Despite a challenging outlook for 2023, there are many reasons for optimism from lenders.
The latest figures released by the Finance & Leasing Association (FLA) show that from January to October 2022, new business was 5% higher than in the same period in 2021. Additionally, the FLA expect asset finance new business to reach £32.5 billion in 2022 – 4% higher than in 2021. While this figure is 9% lower than in 2019, it largely reflects the lack of assets to finance.
The labour market is experiencing demand, and the market is due to be better supplied with a return to work based on post-covid flexibility terms. New business volumes in asset finance are expected to continue rising based on the gradual easing of supply chain shortages and the need to support business investment.
Earlier this month, industry professionals gathered in London at the Asset Finance Connect (AFC) UK Conference to share their knowledge and reflect on key topics of discussion. Through the lens of the AFC event, we wanted to examine some key themes from the asset finance industry this year as we head into 2023.
Markets and ESG
While some markets or sectors struggled with backlog to keep up with demand, at the AFC conference many banks and lenders claimed to have found demand to be patchy and/or that it took longer to get deals out the door. If we could draw a commonality, lending remains cautious in the face of uncertainty. Additionally, while corporates and the larger end of the market are borrowing, SMEs are struggling to get funding. Across the board, the lack of SME funding appears to be rooted in a range of factors, including; performance, market sentiment and forecast for 2023.
Some banks noted that partnerships had worked well for them in the past year, yet independents (unsurprisingly) found rises in interest rates to be their biggest challenge. Actors in equipment finance found additional challenges in the accessibility of specialist equipment. These delays – sometimes compounded by fluctuating interest rates – have significantly impacted deals. Understandably, independents could not fix rates, yet banks would consider doing so for the right business. Additionally, some banks have noted customers taking floating rates in the hope that interest rates will drop in the future, at which time they can look to fix the rate.
Due to the collective will to move towards a more sustainable future, there is growing expectation that funding may only be possible if a business has strong environmental, social and governance (ESG) credentials. Lenders will look to fund businesses with comprehensive ESG policies related to being pro-social, environmentally friendly, and with good corporate governance. While a single ESG standard has not been recognised across the asset finance industry, it will likely be determined by regulation in a market or sector and may impact the businesses they lend to, based on the same criteria. Whether for risk mitigation or brand reputation, ESG will have a continued role in our decision-making, and it will come with challenges.
The industries that lenders serve may also have complex challenges in meeting ESG goals. For example, Professor Jim Saker, President of the Institute of the Motor Industry (IMI), shared insight into the transition to zero-emissions vehicles. As the frontrunner for viable solutions, batteries are integral to electric vehicles, and cobalt is a key resource for battery applications. This year, the Democratic Republic of Congo (DRC) is set to produce 71% of the world’s cobalt, 75% of which is refined in China. By 2030, the DRC’s dominance is only set to fall to 63%. Outside of the impact on economies and electric vehicles in general, the availability of a fundamental resource - and the reality of zero emissions goals – face a serious threat.
Consumer duty and understanding the needs of clients, customers, and brokers
Regulatory frameworks are constantly evolving and can present consistent headaches for lenders - particularly concerning regulation that will pave the way for the best interests of consumers, while placing significant responsibilities on those who work in the relevant space. Today, regulation is a digital burden for a finance company, and should a lender fall foul, they potentially face significant penalties. From a different viewpoint, creating simplicity and clarity for customers are by-products of understanding the customer's perspective. In truth, lenders face hard yards to be compliant – one of the reasons why many may revise their lines and facilities - but those lenders focused on becoming more customer-centric are halfway there already.
At an AFC session covering consumer understanding, a panellist from one bank reflected on the industry’s shortcomings in providing customers with information they understand – instead defaulting to lengthy or jargon-filled documents, collateral or contracts. As much as there is a need to give clients, customers or brokers what they require, it is almost as important to uncomplicate their journey with clear and simple communication - and even a case for information or documents to be tailored for different audiences.
Customer-centricity is more crucial than ever. Concurrently, value is quickly becoming a key competitive differentiator among lenders. A great example of this was an equipment finance organisation that reflected on its journey to building a product department within its lending business. The sole purpose of this department is to source and purchase specialist equipment that addresses the supply chain challenges of their customers, freeing up their time to focus on their business. By understanding their customers' challenges, they will not only add value but build closer relationships.
In the auto finance space, there were continuing conversations on the role technology and connected services play in creating value for customers and brokers. We will address this in a moment but will end this section by noting that in the eyes of customers, one lender's money is the same colour as another. Addressing real customer challenges is an opportunity for a clear and distinct value proposition.
Digitalisation and Ecosystems
Digitalisation continues to be a point of discussion across the industry. From both an asset and an auto finance perspective, it was interesting to see several brokers and agents asking for "more digitalisation".
From fast credit decisions and in-life support to managing the relationship during the life of the finance and speedy payouts, brokers want more control while providing better service to their customers. Understandably, they want this digitalisation under very specific terms as they may fear it will disintermediate them if the lenders have good direct sales channels.
For agents, there was a clear focus on the implementation of smarter subscriptions – for example, flexible monthly fees based on the actual mileage by the vehicle owner. Building the required connections to drive this transformation and achieve suitable business outcomes (for all actors) will require digital ecosystems.
Earlier in the year, we published a whitepaper investigating how ecosystem models can help financial institutions transform business lending - a key talking point in conversations around technology at the AFC conference. While some discussions focused on integrations and partnerships required, few explored the importance of how ecosystems form and the value relationship. Ecosystems are not just about technology - they are also about community. While the quality of partners plays a vital role in the value creation from the ecosystem, the ability for participants to derive independent value from the ecosystem is one of the most fundamental aspects - the core business or platform can facilitate but should not expect compensation for taking this role.
Many lenders are keen on the idea of open banking, with a view to speeding up lending decisions, managing collect-out, or identifying when a customer might start to struggle paying or default. But is that enough detail, and is it too late? Katrin Hearing, CEO & Co-Founder at Funding Xchange, noted that lenders should look to get a greater understanding of their clients' and customers' behaviours before that point. For example, the richer detail available from HM Treasury and credit agencies allows lenders to improve their risk management and build a more rounded picture of a company’s financial health, including money in, balances held in account and net cash position.
Additionally, we should acknowledge that businesses still holding on to cash from government support schemes could distort risk behaviour indicators. Some businesses may only be cash rich due to money held from government schemes - which may cause problems in assessing the risk of a business. To that end, more data points are better than one, and lenders should look to open systems and strategic collaborations that effectively manage risk while increasing the accessibility and attractiveness of their funding.
It is fair to say macroeconomic factors and the geo-political environment will continue to present challenges, yet there is a sense of positivity as markets continue to build. Regulation will evolve, and lenders may look to reduce exposures or refocus their strategies. At the same time, ESG will remain in the spotlight as factors, assessments, and frameworks become clearer.
For software providers, AFC provided an invaluable opportunity for a community to connect with experts and leaders, share experiences and - quite simply - learn more about what is working and what isn’t.
In closing, 2023 may be another transitional year, and lenders may need to continue to exercise discipline. That said, pivotal opportunities will present themselves to lenders with the right technology and strategic partnerships - particularly, as digital plays an increasingly important role in confronting these challenges.
Article written by:
Managing Director, Lendscape