A new set of challenges
By Bill Stephenson, DLL
Bill Stephenson, CEO and Chairman of the Executive Board at DLL looks back over the past year and the increasing number of challenges faced by the global leasing industry. Some years come and go without much fanfare. They present the usual challenges which are dealt with and quickly forgotten, their details replaced in our memories with more recent events. For those of us in the leasing industry, this is not one of those years.
This year appears to have presented us with more than our normal share of challenges. I could cite the generally stagnant economic conditions in many key markets around the world or mention the looming shadow of increasing regulatory requirements and the related costs of compliance. For good measure, I could note the upcoming changes in lease accounting or a new generation of customers with a 24×7 servicing expectation. Sometimes it does seem as if we are facing a “perfect storm” of circumstances that will greatly test the strength and resilience of our industry.
In order to fully comprehend the impact these challenges are having on our industry, let us take a closer look at a few of them…
A more stringent set of rules. The ultimate success of our industry will be determined by our ability to continue providing innovative financial solutions that meet the needs of our customers, while adjusting to a tightening regulatory framework. Companies across the globe are spending billions of dollars every year on compliance, and as we continue to see, the cost is forcing many to reconsider their involvement in the financial services industry.
According to Thomson Reuters’ 2016 Cost of Compliance Survey, 69% of financial services firms anticipated an increase in their annual compliance budgets. And more than one-third of firms said they spend at least one whole day every week tracking and analysing regulatory change. Neither of these results is surprising when you consider that, on average, 200 international regulatory changes, publications and announcements are made every day (“Cost of Compliance 2016,” Thomson Reuters).
To further compound the issue, compliance is not a one-and-done expense. Once we spend the time and money to implement the necessary changes, we must then put in place qualified personnel to ensure continued compliance. Demand for these high-level skills is quickly outpacing supply, adding yet another layer of difficulty. The primary challenge is balancing these activities and investments alongside the expectations our customers have for innovation, speed and simplicity.
A new generation of customers. Our customers – and the needs we are tasked with meeting – are changing. Every day, Millennials are becoming a more powerful segment of the world’s workforce, taking the place of their Baby Boomer predecessors in key decision-making roles. Even if they are not the ones making the decisions today, you can guarantee their time is coming soon and that their perspectives are influencing leadership. Their distinct requirements are putting pressure on organisations to evolve every aspect of their business models – from their go-to-market strategies to their online presence and back-office systems.
Born between 1980 and 2000, the formative years of Millennials were defined by near constant advances in technology, many of which dramatically changed the world as we knew it. Named the first “digital natives” by Goldman Sachs, they were either introduced to the Internet at a young age or never knew life without it. Mobile phones, and then smartphones, were ubiquitous and social media a given. Millennials are accustomed to change and rely on technology in almost every aspect of their lives—from dating to banking (“Millennials: Coming of Age,” Goldman Sachs Global Investment Research).
But what does all of this mean to our industry? It means that we have a new, and very different, customer. The way Millennials want to interact and transact business with a financial services provider varies greatly from what most of us are accustomed to. They rely more on the feedback and recommendations of their social networks than traditional marketing and are much more likely than their predecessors to look for non-traditional methods of obtaining the products and services they need. Their comfort with technology, along with their general distrust of financial institutions (the result of experiencing firsthand the global financial crisis and its fallout) has made this generation fertile ground for change.
The acceleration of technology. For a long time, our industry has had the luxury of creating and implementing new technologies at the pace we were most comfortable. We have always striven to provide our customers a great experience and top-notch service, but for many years, it was not necessary for us to be on the cutting edge of technology. It was a “nice to have” rather than a “need to have.”
However, those days are coming to an end. We are now witnessing what some refer to as the “Uberisation” of commerce, where 24×7 access to products and services is expected. New technologies designed to meet these demands are being rolled out at an alarming rate. The fact that a huge portion of the population now has constant Internet access has given rise to new technologies, often in the form of smartphone apps, that have transformed entire industries.
The leasing industry is no exception. Our business models are being challenged by alternative forms of financing. Microfunders and FinTechs are becoming mainstream. Even giants such as Apple, Samsung and Google are jumping on board and creating highly focused financial services applications. As of the time I am writing this, no FinTech has turned the leasing world on its head, but someone will crack the code — it is only a matter of time.
In its list of top 10 predictions for 2016 and beyond, Gartner estimates that by 2020, autonomous software agents outside of human control will participate in 5% of all economic transactions. They are not referring to the algorithmically-driven software currently driving many of the FinTechs, but a new type of software that is capable of banking, insurance, exchanges and other financial services – without any human support. Gartner further predicts that this new paradigm, referred to as “the programmable economy,” will disrupt almost every facet of the financial services industry (“Top Strategic Predictions for 2016 and Beyond: The Future Is a Digital Thing,” Gartner, Inc.).
