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..

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.. 

or SME -> Regional Advisor -> Broker -> Bank -> Investment Bank -> Asset <anager (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.

Simplicity. Just that.

Recently I've been frustrated at the time taken to get our demo ready for distribution partners. Starting up in financial services was never going to be easy with or without tech. Robustness has to support every innovation.  Also, as one would expect, financial services disruption is wrapped in regulatory challenges and legal complexities. Development time is oxygen to a startups so as you can probably guess I haven't been a happy Larry these summer days.

Who is at fault? Undeniable. Me. 

I have been both consumed by recent fintech advances and too keen to please everybody. As a result, EquipmentConnect has been distracted from its pledge to introduce 1.) more affordable equipment finance via disintermediation 2.)  faster equipment finance via technology and 3.) easier equipment finance via good design. 

Also this week, I met with the founders of a digital golfing business. Both are accomplished players with strong handicaps and their passion was instilled deep in their business. Combining that with their professional marketing backgrounds, it was too easy to conclude they were set for sure success. One issue though. A huge issue. Their product and online presence is so multi-layered and scattered that visitors were lost in the complexity and conversion rates have been incredibly low. Each bell and whistle was considered individually on it's own commercial merits but the overall platform is just too muddled. They weren't running before they could walk. They were sprinting, swimming and skipping all at the same time... before they could walk. 

Considering both sets of woe initiated a train of thought that carried me right along the thameslink. Successful companies start with simple ideas and pursue them purely. Obsessively. 

I'm going to tell you about five companies that really excel in keeping it simple.

 

Company One: Franco Manca

Everybody loves pizza. Well at least the 99% do... Pizza haters are outnumbered by UKIP supporters these days. Which is why I’m always amazed that so many Pizza restaurants ram their menu with everything from chicken milanese to prawn skewers.

Franco Manca was born in the South London market of Brixton back in  '08 when founder Giuseppe Mascoli saw potential if simplicity was combined with quality and delivered cheaply. The purity of 'the market environment' was instrumental in determining the business model. Quality was realised with the finest ground flour and a cheese maker from Italy was even summoned to their Somerset farm to ensure conformity with Italian buffalo mozzarella production. 

My local Franco Manca on a Tuesday night..    Not an empty seat to be found

My local Franco Manca on a Tuesday night..    Not an empty seat to be found

The Franco Manca menu has five pizzas with literally just a hand full of toppings. There is one brand of beer. No desert. Minimal sides. Depressing for the consumer generation? Except it all tastes wonderful. By keeping the options simple, waste is pretty much eradicated, greater economies of scale fall into place and customers order faster thus increasing table turnover. Oh and ingredients are always fresh! 

Takeaway: Less can be more. But only if there is real quality. 

 

Company Two: Apple

In 1984 I popped into the world. More importantly, Apple Inc, then a well established computer manufacturer released the first Macintosh, a computer enshrined in simplicity. Priced at $2,000 the Mac was developed to connect with non-technical home users and ensure a stress-free user experience. The new operating system used a GUI, Graphical User Interface, with a simple system of folders and icons and the computer hardware itself was simple in its form and design. 

 

Steve Wozniak, the chief engineer and outside tech circles, shamefully forgotten co-founder of Apple, was obsessive in using solid engineering principles based on simple logical progression even when pushing the limits of technological ambition.  The late Steve Jobs, sadly no longer with us was even more passionate with simplicity and reduced product design to its very essence. He famously said " That's been one of my mantras - focus and simplicity. Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple. But its worth it in the end, because once you get there, you can move mountains"

With almost $60bln in gross profits last year nobody can dispute the success of this pillar. From the insistence of just having one button at the front of the iphone to the incredibly clean simple unitary design of the apple mac, Jobs mantra holds true in the present day. 

Takeaway: Simplicity can be great when instinctive and intuitive. 

