Why equipment finance is due a fintech overhaul
This year over £25 billion of equipment finance will be drawn down by the SME sector. Leasing and asset finance more broadly, is growing a rate of 8% per annum, as businesses realise the benefits of flexibility, preserving capital and matching outlay with future revenue.
While most analysts agree that the market’s high risk-adjusted returns are not sustainable and that modernisation is needed, there is also an increasing consensus that asset finance is due a tech refurb.
Five reasons why fintech is a great match for equipment finance in 2017:
1.) Speed. Equipment Finance is slow. The funder needs time to arrange the paperwork, time to assess the asset and get comfortable with it’s valuation, more time to deliver the legal documents and even more time to arrange a transfer of funds. Because this is 1987.
Except it’s not. In 2017 determining risk at SME level and at asset (equipment) level should be much faster. Processes should be largely automated (with safety nets of course). Fintech pioneers such as dealflo are rapidly improving the legal integrity of electronic agreements and with a new wave of video technology allowing remote examination, there is no reason for evaluation and agreement to take days. ‘Faster Payments’, the standard now for interbank ( UK ) transfers means the funds can be transferred within minutes.
2.) Deploying fintech to combat fraud. Sometimes fraud materialises as multiple financing (overlaying) against a single asset or piece of equipment. Alternatively it may take the form of financing assets that only exist on paper or in the form of contracts that have been fabricated/altered/forged, as was the case with the Total Asset Finance (a Warwickshire based broker) case where Barclays and KBC suffered £160 million of fraud. Fintech, with the application of blockchain technology, AI and integrated ‘big data’, will play a huge role in reducing these risks.
3.) Benefits from disintermediation. Equipment finance is often heavily intermediated. The flow of financing sometimes has more layers than a heart attack-inducing lasagna (see below). Typically it can take the form of a:
Many layers of intermediation..
Five layer lasagna..
SME -> Accountant -> The Broker->The Leasing Co -> Layer The Asset Manager (via block funding)
Or even a six layer lasagna..
SME -> Regional Advisor -> Broker -> Bank -> Investment Bank -> Asset Manager (via securitisation/ other bond issuance)
All of this intermediation leads to A. increased complexity that leads to an increased propensity for errors and B. increased cost that is passed on as higher cost of financing to SME and lower return on funding for the Asset Manager. Direct Lending technology, as popularised by peer-to-peer platforms but more prevalent in institutional financing, has already had a huge impact on reducing financing rates in commercial property and will make a huge difference to smaller ticket finance segments, such as equipment finance, as technology improves to allow this.
4.) The potential from capturing and analysing new sources of data. There are two dimensions to credit scoring in equipment finance. Firstly, the assessment of the borrower’s creditworthiness and secondly, the assessment of the asset (the equipment) strength as security. The former is well covered by traditional lenders and recent developments such as PSD2, the increasingly sophistication of credit bureau and the opening up of bank account data through platforms such as Yodlee and Bank Vision mean that the measurement of SME creditworthiness is better than ever before.
However it is on the asset side where there is the greatest propensity for data availability to make a difference. Traditionally the opaqueness and complexity of specialist business equipment and machinery across a multitude of industries was overwhelming for funders. That data is now becoming 1.) much more accessible and 2.) the power of analysis has increased substantially with engines such as IBM’s watson and Google’s Deep Mind.
5.) Fintech can assist asset monitoring and protection. For equipment and machinery to serve as effective security to justify the term ‘asset finance’, the underlying value must be protected over time. Theft, accidental damage or more commonly, plain misuse, can undermine the funders security. In the past this risk was mitigated with regular visits, with a cost that was ultimately paid for by the SME!
For some years now, telematics, which in reality is a well established branch of the ‘in-vogue’ field known as Internet Of Things (IOT), has enabled a leap forward in the management of assets by funders. Using OBD chip technology, everything from location to the hours of operation, to mechanical status can be monitored remotely. Servicing can be scheduled for when it is really needed rather than on a pre-set periodic basis. The technology was susceptible to tampering, very expensive and user unfriendly but is now much improved on all three counts.
Over the coming months EquipmentConnect will be rolling out its MVP which will incorporate technology to address the above. Tech isn’t essential to a sucessful startup but good tech will be a cornerstone equipment finance and at EquipmentConnect we see tech as the lever that gives us the power to really ensure a better deal for funder and SME.