I recently had the opportunity to host 4 roundtable discussions with 65 equipment finance professionals. The participants represented a wide range of financial institutions across the United States, including large banks, captive financers, and small leasing companies. Prior to the event, I worried there would not be enough participants who outsource to spark a meaningful discussion. To my surprise, 34% of the roundtable participants said they outsource some portion of their equipment finance and lease lifecycle to third-party service providers, and their input gave great insight into how and why the industry is outsourcing.

Having worked in multiple banks and then for a global outsourcing company for many years, I always knew there was value in outsourcing. However, I never realized the prevalence of its use in the equipment finance and leasing industry until speaking with these finance professionals. To better understand the use and value of outsourcing to equipment financing and leasing, I asked participants to describe their outsourcing activity, including the items they outsourced, where they outsourced, and the third-party partners they worked with.  After engaging the group in discussion about their outsourcing strategies, the following themes emerged as being consistent across the industry:

Customer Experience is Top of Mind When Outsourcing Processes

Companies who outsource indicated they work with third-parties for a combination of origination and ongoing servicing activities. Origination activities included application intake, data entry and third-party due diligence of customers and prospects. On the servicing end, activities included customer billing, payment processing, tax administration, delinquent accounts collection and reporting. Interestingly, apart from delinquency collections, these outsourcing processes had no direct customer interaction. Those who outsourced felt that having the bank or equipment finance company manage the customer or prospect contact offered further opportunities to continue building the overall relationship. Additionally, all of these processes were managed by third-party service providers located within the United States.

Finding Value in Cost Savings and Speed

In terms of the value outsourcing provided, roundtable participants indicated the most immediate value is the cost savings. Even with the added cost of increased governance and audit frequency that is necessary for outsourcing, participants felt the overall positive contribution to the bottom line was significant enough to continue to outsource.

Outsourcing also proved to be valuable for more than just cost savings. Other participants added that, because of the niche focus of these service providers, outsourcers are often better and more efficient at these processes than their in-house counterparts.  Outsourcers, like many of today’s fintechs, are able to do this because the systems they utilize to perform these functions are purposefully and thoughtfully built for that particular service. This eliminates the need for a bank or finance company to acquire, develop or update the software to accommodate quickly changing market conditions.

Lastly, some participants even went as far as to say that the concept of outsourcing was now part of their ongoing business operating model. When properly executed and managed, the value of outsourcing in the equipment finance and leasing industry can not only reduce costs and create operational efficiencies, but also provide a competitive advantage, allowing organizations to expedite transactions throughout.

Collaboration and Communication Will Be Key To Industry-Wide Acceptance

While it’s fair to say that most roundtable participants seemed satisfied with the overall service being provided, they did echo some of the same concerns as those at the roundtable who did not outsource at all. By far, the largest concern was the risk that, if not properly managed, an outsourcing provider could create for their business. Participants recognized and have accounted for the need for additional governance to manage some of these third-party vendor risks. However, they are still concerned that under the current regulatory regime, they will be held liable for an outsourcer’s actions.

In a similar manner and also of regulatory concern, participants expressed concern about data security – especially in light of the media attention surrounding data breaches as of late.

Some of the less common concerns that emerged included SLA monitoring and management. While contractually memorialized, many of those who outsourced worried about meeting established service level agreements. Acknowledging this can be mitigated with a strong contract agreement including penalties for inadequate performance results, most participants indicated that if the issue was not chronic, the overall benefits outlined above were enough to accept the occasional variation from agreed upon service levels.

Perhaps the most striking of the challenges voiced by participants centered around collaboration and the outsourcer’s ability to be agile from a personnel aspect in a quickly changing industry. On this topic, participants pointed to human resource preparedness and training not being delivered by the outsourcer in a timely manner, which they felt could create some risk exposure for them, particularly from a regulatory standpoint.

Though many cited governance and third-party vendor management as a major concern, many participants admitted they don’t have a substantial amount of contact with the outsourcers. Perhaps this is due to roundtable participants not being directly involved in the auditing or vendor management aspects of the outsourcing relationship. Nevertheless, this observation reveals an opportunity for vendors to ease concerns through increased interaction.

As the use of fintechs continue to rise in popularity, my roundtable discussions indicated that outsourcing for the equipment finance and leasing industry seems to be well accepted, though to a lesser degree, for banks operating within this industry. As the industry continues to rapidly change, outsourcing has the potential to win over more of the equipment finance and leasing industry by leveraging its specialized skillset to help firms adapt quickly and at scale. What will it take to get there? Participant responses, especially regarding their concerns, demonstrated that increased collaboration between vendors and firms has the potential to not only increase customer satisfaction, but to increase the overall use of outsourced functions in the industry at large.