 

Company Three: Google

 

The original Google Browser Page as born from research at Stanford in 1997

The original Google Browser Page as born from research at Stanford in 1997

Anybody younger than 23 you will have to trust me. Search engines before google consisted of excite, alta vista, yahoo were HORRIBLE... They were effectively a directory page that looked similar to the penultimate page in your free local newspaper. As well as categories and adds,  popups were everywhere. Overwhelmed would be an understatement.

Google not only vastly improved the relevance of search results, by way of an improved algorithm, they also pivoted their solution around simplicity and conciseness. The doctrine spread across products from Gmail to Addwords to the interface of the cloud. 

Takeaway: Only do something if you can do it better than the incumbents. Don't do everything at once but build up offerings as you go.

 

Company Four: Nike

The original Nike logo

The original Nike logo

 

From the unhelpfully vague tag line 'Just Do It' to the simple confident boldness of the swoosh logo, Nike excel at simplicity. When Fila and Reebok were adding complexity in design, features, and communication Nike stayed almost boringly short and straight. But guess what.. it has worked.

On releasing their recent Tiempo Premier black boots, Nike proclaimed 'Simplicity is Genius' . 

By not over-stretching your product or over-elaborating on your marketing you present the vision of a company that is pursuing greatness in what it does best.

 

 

Takeaway: Simple messages communicate best. 

 

Company Five: Mini (BMC) 

Simplicity often allows agility.

Simplicity often allows agility.

The final example is more precisely a product rather than a company but compels me to be included. Back in 1957 there was a oil shortage spurred by a political crisis on the Suez canal and the British Motor Company pulled the trigger on the development of the Mini. The car had to be less than 10ft with at least 80% of space devoted to human and luggage carriage and it's engineer Issigonis rushed it to launch two years later. 

Famed for its economical running and agility in the city environment the Mini was a runaway success. Then came racing in the early 60's where the mini powered by it's lightweight design soared to success culminating in the 1964 Monte Carlo rally won by Paddy Hopkirk. 

Takeaway: If you keep it simple it will be agile and in today's tech world that is so important.

 

So that's it, five examples of wonderful simplicity. All of these companies cracked success by embracing and purifying the uniqueness of their product. In today's world of information deluge and consequently, increasingly fussy attention spans, it's so important that us entrepreneurs sharpen our message. Keep it simple and keep it sharp.

The US Navy coined the acronym, 'KISS- Keep it simple stupid” when working with Lockheed Martin engineers in the 60’s and I've now decided to set that as my iphone lock screen so every morning starts with the a kick in the behind and a sharp reminder to focus.

In a future post I will discuss some of the actions I have taken, what was cut from the development and what was prioritised. 

One step at a time for UK SME tied to Europe

Britain, over the ages, has thrived as an outward economy. From the first and second centuries when Roman Cantiacorum (modern day Canterbury) exported agricultural products, oysters and metals to the continent right up to today when almost 200,000 businesses trade with the EU*, this island has always been a hive for European commerce.

In more recent times, over perhaps the past 50 years, many foreign entrepreneurs have made the UK their business base, attracted by good governance, tried and tested common law and modest taxes. Back in 2014 the FT estimated that one in seven new companies in the UK were set up by foreign entrepreneurs. This is unlikely to ever change - The UK will remain open for business and a world leader in international trade for all our lifetimes.

However, we are clearly in the midst of significant political change with departure from the EU now well underway. The EU accounts for almost 60% of UK SME exports and while the opportunity to forge new independent trade deals with non-EU countries will create opportunities 5, 10 or even 20 years down the line, the immediate few years will be an uncomfortable adjustment for some companies. 

After a fair jig of political dancing it now looks almost certain that the UK will leave the customs union and single market but that the future relationship will be reasonably amicable and consequently, relatively open. It is likely that UK companies will pay some additional costs on some of their imports and have their goods and services, particularly those in politically sensitive industry, subject to EU tariffs.  With some fairly blunt assumptions I suspect segments of Agriculture/food processing, financial Services and luxury/fashion will be the sectors that take pain. This will be elaborated on in another blog post. 

