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 startup companies. How do you recommend that banks and independent finance companies adapt these new technologies to improve their business models and customer experiences?
Baez: Bank and independent finance companies need to have a clear and well-defined digital business strategy when it comes to integrating with fintechs. They need to do their homework against each to ensure alignment with customer expectations and delivery objectives, as well as have plans to address gaps and mitigate risks.
Croessmann: Banks and independent finance companies struggle with a couple of things when working with third-party fintech providers: 1) integration requirements, 2) reliability in terms of the service being provided and 3) regulatory compliance. Their existing vendor programs are dependent on not negatively disturbing the existing customer relationship. Most vendor programs go through a thorough vetting process to ensure that key metrics are in line with expectations. If there is a chance that a new technology could be disruptive to the metrics, a vendor provider will be extremely cautious in introducing that technology until it can be thoroughly tested and proven to the vendor. This is especially critical when a vendor is still skeptical on the value of financing. Just one bad experience with the sale organization can destroy a vendor program. For this reason, many vendor program providers are hesitant to be first adopters.
Nelson: My view of picking 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 have significant gains. But the banks and finance companies also have customers whose experience can also be improved or automated via these types of tools. These are “the customer’s customers.” Good design thinking always considers the “customer’s customer,” so my first recommendation is to make sure that any company with whom you work understands that while you are their customer, your customer is the most important party in the financing workflow. If they do not understand this, they are likely to implement solutions that may help you save money but not help you expand or grow your business through better experiences for your customers.
Scampton: Banks and independent finance companies tend to approach technologies such as APIs, interfaces, etc. as if they were tools designed to tackle specific tasks — like how a flathead screwdriver only has a handful of applications but is extremely effective at those tasks. But those tools are time-consuming to design and produce and require constant maintenance to stay effective. Cloud-first platforms that offer low-code/no-code configuration allow businesses to be just as laser focused on solutions but agile enough to keep up with customers’ evolving needs.
Verhelle: Banks are adopting fintech platforms. I wouldn’t worry about this. We are overwhelmed with interest, and we just started offering our QuickFi platform to banks during 2022. The unit-economics of new, digital, 100% self-service platforms like QuickFi will be compelling. When banks realize the cost of new alternatives are less than one-third the cost of the existing model, operating at scale, large-scale adoption will occur. The equipment finance industry transition will likely be rapid once it starts in the next year or two.
AUTOMATED DECISIONING
My final question stemmed from my personal experience. Many lessors have the capability to auto-score and auto-decision every application up to $350,000 but chooses to refrain from exercising that capability because they prefer to have eyeballs look at each deal. This limits their capabilities and makes them less competitive in the marketplace.
Fully automated credit application processing, decisioning and document creation and delivery are readily available today. But most lessors are unwilling to use auto decisioning and fully automated documentation delivery. What will it take for the old regime to adapt to the new mode of doing business?
Baez: Not to oversimplify, but many are looking for the tangible “proof” that it works. They need enough of a sample size and history to demonstrate that auto-decisioning and automated delivery of documents are yielding the appropriate results. Technology solutions also need to be configurable enough so that risk attributes can [be] modified “on the fly” as adjustments are needed.
Croessmann: I haven’t seen a reluctance in using auto-decisioning. Most of the lessors I deal with have some level of rapid credit processing. It might be more of the “degree” of automation for transaction types, size, etc.
When it comes to fully digitized/end-to-end process, it becomes part of the natural tug of war in terms of priorities for any organization. If the lack of a fully automated digital process becomes a competitive disadvantage and ultimately has an impact on volume generation, the old guard will be forced to push it higher on the priority list.
Nelson: Change is hard because change adds risk. The more risk-averse the industry, the slower it will change. The key to change in this case is to either clearly understand the risk of using the automation or use the automation to reduce the risk inherent in the process. Companies can reduce the risk of automation by defining measured risk policies that enable the automation. For example, deals that go through the decisioning process automatically are ones with a limited dollar amount, a minimum delinquency probability or credit score and of particular equipment types. When risks are measured, the cost of taking those risks can be managed. Slow movers must change their view of risk to one of engagement versus avoidance if they are going to benefit from digital systems and the automation they empower.
Scampton: Exposure, exposure, exposure. By the time finance companies get to RFI time, they’re getting a crash course in available technologies while being thrown tons of shiny features in front of their faces without a lot of context for how they actually work or make life better for their customers and teammates. Heads of business need to regularly engage with the market and their teams on what is available and what is needed to stay competitive and beneficial for their customers. A great place to start is by carving out dedicated time and space to explore new concepts, solutions and explore innovation opportunities.
Verhelle: There are several related questions here. Many companies in our industry have been credit scoring to $250,000 (some higher) for many years. Because this process is embedded in an old-fashioned delivery model, transactions are unable to flow through pricing, structuring, documentation, lien perfection, fraud prevention, compliance, funding and servicing. Each of these manual processes is loaded with friction and cost. Redesigning and rebuilding all these workflows, which in many companies are operating at scale, is difficult. In my opinion, the problem is not an unwillingness to employ credit scoring but the massive difficulty in dramatically changing any large firm’s core business model while operating at scale. The needed changes are not incremental; they involve halting the existing sales, operations, funding, compliance and servicing processes and replacing them with entirely new processes, making it more difficult. There is no single “new model” to adopt, as digital platforms are just emerging.
THE TIME IS NOW
There you have it. Five people well-schooled in the art of automated process technology and the costs and related benefits they can bring to their users, with each person giving their explanation of why we should be advancing in our utilization of technology tools readily available to lessors today. Nevertheless, we resist. We justify our procrastination. We rationalize why the timing isn’t right or the moons aren’t aligned. We make excuses. Most notedly, banks need to step up their efforts. Legacy systems and calcified ways of doing business are hindering progress for many bank lessors. It is time to move forward. It is time to adapt. It is time to take the medicine and heal what ails us. It is time for the adoption of technological solutions. If not now, when?
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