The UK asset finance marketplace is impacted directly and indirectly by many things. However, rather than talk on a grand scale about global trends. I want to try and focus in on the things that are impacting the UK market, particularly the unregulated asset finance space, now.
Asset Finance Lending – over the last 10 years the asset finance (unregulated) pace has grown consistently. Despite the economy cooling and the uncertainty around Brexit, the market continues to grow, albeit at a much slower pace. However, it is interesting to note that net new lending to PNFC’s is not growing. It is stable at best. One can, therefore, postulate that all other things being equal, asset finance is taking an increasing share of the UK lending market.
Bad and Doubtful Debts – after an unprecedented period of low-risk costs, the industry is now beginning to see risk costs rise. Back book spreads are under pressure and it is somewhat surprising that lessors are not moving more quickly to better insulate their businesses by way of increasing lending margins because the margins that we are currently seeing are not sustainable.
Disclosure/Transparency/Treating Customers Fairly - over the last five years we have seen a number of entrants into the market. These players have without exception adopted for an indirect distribution strategy which has seen broker distribution now reach an unprecedented £6 billion in value terms. However, I believe that it is merely a question of time before the FCA moves to make it mandatory that all commissions are disclosed. It is incongruous that in many cases the highest commission can so often be synonymous with the “best customer solution”.
Asset Management / Environmentalism – a “back to the future” view - regulatory and legal issues are driving an increasing need for both an effective and efficient asset management capability. The back to the future reference refers to my belief that lessors will need to do more than just finance assets. If we are to remain a differentiated and capital efficient industry/product, then we need to become more asset managers than mere asset financiers. There is also increasing pressure on equipment owners to be and be seen to be responsible when it comes to the disposal of equipment. Equipment lessors will come under increasing pressure to ensure that they are doing their bit. In addition, there are the first indications that lease financing structures are going to increase in popularity in the corporate space. Therefore, asset management skills and capabilities will be in short supply.
What are the challenges facing the financing of vehicles and equipment financing?
• A lack of a level playing field between authorised and non-authorised institutions
• Balancing technological speed with simplicity and value optimisation in the area of client on-boarding
• Information security and in particular the ability of banks to plug into cloud-hosted solutions
A level playing field in the form of regulation and compliance does not exist. “Authorised Institutions” wishing to play in this space have a lot more hoops to jump through than non-authorised institutions. These hoops culminate in what is a higher level of due diligence that needs to be attained relative to non-authorised institutions. This raised level of compliance requires banks to incur greater transaction costs in respect of client acquisition, as well as face greater operational and reputational risks associated with client dissatisfaction if they fail for whatever reason to meet the expectations of their clients. I am not for one second saying that KYC/ AML/Financial Crime checks and controls should not exist. What I am saying is that all parties in the provision of asset finance funding should be required to meet a consistent level of due diligence.
The need for speed and simplicity has generally been good for consumers and businesses alike. However, I do not see speed and simplicity as inextricably connected. That said, the growing influence of the “Millennial” generation means that speed and simplicity very often get conflated.
With respect to speed, I do feel that as an industry we are now in danger of being driven to focus on the wrong things. Broker and point of sale distribution models are predicated largely upon the speed of credit approval. The speed of credit approval is valued by end users but is very often valued more by the channel intermediary or vendor who use speed, amongst other things, to gain a greater degree of control over a sales opportunity than they would otherwise perhaps enjoy.
Speed in the regulated consumer space has a far more important role to play currently than in the corporate unregulated space where speed for speed’s sake may not necessarily lead to happy customers. My point is that speed can be a driver of value but the extent to which it is will be a function of two things – who the customer is and the business model deployed.
Simplicity, on the other hand, is something which I believe can be value enhancing and can provide the platform for the provision of a much better customer journey, experience and future interaction. In short, it can help provide the basis of a customer relationship. Using technology to simplify the on-boarding process is potentially far more value accretive.
Nowhere is this more evident today than in the area of KYC, AML and Financial Crime checks. Add to this the checks that a diligent provider needs to undertake in respect of KYS, KYA etc. Simplicity creates value where processes are simplified. The challenge and the value creation lies in making it as easy as possible for customers to do business with your organisation, whilst at the same time ensuring that relevant data (of whatever nature) can be captured once, and once only, on a right-first-time basis.
Information Security is the third point. It is increasingly the case that financial institutions are looking to third-party providers for solutions. There are particular challenges with regard to cloud hosted solutions and first and foremost amongst these is information security. The conundrum here is that financial institutions who look to deploy cloud-hosted solutions will be looking to ensure that their partners are “on the hook” for any data breaches. As such, it is very likely the case that banks will be looking for indemnities in respect of data breaches. The cloud hosting partners will be looking to do all they can to avoid and/or minimise the financial risks associated with data breaches as a fine of 4% of a bank’s global turnover could in many cases spell the end of many partner vendor businesses. The challenge is finding a way to square this particular circle.
What are the Opportunities within the Industry To-Day?
Back to the Future – the key opportunity is to build on research and acquire/develop asset management capability to drive better capital efficiency across the asset finance product range relative to traditional forms of bank lending. Once in situ, a developed platform should be used to drive asset finance forward by looking to its core historical roots and values. I suspect operating lease type financing structures will become increasingly important going forward. This will demand that those lessors that are up for the challenge finally gear up to become asset managers as opposed to just asset financiers.
Embracing Disclosure – the industry needs to embrace the very real prospect of disclosure. We cannot have the tail wagging the dog. If it does not then it is likely to be done for the industry. Over the last 10 years, we have seen asset finance grow in popularity. This has been more good luck than good management. However, it falls to present-day management to-day to capitalise on this situation. Rather than seeing commission disclosure as a problem, perhaps another lens is to see disclosed commissions as an opportunity to demonstrate the inherent value of the asset finance product set. I believe that this will not only increase the demand for existing asset finance users but will also bring new customers into the asset finance stable.
Talent Development – the industry is ageing rapidly and as far as I can see is doing precious little to develop the necessary skills sets and capabilities that will be required to run successful asset finance businesses in the future. The identification and development of talent and leadership skills within the industry is the number one challenge and opportunity.