Away from trade, the other big concern being highlighted by the media is access to talent. With historical free movement of EU nationals, an unrivalled education system, and hubs of industry success (the 'City' of London, Silicon round-about, Thames valley pharma, the defence industry, high end fashion), the UK has traditionally be able to attract some of the very best talent from Europe. I don't believe the top end of the labour market will face issues here as Theresa May's government appear to recognise the importance of this human flow. The recent announcement securing the residency of existing EU nationals was certainly positive. The problems are more likely to be suffered by companies with lower skilled  workers from the EU.

Another issue for UK SME arising from the our exit is the weakness of sterling and the consequently higher import prices that feed into the supply chain.  Since Britain decided to leave the EU, the pound has substantially weakened against all major currency pairs. Of course there is a benefit to exporters but importers have seen a fall of 20% in their purchasing power from end of 2015.

Another element of damage from Brexit often not talked about, is the negative PR spin and unpopularity effect that been born from our decision to walk away from the EU (Which rather unfairly is being portrayed by European media and politics of disgruntled arrogance). 

So what are UK SME to do? How does the Europe dependent SME prepare?

Some ideas below to consider.. There are no easy solutions; the strategy has to be to consider every option and find the right cost-effective approach for your business.

1.) Explore setting up a market/sales satellite office in the EU. By having a subsidiary in an EU country and structuring the production or service delivery process there may well be scope to significantly reduce the impact of tariffs. The cost of this can often be less than you might fear. Shared office spaces catered for by an abundance of monthly services . Train travel via eurostar is expected to cheapen considerably in next two years and new direct routes are being opened to Amsterdam and Cologne. 

2.) Consider developing new branding that can be applied exclusively for the European markets. Perhaps worth hiring sales and marketing resource in Europe to be stationed in their respective market.   

3.) Investigate strategic partnerships within your European market.  On a more ambitious level, there is an argument that now is a good time to consider horizontal integrations/ m&a..

4.) Be organised within your industry and ensure your voice is well heard by government. Lobbying in tandem with your European supply chain (And potentially peers!) will prove to be a worthwhile strategy. Tariffs and inefficiencies associated with customs are often reciprocal so likely your associated EU companies will be as eager to avoid also. 

5.) Manage your fixed cost base prudently. The UK economy has enjoyed relatively solid economic growth for a number of years now. The likelihood of that continuing is slim so be prepared to cut staff and non-core fixed costs. Stay nimble Jack.

6.) For importers, weigh up backup supply options from within the UK. Unlikely you will need to act on this but having this as part of your operational risk management is recommended. 

 

*HMRC 2012 report

**Courtesy of the Statesman Journal. 

Banking: Forget the greed. Waste is the problem.

Lunch special: Politics of envy generously seasoned with populist condiment. Dish heated to boiling point. Fake news and emotional diatribe infused. All honest flavours lost. Any takers for idealist mush on toast? Unfortunately, yes. Far too many right now. 

As we approach a general election in the UK, the banker bashing anthem once again ring aloud from the political class. The 'greedy bankers' should be drowned in farmer's slurry alongside tax cheats and company bosses using zero-hour contracts. I mean employers matching employee cost with customer demand..  shocking stuff, shoot em at dawn!

It is of course beyond argument that bankers, traders, asset managers and the other deal makers of our financial economy are well remunerated. To an extent, the additional pay is a function of high achievement, unique skill sets and usually, a difficult and challenging rise up through the ranks famed for long and intense hours.

Are they greedy? Well they certainly want to earn more. Who doesn't want the best for their family and can any of us genuinely claim we face no risks in the future that would be lessened by financial padding. But shouldn't the alarming increase in inequality be tackled? Yes, of course but not by demonising our high earning producers. Would we point knives at top goal scorers in Wembley or shout down the winner of master chef? 

At the end of the day we have a tax system and governance that exists so much of the generous tip of the 'moneyberg' is redistributed across society. We should probably levy a higher income tax on the most excessive income but as a starting point let's admit that the desire to earn more, live better and prosper is natural and right. Lets not soften the drums of production and impede the economic march because the brightest and hardest working are commercially sucessful. 

