The project is one of the largest, most comprehensive studies ever produced by the Foundation. It is decidedly forward thinking with a focus on optimizing and automating transaction origination business processes. For many members of our industry, this means automating one of the last areas of manual transaction processing — paper lease/loan agreements and related documentation.
Introduction
Industry analysts see significant growth in process automation. “According to Gartner, the application of fully electronic processing to automate currently manual-intensive business processes is growing at a compounded annual growth rate of 40-45%. While a large part of this growth is in government, the most rapid growth is in financial services.”1
Mike Leichtling, Foundation chairman, says the timing is right for the study. “Paperless transactions are in various states of adoption in other similar industries and it is a logical progression for paperless transactions to become a bigger part of equipment finance, as well,” he remarks.
This study offers both critical thought and helps frame answers to a number of important questions regarding adoption of paperless transactions across our industry. An abridged list of topics discussed in the study includes:
Is our industry ready to make a move to paperless transactions? Is there a potential for a first-mover advantage?
This article summarizes and expands on the findings of the report to help readers fully understand the potential future impact of paperless transactions in the equipment finance industry. For a deeper briefing on the topic, reading the full report is recommended.
Paperless Benefits
What business challenges are paperless transactions trying to solve? Saving money and speeding processes are two of the most common answers.
Think about a typical equipment finance transaction. Most involve documents. These documents can require many signatures, disclosures and other transaction-related paperwork. This paperwork has to be created, routed, printed, copied and mailed to the customer. Once received back from the customer, the documents need to be audited, processed and stored. Other interested parties, including business partners, financing sources and regulatory agencies, also require access to these documents from time-to-time.
Some firms have gone paperless through imaging and document management systems that scan, index and store each paper document in an electronic format for retrieval as needed. This is as far as firms go today, but it does not capture the full promise of going paperless.
A paperless transaction, in its purest sense, means never creating a piece of paper. This is accomplished through the automatic generation of electronic transaction documentation (an electronic contract) from the transaction origination system and routing of the document to the customer for signing using an electronic signature.
Manual Processes Prevail in the Industry
In recent years, many members of the equipment finance industry have focused on reducing their reliance on manual processes to improve their efficiency, strengthen profitability, enhance the customer experience and, for some, to use process efficiency as a source of competitive differentiation.
The study postulates that our industry has a high reliance on manual processing. This clearly is an understatement.
The results of a recent Equipment Leasing and Finance Foundation informal Web survey focusing on member transaction origination processes helps illustrate the level and extent of manual processes being used in transaction origination.
A summary of notable findings indicate that:
It should be noted that follow-up conversations with survey respondents reporting the use of electronic contracting systems reveal all but a select few paperless pioneers still require a hard-copy, signed agreement to book a deal, even in the highly automated “minimal” touch transactions referenced above.
The survey respondents’ open-ended comments reveal the depth of automation varies significantly across our industry— usually driven by the ticket size of the transaction and the “speed premium” required to compete in a specific market niche, for example, vendor financing.
Manual information capture is typical for big- and mid-ticket transactions. Web-based front-ends with automated customer or prospect information capture and manual downstream processing are next on the automation continuum. Fully automated, minimal-touch originations, automated credit scoring and system-generated documentation are typical for segments with the largest transaction speed premium — small and micro-ticket.2
Not all transactions are well suited for taking paperless transactions into the mainstream. These include large- and medium-ticket transactions with unique structures, or those that require specialized agreements.
Smaller ticket “flow” and vendor transactions, however, can leverage standardized documentation, automated processes and process speed as competitive advantages. They are logical candidates for paperless technologies as early adopters.
Obstacles to Paperless Adoption
Survey respondents brought forward a number of obstacles to greater adoption of paperless business processes. The reasons vary, including lessee acceptance of paperless documentation, other internal projects competing for funding, uncertainty of their technology platform’s capabilities in generating electronic contracts, and legal counsel and business partner comfort with paperless agreements and digital signatures.
The study suggests full acceptance of the purest form of paperless transactions depends on the equipment finance industry adopting some form of paperless standard. Standards will help sanction the use of electronic contracts by secondary markets and rating agencies.
This does not mean paperless transactions in the equipment finance industry are decades away. With the amount of manual processing in place, there is plenty of room for improvement. The study looks to other segments of the finance industry to help show the way toward industry-wide adoption of paperless documentation.
Paperless In Other Finance Segments
The study also postulates that greater industry acceptance of paperless opportunities in other financial services sectors, such as retail automotive financing, mortgages, variable annuities and related secondary markets, and rating agencies, will eventually prompt acceptance in the equipment finance niche.