Not only is technology forcing us, as lessors, to innovate our business processes, it is dictating the way our partners and customers transact business as well. Technology will continue to disrupt many of the traditional distribution channels used today to sell equipment to customers, and in turn, will disrupt how leasing and finance solutions are introduced to these customers at the point of sale. It is not difficult to imagine a future state where all equipment is evaluated and procured via an app on your smartphone…and where the acquisition method, whether cash, loan or lease is also procured in this same manner.
What the past can teach us. I have just spelled out some pretty serious challenges, but I am confident that our industry can – and will – prevail. As I contemplate how equipment lessors can be successful in the future, I cannot help but think back to another year that I will never forget.
In 1986, I was a Regional Sales Manager, working for a small, family-owned vendor finance company in Chicago. That year, the entire US industry was lamenting the repeal of the Investment Tax Credit, which provided an incentive for companies to invest in machinery and equipment. In addition to the challenges presented by the new legislation, our company did not have consistent, low-cost access to funding, so our rates were quite high. We could not compete on price. We never seemed to have enough people in the back office and we certainly did not have cutting-edge systems.
Despite what seemed like insurmountable challenges, we survived by remaining focused on the core tenets of our value proposition: Industry Specialisation, Sales and Marketing, and Customer Service.
Industry Specialisation was critical in building credibility with our clients. We had to demonstrate that we truly understood their business. To that effect, we hired equipment sales representatives, who understood the technical aspects of the products and how they were sold, and then sought to teach them about leasing. This practice ensured that we understood how and where our partners made their money and how financial services could help them be more successful. It confirmed our role as a strategic partner. Today, we use terms like “outside-in” and “voice of the customer” to describe these activities, but they have always been present.
Then we took it further by positioning our company as a sales and marketing organisation. We were not just a supplier of funding, but an integral part of the equipment sales cycle. Our primary objective was to help our partners sell more equipment at greater profit margins. We developed marketing programmes and trained the equipment sales representatives on how to properly “lead with leasing” in all of their sales pitches. Now we talk about integration with the distribution channels and systems of our partners, using APIs and online portals to create seamless experiences, yet there is still a very essential human element to this approach that has not disappeared with the emergence of technology.
Finally, we committed to providing superior customer service and supporting our partners through both good times and bad. By adopting a partnership approach, we ensured repeat business and mitigated the risk of losing meaningful deals to our competition. High quality customer service remains an ever-present requirement of doing business, especially as the channels and forums for communicating with our customers continue to proliferate.
How our industry will prevail. Looking back at the challenges the leasing industry was able to overcome in 1986 should serve as a source of encouragement. By sticking to the fundamentals of our business, we continued to deliver value to our customers, and the industry prospered. Fast forward 30 years, and I have every bit of confidence that we can do it again.
The world is changing, and so too are the people and processes that comprise it. We can ensure that our industry evolves right alongside them. Although many of the challenges we are currently facing are beyond our control, we are far from powerless. We have the ability to ensure the success of our businesses long into the future, but only if we commit to acting upon the things we can control.
First, we must commit to meeting the changing needs of our customers. In order to do that, we have to go out there and proactively learn more about them. We have to uncover their needs before they even realise they have them. And we have to innovate our products and create solutions that provide value to this “new” customer. The key to innovation and differentiation is to solve an unmet need, and our industry is poised to do just that if we commit to embracing change.
We also need to accept that the industry itself is changing, and we need fresh, young talent to help us adapt to the new way of doing business. I do not know the first thing about developing a mobile app or what it takes to go 100% paperless, but there are 25 year olds out there who do. They can be the change agents in our organisations – the ones who help bring the rest of us along. We need to embrace this generation and make sure we are attracting the best and brightest to our industry. When their fresh ideas are combined with the practical experience and wisdom of senior leaders, the potential is truly limitless.
Finally, we need to be paying attention to where the industry is headed, and we need to be having the tough conversations today that will better prepare our organisations for the future. If the financial services industry will soon be disrupted by fully autonomous machines, I do not want to be watching from the sidelines. We must not only stay abreast of new technologies that will inevitably change the way our industry functions, but play an active role in developing these technologies. Change is inevitable whether we like it or not. Instead of fearing it, I propose we get on board.
For the past 30 years, the underlying principles for success in the leasing industry have remained remarkably basic and unchanged. In many ways, the challenges our industry faced in 1986 mirror those we are facing today. That year, the company I was working for was able to overcome seemingly insurmountable obstacles and continue to grow by excelling at three simple fundamentals: industry specialisation, sales and marketing, and customer service. If we commit to staying grounded in these principles and preparing for unavoidable challenges by acting upon the things within our control, I have every confidence that we will again survive and continue to provide financial solutions that meet the needs of our customers – no matter who those customers may be – for many years to come.
Bill Stephenson, CEO and Chairman of the Executive Board
Vestdijk 51, 5611 CA Eindhoven, The Netherlands
Tel: +31 (0)402339050