Bankers, traders, quants, technologists and asset managers should all be encouraged to push the boundaries of what they can achieve because the broader economy and public all benefit. It may not be obvious but every single product and service in our daily life, from a pepperoni pizza to piano lessens, is easier to buy and cheaper with less price volatility because of the work done in our banking sector. Encouraging competition and success in banking doesn't cost the system overall.

What we really pay for is hidden waste in financial services, especially in banking. Ultimately our account charges, foreign exchange fees and mortgage interest rates are all that bit higher because of waste. Financial services represents 7.2% of the UK economy (GVA) so the effect cannot be deemed marginal.

Hidden waste take fairly unique forms in banking and consists of: 

1.)  The less explicit costs of government and political knee-jerk policy and insufficiently thought-out regulation. Often the practicalities of  regulation and the secondary economic effects of regulation are not considered.

2.)  Waste within banking is also the function of poor management structures. There are typically too many layers of management with convoluted  reporting lines and an obsession of micro level control rather than holistic evaluation. Net Net:  The bigger less regular problems aren't managed until they are large and very expensive to fix!

3.) Labour rigidity. Banks, particularly the larger organisations are traditionally really poor at developing their employee skills laterally. Workers tend to fall into silo and responsible for specific function. While specialisation of labour has benefits there are costs associated with employment that is too rigid. When challenges arise banks are often forced to hire outside contractors or consultants at high rates and of course as specialised employees are promoted they often struggle with the breadth of responsibility associated with management. 

Some of the more offensive examples of waste within financial services here in the UK are listed below . All of the factors mentioned above can be seen here and ultimately one should ask themselves who is been served?

  • Estimated £45 billion**  in costs for PPI claims. Of course banks should have acted more ethically and invested more in compliance upfront. Nonetheless the manner in which redress has been applied is clearly hugely wasteful. 
  • Banks are squandering £2.7 billion a year chasing false leads because outdated anti-money laundering (AML) systems.*
  • £3bln - legal, consulting and one-off implementation costs of the Solvency II regime within the UK insurance industry. 
  • £107m - The amount paid to advisers so the government could support RBS, Lloyds in 2009. ***
BanksyLA

So to conclude I would  define Hidden Banking Waste with the following.. Probably more to add but this is where I am starting off!

Hidden Banking Waste = Poorly designed regulations + labour rigidity + tech inflexibility + management overkill.

 


 

PHP in 2017, holding strong..

PHP emerged as a popular server-side language all the way back when Oasis dominated the charts here in the UK, over 20 years ago now. Initially developed for simple personal websites the language was later adopted by developers of online juggernauts such as WordPress and Magento and other content management systems. PHP now powers several hundred million websites and remains the most popular server-side solution and approximately 83 percent of data-driven web properties are using it according to w3techs.com.

Trends in the relative popularity of PHP can be ascertained using data from sources including GitHub, StackOverflow and LinkedIn. PHP has seen its market share eroded in recent years by the explosive growth of Node. A high percentage of startups are opting for the younger and arguably sexier JavaScript-based technologies as they criticise, sometimes fairly, flaws such as unusual type casts, confusing/old semantics and error forgiveness.

However I argue that PHP in its latest form, and associated progression into Hack and HHVM offers a sustainable and robust option for the development community.  

PHP 7, the latest iteration, offers faster execution and substantial improvements in memory usage with a decrease in RAM consumption of more than 50 percent in some cases. PHP libraries such as Icicle allow for asynchronous execution. 

Ultimately PHP is an agile language. The fact that you start each request with defined state means,we get a kind of a more 'real' or natural error identification. Furthermore while concurrency may seem restrictive at first, it is lower risk than the locks /distributed slate of competing languages. 

However, probably the greatest strength of PHP is the broad community of developers who support its future and are available for it's utilisation. Coding in PHP is relatively easy and painless (as simple as save and load) which allows for the rapid development of a minimal viable product.