Why are traditional lenders so reluctant to embrace new technology tools in the US equipment finance market?
More and more companies are developing useful tools, APIs and interfaces that automate the customer financing experience. But many of the companies providing these tools are fintech-oriented startups. How do you recommend that banks and independent financial companies adapt these new technologies to improve their business models and the customer experience?
Bez: Banks and independent financial companies must have a clear and well-defined digital business strategy when it comes to integrating with fintechs. They must do their homework on each to ensure alignment with customer expectations and delivery goals, as well as have plans to close gaps and mitigate risk.
Crossmann: Banks and independent financial firms face several issues when working with third-party fintech providers: 1) integration requirements, 2) reliability in terms of service provided, and 3) regulatory compliance. Their existing supplier programs depend on not negatively disrupting the existing customer relationship. Most vendor programs go through a thorough verification process to ensure that key metrics are performing as expected. If there is any chance that a new technology could disrupt the metrics, a vendor vendor will be extremely careful in introducing that technology until it can be thoroughly tested and proven to the vendor. This is especially critical when a seller is still skeptical of the value of financing. One bad experience with the sales organization can destroy a supplier program. For this reason, many vendor program providers are hesitant to be early adopters.
Nelson: My view of selecting good “fintech-oriented solutions” starts with the word “customer”. In these digital financing relationships, the word customer is recursive. When a fintech helps a bank or finance company with their workflow, the bank or finance company is “the customer” and workflow improvements can bring significant gains. But banks and financial companies also have customers whose experience can also be improved or automated through these types of tools. These are “the customers of the customer”. Good design thinking always considers the “customer of the customer”, so my first recommendation is to make sure that any company you work with understands that even if you are their customer, your customer is the most important part in the funding flow. If they don’t understand this, they’re likely to implement solutions that can help you save money, but not grow or grow your business through better experiences for your customers.
Scampon: Banks and independent financial companies tend to approach technologies such as APIs, interfaces, etc. as if they were tools designed to tackle specific tasks – like the fact that a flathead screwdriver only has a handful of applications but is extremely effective at those tasks. But these tools take time to design and produce and require constant maintenance to remain effective. Cloud-focused platforms that offer a low-code/no-code setup allow businesses to be just as solution-focused, but agile enough to keep up with changing customer needs.
Verhelle: Banks are embracing fintech platforms. I wouldn’t worry about that. We are overwhelmed with interest and have just started offering our QuickFi platform to banks in 2022. The unit economics of new 100% self-service digital platforms like QuickFi will be compelling. When banks realize that the cost of new alternatives is less than a third of the cost of the existing model, operating at scale, widespread adoption will occur. The equipment finance industry’s transition will likely be rapid once it begins in a year or two.
My last question stems from my personal experience. Many lessors have the ability to automatically score and make automatic decisions for every request up to $350,000, but choose to refrain from exercising this ability because they prefer eyeballs to watch every transaction. This limits their capabilities and makes them less competitive in the market.
Fully automated document processing, decision making, creation and delivery are readily available today. But most landlords don’t want to use automatic decision making and fully automated documentation delivery. What will it take for the old regime to adapt to the new way of doing business?
Bez: Not to oversimplify, but many are looking for tangible “proof” that it works. They need sufficient sample size and history to demonstrate that automated decision-making and automated document delivery deliver the appropriate results. Technology solutions must also be sufficiently configurable so that risk attributes can [be] changed “on the fly” as adjustments are needed.
Crossmann: I didn’t see any reluctance to use self-decision. Most lenders I deal with have some level of fast credit processing. It may be more about the “degree” of automation of transaction types, size, etc.
When it comes to a fully digitized/end-to-end process, it’s part of the natural tussle in terms of priorities for any organization. If the lack of a fully automated digital process becomes a competitive disadvantage and ultimately impacts volume generation, the old guard will be forced to put it higher on the priority list.
Nelson: Change is difficult because change adds risk. The more risk averse the industry, the slower it will change. The key to change in this case is either to clearly understand the risk of using automation, or to use automation to reduce the risk inherent in the process. Companies can reduce the risk of automation by setting measured risk policies that enable automation. For example, transactions that automatically go through the decision process are those that have a limited amount, a minimum probability of default, or a particular credit score and types of equipment. When risks are measured, the cost of taking those risks can be managed. Slow movers need to change their view of risk to one of engagement rather than avoidance if they are to benefit from digital systems and the automation they enable.
Scampon: Exhibition, exhibition, exhibition. As financial companies enter the RFI era, they are getting a crash course in available technologies while having tons of shiny features thrown in front of their faces without much context on how they actually work or improve. the lives of their clients and teammates. Business leaders need to talk regularly with the market and their teams about what’s available and what’s needed to stay competitive and beneficial to their customers. A good place to start is to set aside dedicated time and space to explore new concepts, solutions and explore opportunities for innovation.
Verhelle: There are several related questions here. Many companies in our industry have had a credit rating of $250,000 (some higher) for many years. Because this process is embedded in an old-school delivery model, transactions cannot go through pricing, structuring, documentation, perfection of privileges, fraud prevention, compliance, funding and service. Each of these manual processes is fraught with friction and cost. Redesigning and rebuilding all these workflows, which in many companies operate at scale, is difficult. In my opinion, the problem is not the reluctance to use credit scoring, but the enormous difficulty of radically changing the basic business model of a large company while operating at scale. The changes needed are not incremental; they involve discontinuing existing sales, operations, finance, compliance, and service processes and replacing them with entirely new ones, making things more difficult. There is no single “new model” to adopt, as digital platforms are just emerging.
IT IS NOW
So. Five people well trained in the art of automated process technology and the associated costs and benefits it can bring to their users, each person explaining why we should progress in our use of the technology tools readily available to lessors today . Nevertheless, we resist. We justify our procrastination. We explain why the timing is not good or the moons are not aligned. We make excuses. More importantly, banks need to step up their efforts. Legacy systems and calcified ways of working impede the progress of many lenders. It’s time to move on. It’s time to adapt. It’s time to take the medicine and heal what ails us. It’s time to adopt technological solutions. If not now when?
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