January 12, 2023

IoT Impacts on the Asset Finance Industry

The internet of things (IoT) is not a new concept, but its growing proliferation means that it will become increasingly important for finance providers. The use of internet-enabled sensors embedded in the physical world of machinery, vehicles and across working environments (think smart offices and smart factories, for example) will quietly and, in some cases, radically change commercial activities, behaviours and related business models.

A relatable example for asset finance providers is IoT-based predictive maintenance. By monitoring equipment in use, it is possible to provide maintenance at the right time and in the right way, predicting and avoiding equipment underperformance or breakdown. This sounds useful, but if you contextualise it within the production line of a large factory, with multiple inter-connected machines all reliant on each other to generate an end-product, the value increases significantly.

The benefits of this type of predictive maintenance are manyfold for the operator and are not to be underestimated. They include increased production output, improved machine utilisation, lower maintenance costs, longer machine life, improved stock management, increased competitiveness and ultimately, increased profitability. 

Asset finance companies can respond to these situations in a number of ways. For example, asset managers will have more data in managing residual value positions, both in terms of downside risk protection, making informed in-life mark-to-market valuations (potentially reducing capital allocation across a lending portfolio), and in facilitating an equipment upgrade based on the enhanced equity held in a well-maintained asset or as it can be seen to be nearing the end of its useful life. 

Machinery is more likely to be sold under a service contract with maintenance embedded within the contract. Additional monitoring and management services may also be included in the sale. These may drive both new business and risk appetite implications for lenders. 

The cost of maintenance may become a variable rather than a fixed amount, creating new bill and collect considerations for the lessor. And, of course, as sensors monitor the actual usage of the equipment, the case for pay-per-use becomes clearer for all concerned.

It’s not hard to see why IoT is becoming a major factor in many commercial environments. In 2022, the number of IoT-connected devices globally was estimated at 14 billion, set to grow to 27 billion by 2025 and the most prevalent use case is remote asset monitoring (with IoT-based process automation and vehicle fleet management also major areas of adoption). 

It’s also clear that providers of assets will naturally move further towards a model involving more service income through the commercial life of the asset. And, of course, establishing the environment of sensors, analytics, reporting, AI-driven diagnostics and new services in itself creates new opportunities for finance providers.

Industry 4.0, the Fourth Industrial Revolution, is happening before our very eyes. We should take care not to miss the implications and opportunities that it creates.

To discuss further, please contact peter.hunt@finativ.co.uk

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