DLL calls it servitization, a term it attributes to a 1988 article in the European Business Journal. Along with the changing behavior comes a demand for flexibility. Customers are often less willing to make firm term contractual commitments, instead requiring the ability to terminate and return some or all of the products or undelivered services whenever their needs change.
These changing customer demands have forced vendors and lenders to revisit the need for standard legal provisions in their transaction documents, especially the hell or high water provision. Traditional lenders cannot afford to bear the operational risks represented by the more flexible and less stringent contract terms. Equipment manufacturers, software developers, dealers and distributors will be required to bear a fair share of the risk if the model is to succeed.
Transaction documents may not be paper any more, representing another shift. Between electronic documents, electronic signatures and vaults owned by funding sources where the chain of custody is recorded and preserved, we have come a long way from the fireproof Steelcase filing cabinet sitting in the corner of the office. The future is now.
We are no longer dealing with standard operating procedures, and the pace of change is accelerating. This is definitely not your father’s leasing company. To succeed in this new era, now is the time to challenge your thinking about business as usual.
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