Insights from the Leasing Life conference in Barcelona, March 2022
SOFT4 team attended the Leasing Life conference in Barcelona, where major players from the financing sector, as well as the largest software providers, shared their insights on the market and future financing trends. We did a brief summary of what leasing and asset finance companies could expect, and the next directions they could explore in their business.
The biggest conversation was – of course – around the impact of Covid on business. The news, however, was encouraging – 99.5% of customers returned to normal payments even though there was about a 30% slowdown in payments at the beginning of the Covid crisis, in 2020.
Companies discovered many good things they were not capable or brave enough to try out earlier – such as changing from formal dressing to casual one, knowing each other’s families and environment better (until corporate backgrounds were created), discovering the unnecessity of travels (which helped to reduce carbon levels, too).
Digitalization of business became a norm and involved document e-signing, self-service portals, e-commerce, and other online services which boosted the demand for IT services. No wonder companies such as SOFT4 have been busier than ever in the last couple of years.
However, this trend might also threaten brokers’ business, as financiers started taking a direct approach when dealing with customers, to understand their needs, analyze sales and services provided and the customers’ feedback. Amazon’s example of working directly rather than through partners was highlighted.
How the pandemic changed the market?
A recent study by the advocacy group Plug-In America found that barely 15 percent of respondents felt dealer salespeople were knowledgeable and able to help them while shopping for an EV. During the pandemic, lasting till today, dealerships experienced 3 times less traffic on their premises. Today, Volvo sells around 10% of their cars online, and in coming years, all sales of their electric cars will be available online only. Therefore, leasing and asset finance companies will continue to invest in e-commerce platforms and might rethink their sales strategies and channels. If this trend develops, this might mean a significant decline in the brokerage business.
Pay per use is another fancy trend in the last few years. However, like some Leasing Life conference attendees jested, this “new” trend has been gliding in the market for the last 6-8 years, and still, no one knows how to make it a reality.
As noted in the SOFT4’s article in the World Leasing Yearbook, pay per use is nothing new to the IT industry. Today this model is used by 55% of all customers. Yet this swift change from CAPEX to OPEX brought quite a few challenges. Asset finance institutions seem to experience very similar changes, like taking the risk instead of a customer, smaller revenues distributed over time, very low margins, and others.
Big data cannot stay out of sight either when talking pay per use. Today the data is there but hard to retrieve and use for gaining insights. The participants agreed that closer cooperation with manufacturers to get data for further analysis and use it to make the right decisions would be inevitable for their business. E.g., getting information on the average usage of the car, non-driving time, and information on the asset independently from the customer, could help create the pay per use metrics. This is where Artificial Intelligence (AI) solutions analyzing driver’s behavior could prove helpful. The AI solutions have already been applied in the insurance industry, saving significant time and providing valuable insights into the asset condition.
There’s the challenge of trying not to associate data with the individual using the asset (e.g., speeding, traffic infringement, driver’s identity) but instead analyzing the owner, e.g., car condition during the drive.
In their discussion, the asset finance companies concluded that the hybrid model could be beneficial to start with when creating pay per use business model – the asset depreciation should be evaluated when formulating pricing, putting some extra allowance for the margin. Like in IT, the pay-per-use model will not be around the traditional approach and the asset alone – leasing companies will need to bundle more services around the asset to get profits the same way the software companies created various services and product addons around the main product they sell.
In the coming years, leasing would most likely look more like a rental business rather than the traditional leasing as we know it today. Ironically, the leased cars are not being used most of the time, which is why the industry is looking to implement the pay-per-use model… This will certainly bring more challenges. Arranging logistics, not the asset itself, will be the biggest challenge of the pay-per-use model.
Flexibility is the key
The slogan of SOFT4, which is the sponsor of the conference, was “flexibility is the key.” It seems we hit the theme just right, as the topic was heard in various discussions – from leasing companies providing flexible conditions to the customers, including flexible payment schedules to the leasing and asset finance software used being able to accommodate changes in customers’ requests, provide self-service capabilities, and be easily adjusted and extended in the face of unknown.
The financiers discussed the asset depreciation topic – the actual price of the old asset can be high compared to its real value these days. Both Covid and the war in Ukraine brought about long delivery times, component supply shortages which affected the production of vehicles and equipment. This will raise the importance of re-marketing and also grow the second-hand market. Therefore, lessors will need to check on their business software enhanced capabilities for re-marketing, contract extension, asset valuation, depreciation throughout the time, etc. With assets being re-marketed, lessors will need to see the aggregated revenues – all revenues from different sources and customers related to the particular asset, rather than revenue per customer.
Also, the new approach to the asset’s value and depreciation should be applied as new business models appear. For example, Tesla’s value increases over time because of the constantly updated software implemented in the car; the residual value of Apple notebooks stays high even after 2-3 years, which makes re-marketing them very easy; there are new leasing businesses, such as herd leasing in Australia, where instead of the depreciated asset, the business has even more assets at the end of the lease!
All of the above will bring new challenges, and as usual, new opportunities for those planning their asset finance business future. Stay tuned for more news from the leasing world.