Typically, the sales force represents a substantial portion of an equipment finance organization. In the case of banks and independent funding sources, they can choose to employ a direct sales force or work with a channel of indirect originators commonly referred to as IOs or TPOs (third party originators). One of the main advantages to the indirect channel is it provides variable cost as opposed to a fixed cost, reducing the breakeven point and propelling profitability. Trained and experienced IOs also improve operational efficiencies by investigating and evaluating transactions prior to submission, resulting in a lower cost of origination for a funding source.
According to Monitor 100 data, the indirect sales channel originated $14.5 billion of new business volume in 2020. Over the last five years, the increase in indirect sales volume is in step with direct channels and slightly less than the vendor channel. New originations for 2021 are forecast to increase 10.8%, and it will be interesting to see if this includes indirect originations. Businesses at every level were disrupted in 2020 and have continued to be in 2021. Over the next year or two we will find out if the indirect sector of equipment finance was nimble and able to adjust or if the COVID-19 pandemic’s effects on the economy hasten disintermediation of this channel.
Digital Disruption: Friend or Foe
Over the last few years, equipment finance companies have begun to implement the use of portals to process transactions on the front-end. This streamlined data entry process has drastically improved efficiencies for direct and indirect sales reps entering transactions directly into databases and scoring modules as well as the sharing among the parties involved. The COVID-19 pandemic has accelerated these digital transformations and fundamentally changed the way we work. According to Pew Research, 71% of the workforce have worked from home during the pandemic and only 13% have found technology and equipment challenging or difficult for them to perform in their job. The implementation of these types of digital portals likely has played a large part in the success of this transition.
This trend is now evolving and changing the way banks and funders communicate with their end-users on the back-end. For example, if a customer wants to change a payment due date or ACH debit account, they must create a username and password to access the system and request these changes. This creates and interesting dilemma for the indirect originator by compromising the ability to communicate with customers about ongoing matters such as payment due date changes, balances and payoffs. These points of contact are a value-added aspect of an indirect lending relationship. New business is the name of the game for IOs; however, customer retention is equally important for companies in business for the long run. Portals are altering the transaction life cycle in addition to customer retention. Although the portal is marketed as making it easier and more cost efficient for everyone to do business, it is most often a one-way access point and is knowingly or unknowingly being used in disintermediation. IOs must also learn to use automation to retain their service role with their clients. In some ways, the implementation of these types of portals is squeezing out the indirect originator for future sales opportunities, yet they are a necessary risk.
Is the evolution of technology and the self-service approach reshaping the sales force as we know it or is it just changing the way we typically look at how our companies are organized? Are we heading into a time when the sales team will be in part, if not fully, automated by algorithms and artificial intelligence? The answers to these questions may be coming along sooner than we expected.
Economic Opportunities: M&A and Stimulus
There are economic factors among the current challenges facing indirect originators as well. Interest rates remain low, stimulus money has buoyed businesses and everyone is searching for increased yields on investment. This has resulted in a surge of merger and acquisition activity. According to Forbes, “Globally, an all-time record of $1.77 trillion in M&A transactions were announced through the first four months of 2021. That’s up a whopping 124% compared to last year, and it’s 10% higher than the first four months of any other year on record.” The equipment finance sector is keeping pace with this trend.
Monitor reported 11 M&A transactions in 2020 compared with 12 in 2021 as of writing and the trend is forecast to continue. This impacts the indirect channel of originations in several ways. First, companies making acquisitions (the buyer) may provide a new source of financing for an independent originator. However, often the buyer has no understanding of the indirect sales channel nor the signed agreement that exists between the seller and the IO. At the same time, many end-users are seeing the company name on their billing statement change again and again. This dilutes the relationship between the indirect originator and the end-user and the ability for an indirect originator to obtain information on existing or terminating contracts can become arduous if not impossible at times. This also has a negative effect for end-users making payments via ACH, as they have no idea who owns the contract or who to contact with questions about their contract. This can erode confidence and trust between the end-user and their originator.
Relationship Lending: Here to Stay
The reality is the self-service approach is going to challenge the ability of the indirect sector to succeed in the A-credit small-ticket market. However, there is an entire universe of equipment finance that does not fall into this arena and requires the indirect originator to source financing.
Indirect originators who are in business for the long haul conduct due diligence to fully investigate the merits and weakness of each transaction. They then match these transactions to the banks and independents with the appetite for the equipment financing being considered and provide a new source of credit beyond what a bank’s line of credit would allow. This role is vital in all cases but particularly for B, C or story credit transactions. Someone recently joked with the me that the only reason you would need an IO or broker is if you lived in a cave and didn’t have internet. But the reality is many people still enjoy interacting with real humans and are even willing to pay a little extra for the white glove treatment.
I look forward to growing my business in a healthy economy that conducts itself responsibly and ethically, a place where technology provides us all with the opportunity to improve communication and marketing effectiveness at a far lower cost than ever before. Banks and funding sources make the decision to support and invest in the indirect channel for their source of origination and the IOs make the decision about who they will trust with their client database and relationships. The responsibility lies with all parties to build partnerships based on mutual trust, mutual commitment, shared ideas and common goals.
Theresa Kabot is the founder of Kabot Commercial Leasing (KCL) and K2 Funding Group. She is an active member of the National Equipment Finance Association and the American Association of Commercial Finance Brokers. She currently serves on the board of directors of the Certified Lease & Finance Professional Foundation and Monitor’s editorial board. In 2019, Monitor recognized her as one of 50 most influential women in equipment finance.
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3 Replies to “Progress or Peril: Current Challenges Facing Indirect Originators”
Excellent and thought-provoking. The landscape is indeed changing as we never could have foreseen. What is a “relationship” when all communication is by email, phone and (maybe) Teams or Zoom? Thank you, Theresa.
Very well written and thought out! Very thought provoking as well as present solutions to the potential
Good article Theresa! Poses some interesting thoughts about the future role of TPO’s in this industry while illuminating past and present value-add of IO’s.