How a Simple Idea Transformed the Equipment Finance Industry
by Dan Michalek June 2019
This year marks the 30th anniversary since Tim Berners-Lee invented the World Wide Web. It is challenging to fully understand the impact of how this has changed our lives. This one simple idea has transformed industries and given birth to companies like Amazon, Uber, and Netflix. However, when first conceived, there were many that questioned its use and others that said it could not be done.
I heard this time and time again back in the late ‘90s when I was envisioning the idea for a new company to be called PayNet (Payment Information Network). At that time, I was CEO of Connor Capital and was thinking about how ridiculous it was that we had to call our competitors to get information on how a potential customer paid on their equipment leases. In addition to the painful process, we were tipping off our competitors that their own customer was shopping for another lease. After selling my leasing business, I knew there had to be a better way.
Subsequently, I decided to launch PayNet with Bill Phelan. Initially, we interviewed chief credit officers in the industry to validate the need for this type of offering. Overwhelmingly, the research came back positive. Although the research validated the idea, it was challenging getting a “critical mass” of data for successful “hit rates.” The initial prospective leasing companies wanted to know “who else is on board?” The vast majority agreed that there was a need for the platform although progress was slow in building the database. We decided it would be best to build out the database by niche vertical markets. We targeted early adopters and they came forth! It only took a few initial major customers in each of these vertical markets to create the tipping point, which allowed others to follow. The business model of “give to get” still holds today and allowed us to build a phenomenal database with well over 90% client retention. Additionally, we formed a strategic partnership with the ELFA (formerly ELA) shortly after the founding of our company which provided tremendous validation. Our pitch to ELA was that working together, we will be strengthening the industry with better credit decisions leading to fewer failures of leasing companies, which in turn maintains a strong ELA membership.
This past April at the Funding Conference was PayNet’s 19th year in business! PayNet has become an integral part of the equipment finance industry, allowing its members to grow their business and make better decisions based on technology-driven data models. Without PayNet, it is fair to say that many lenders would have either stricter lending criteria or be making risky underwriting decisions that could lead to defaults.
Over the past few decades, there has been substantial advances in the use of technology but primarily on the origination side. Digital applications, e-docs, and auto-decisions have all transformed our market. This area continues to see new investment by many leaders in our industry and the advancement of this technology will flourish for years to come.
However, even with these advances, there are still areas that are stuck in the “dark ages” and are hindering the growth of our market. Each year marks new milestones for the equipment finance Industry, leading to my belief that we are falling behind in technology advancements in the syndication/secondary market. Like the mortgage industry, it is the secondary market that fuels the primary market.
It is estimated that over $200 billion of the $1.3 trillion in equipment finance originations are syndicated annually. These transactions are either syndicated at origination or after the transaction is booked. Each syndicated deal has a different story and reason behind the sale. It could be that the seller has too much exposure with the borrower or the industry. Otherwise, it could be their business model to focus on originations and generate fee income. After spending the past year obtaining a deeper understanding of the market, I know that there is a real need for change.
With all the advancements focused on the primary market with originations, the secondary market is still using antiquated technology like email, spreadsheets and data tapes to buy and sell billions from a limited group of buyers and sellers. The real market disruption would be to make the secondary market more accessible and efficient, which will provide a significant increase in origination volume. Ultimately, this will open equipment finance to a wider network of buyers and sellers.
After seeing the market opportunity, I decided to join Finance Exchange, which already had a successful origination platform. Soon after joining, we began building a platform to revolutionize syndication and the secondary market. Currently, I’m noticing parallels with the adoption of our newest platform similar to PayNet’s experience in the early days. I’ve always felt the syndication market would benefit if all this data on transactions were centralized in a secure environment. It’s outlandish to think about the amount of sensitive data, including personal and financial information, that is being sent in an unsecured manner across the internet. Our research indicated a desire for a more streamlined and efficient process to syndicate. •
Patrick Gaskins, Vice President of Financial Services, Corcentric Capital Equipment Solutions
The first step in developing a long-term equipment financing strategy is to identify all of the fixed and variable costs associated with operating your current fleet. Patrick Gaskins of Corcentric recommends developing a spend analysis to identify current and future potential purchases.
Kenneth P. Weinberg, Shareholder, Baker, Donelson, Bearman, Caldwell & Berkowitz
Usury laws vary from state to state, which can make a lease or loan more complicated when the lessor is in one state and the lessee in another. Kenneth Weinberg discusses how this has played out so far in the courts, with favorable rulings for a lessor often depending not only on who files first, but where they file from.