The study points to three industries already actively engaged in paperless initiatives — the mortgage, automobile finance and variable annuity finance segments.
The mortgage industry has created voluntary technical standards to enable the creation of standardized electronic documentation. It has been somewhat successful in working with secondary markets to accept electronic documentation. For example, Freddie Mac and Fannie Mae will accept electronic documentation that follows certain formats.3
It should not be construed that paperless transactions have completely proliferated the nation’s mortgage companies. The eMortgage (the functional equivalent to electronic contracts) is still in relative infancy with minimal market penetration. But the mortgage industry is in active dialogue with secondary markets to evangelize business benefits.
The retail automobile finance industry has developed a set of legal standards for the handling of electronic chattel paper, thereby placating the secondary markets. There has been significant investment in paperless transactions by GMAC, Ford Motor Credit, Toyota Financial Services and DaimlerChrysler Financial. These companies have combined forces to standardize and automate the origination process.
With active industry involvement, retail auto finance is much further along in the adoption curve with electronic contracts being commonplace. Ratings agencies are on-board with legal standards, thereby improving penetration.
The variable annuity industry discussed in the study is another example of an industry that is going the standard-setting route to satisfy the ratings agencies and regulators. Once implemented, the standards are expected to reduce errors and improve the customer experience. The payback quoted in the Foundation study is amazing — “Some estimates show that electronic processing time will be less than 10% of the time current paper-based processes consume.”4
The Role of Technology
Both the study and the survey point to the need for technology, primarily transaction origination systems (e.g., front-end systems) to do the heavy lifting when it comes to implementing and integrating paperless business processes.
What types of transaction origination systems are well suited to paperless transactions? The answer lies in the flexibility of the application to both create and manage documentation at a financial product level.
Generally speaking, older, more hard-coded origination systems will be less suited to paperless transactions. Newer generation, financial product-based packages, which enable automated transaction workflow, are usually best suited to creating and managing paperless transactions.
The Legal Infrastructure
The adoption of electronic contracts in our industry will result in the use of new terms describing events in the transaction life cycle. The study discusses these terms both in the current and future states.
A common response from industry members is that they want to implement electronic contracts and signatures, but have not been able replicate the comfort of a paper agreement brought to their legal counsel, rating agencies, syndicators and other interested parties.
The Foundation study discusses this as well. “While automation of the equipment lease and finance industry has been steadily developing over the last decade, the legal framework for engaging in electronic transactions, including the ability to replace paper and ink writing and signing requirements with electronic signatures, is still in its nascent stage.”5
This report also discusses how two important legal frameworks, the Electronic Signatures in Global and National Commerce Act (ESIGN) and the Uniform Electronic Transactions Act (UETA), are providing the legal basis for adoption of electronic contracts. “With the passage of ESIGN and the adoption of UETA in most states [collectively referred to as the ‘eCommerce laws’], the legal base now exists for the creation of the e-contract.”6
The study also discusses how, under the eCommerce laws, loan and lease agreements can be:
The study also discusses how legal concepts, such as “control” and “authoritative copy” found in Article 9 of the UCC, come to play in electronic contracting. The legal framework is in place for further integration of paperless transactions.
Conclusion
For a forward-thinking firm, “Paperless Transactions: The Competitive Edge” is a comprehensive look at a promising strategy for improving their business processes and operational efficiency.
Is the paper lease and loan agreement going to go away any time soon? Probably not. Is there room for our industry to follow the lead of others and take a pragmatic approach to both improving transaction automation and implementing paperless transactions? Yes — there is something here.
There is a business problem that needs to be solved. The legal framework is in place. The technology is known. The business processes are known.
Is the equipment finance industry ready for paperless transactions? As they become more and more accepted by other financial segments, legal comfort is addressed and people grow more comfortable with electronic documents, it will be easier than ever to become a first mover.
Steve LeBarron is a vice president with CHP Consulting, a technology provider and management consulting firm serving the global equipment leasing and finance industry. LeBarron has more than 24 years of experience in the equipment and vehicle leasing and finance marketplace. LeBarron is a frequent presenter at leasing-related trade association conferences, and has authored or co-authored articles published in trade periodicals on a variety of topics.
LeBarron is a member of the Equipment Leasing and Finance Foundation research committee and has served as a member of the ELA Operations and Technology Conference planning committee. He can be reached at 952-926-1405 or by e-mailing [email protected].
For a complete copy of the study, visit www.leasefoundation.org.
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