October 31, 2023

Growth in Demand for Pay-Per-Use Contracts

After a lengthy period of much talk and little action, over recent months we have seen a material uplift in interest from finance companies and, indirectly, from OEMs in pay-per-use (PPU) funding structures for the asset finance market. 

The proposition for all stakeholders appears to be getting clearer and there are material developments in the finance company's ability to deliver.

Below is a brief outline of the benefits for each group:

  • End customers - improved cashflow with alignment of incoming and outgoing cash flows, risk-mitigating financial flexibility, ability to scale up or down, maintenance/ performance risk transferred to equipment supplier, efficient operations from more effective maintenance (timely, preventative) 
  • Equipment suppliers - ability to satisfy growing market demand, lock in higher margin service and parts income over the financing term, significantly uplift customer lifetime value, retain a longer term, more informed relationship with customers with increased potential for further sales, move towards outcome-based as-a-service (AAS) propositions, improved maintenance provision
  • Funders - meet growing demand from vendor finance partners, increase margins, achieve competitive advantage, win or retain vendor partnerships

Funder risks are generally mitigated by a minimum monthly payment level. To ensure reliability of asset performance, maintenance contracts are included in the structure, providing higher margin income streams for the equipment supplier. In turn, this has been seen to drive higher buyback positions and as a result, lower overall rentals for the customer despite increased margins for the finance company – a very positive virtuous circle for all concerned!

A key underpinning technology is the Internet of Things (IOT). Increasingly, vehicles and industrial equipment come loaded with sensors that can transmit machine-generated data to the manufacturer and finance provider. This drives the variable pay-per-use element of the finance contract. A very valuable byproduct is the insight the data provides. As a simple example, a significant under-use of a core asset may be a sign of a low economic activity and therefore a potential default risk, while high usage may offer further sales opportunities, related to both asset finance and other financial products.

A key issue is the funder's ability to manage variable payments, with manual workarounds being inefficient and the source of potential operational risk. Recent announcements from system providers suggest that progress has been made in this area (and this functionality may now be an extra consideration when selecting a system). Moreover, we are aware that Findustrial, a provider of an IoT platform for pay-per-use financing transactions, is in discussions with technology vendors on the potential to create a distinct PPU microservice for lenders, integrating with the funder’s general ledger.

For more information contact:

Peter Hunt, Chief Operating Officer, Finativ

e-mail: peter.hunt@finativ.co.uk

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