What’s Next in Equipment Finance’s Digital Journey?

by By Justin Tabone & Denis Stypulkoski Nov/Dec 2019
The first decade or so of digital transformation in equipment leasing and financing companies has happened in bespoke fits and starts. But as that work continues into the next ten years, digital coordination with vendors and different industry partners will become even more important.

Justin Tabone,
SVP of Originations, Vendor Equipment Finance,
TIAA Commercial Finance

Denis Stypulkoski,
TIAA Commercial Finance

The equipment finance industry has come a long way on digital transformation in the past decade. As we enter a new one, the next frontier will be completing the digital journey to encompass all points in the leasing life cycle.

Between 2016 to 2019, the overall rate of adoption for digital sales in business banking globally surged from 7% to 37%, according to a recent report from banking software firm Temenos. However, this impressive progress still lagged significantly behind categories such as personal banking and wealth management; it’s no secret that equipment finance has plenty of work to do.

Certain parts of leasing have been digitalized or automated for years. For example, credit scoring has been an algorithmic process for decades, so it translates easily to digital platforms. But other parts of the leasing cycle, like document management, have held fast to their analog roots and only recently have begun migrating into the digital world. In other industries, it would be unthinkable for document management to live offline today.

Over the years, equipment finance has taken cues from consumer brands both within and outside of financial services. For instance, what will it take for equipment finance to have the equivalent of two-day shipping and instant checking? There are a few key challenges to overcome.

Critical Disconnect: Direct Leasing and Vendor Finance at Different Points on the Journey

One important distinction to note is that direct leasing and vendor equipment finance are at different points in the digital journey.

Direct lenders have the flexibility to digitalize their processes and present them to customers. The customer then has a choice: accept this arrangement or find another option. This has allowed direct lenders to transform to digital more quickly without losing a critical mass of clients.

Vendors and other strategic partners, on the other hand, must approach digital transformation as a more customized and iterative process. Each partner will have different comfort levels with digitalizing different parts of the leasing lifecycle, so solutions must be more tailored. Without providing flexibility, the pool of customers shrinks considerably.

With this in mind, there are challenges for the entire industry, but hurdles can be especially high for vendor equipment finance.

Challenge #1: A Disparity in Approaches to Digital

When it comes to digital transformation, one thing is certain: you can’t just go out and buy a one-size-fits-all digital ecosystem.

This has proven to be a double-edged sword. On the one hand, lenders have been able to work closely with their strategic partners to build bespoke digital platforms that work better than an off-the-shelf approach. On the other hand, if you are a vendor, what happens if your digital approach with one lender does not square with the approach you’ve taken with others?

Vendors often find it difficult to navigate between disparate digital approaches taken by lender partners. These partnerships run deep; in many cases, digital platforms are co-developed between the engineering teams of lender and vendor. This ensures that both parties’ digital ecosystems are speaking the same language but requires a tremendous amount of work. These ecosystems, in turn, must be amenable to the customers with whom the vendor works. The number of relationships to balance can be unwieldy.

While these tailored relationships will continue, as time goes on, there will be more sharing of best practices within the industry, and existing processes will become more efficient. This will lessen the workload for adopters and make digital transformation more palatable.

Challenge #2: Integration is Fast, but Adoption Takes Time

There are significant technical challenges to bringing an industry into the digital age that has such a long history of analog processes. Building custom APIs and document libraries will challenge even a talented programming team. However, time spent on the integration itself is still much shorter than the time it takes for these practices to be adopted industrywide.

Vendors and customers dislike being forced to digitalize parts of the leasing process they might not be comfortable with yet. Instead, lenders should find ways to argue the business case for digital adoption and help their partners take the leap.

The business case is clear: digital transformation might impose short-term costs, but it more than pays for itself in the long term. The leasing process becomes more efficient, saving time and money both at the point of sale and throughout the life of the loan. Customers have a faster speed to cash, giving them easier access to the financing they need to grow their business. The upshot is a much better customer experience. Indeed, 95% of banks identified better customer experience as a primary reason to digitalize, according to a 2018 report from consulting firm Capgemini. A further 75% identified cost reduction measures.

Once this case is understood, though, how can lenders encourage their partners to put it into action? It helps to start at one point in the lifecycle and move forward step by step. For example, a common place for a digital integration to start is an API ecosystem or web portal for credit applications. Once this is successfully in place for a vendor and its customers, the next step might be to build document generation into this ecosystem, followed by other servicing processes such as booking, billing and disposition. This process is much easier to swallow than a total overhaul of the lifecycle all at once.

Challenge #3: Some are Further Along the Digital Journey Than Others

As mentioned previously, there are differences in digital adoption between direct and vendor-focused lenders, and there are some lending processes that are more digitally mature than others. To further warp the playing field, the adoption curve is another complicating factor.

From healthcare to manufacturing, there are a number of industries that rely on equipment financing, and not all of them are equally comfortable with the idea of digital leasing. Each of them has a different history with digital adoption. After all, it is much easier for a company to get on board with digital leasing if they are already using similar processes elsewhere in their business.

One industry that tends to be especially forward-thinking with digital lending transformation is healthcare. TIAA Bank’s healthcare team ran a pilot program with vendor partners and customers to introduce electronic document signatures — a small, but important step to making the leasing process more efficient. The pilot exceeded expectations, leading to a 100% adoption rate for e-signatures in this part of our business.

Not all adoption will be this quick. If you are lending across different industries, it’s important to understand that each will have their own experiences and pain points with digital transformation in other parts of their business. Of all the challenges, this one is the most out of lenders’ control but can be mitigated with deep industry knowledge. If you know a sector well and can explain to a customer or vendor how digital leasing can fit in even with their non-digital processes, then you are that much more likely to get the business.

Digital Adoption is Crucial to Being Competitive

Not everyone is at the same point in the journey to digitalization, but urgency will gain momentum in 2020. Entire industries like brick-and-mortar retail and media have already been shaken to their core by the shift to digital. Financial services is no exception, and the equipment finance world needs to continue adapting or risk losing its competitive edge.

So far, the equipment finance field has adopted digital transformation in pieces and on a bespoke basis with individual vendors and customers. Over the next decade, equipment finance will inevitably transform more holistically. Not only will it make vendors’ and customers’ lives easier, it will ensure that our industry continues to thrive.

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