December 12, 2023

The PPU Contribution to ESG

Article published in association with FIS

How might PPU be seen as sustainable?

The primary selling proposition of a Pay-per-Use product is that the end-customer pays only for their use of the asset, thereby focusing their attention on how much that usage costs them, with the financier/owner retaining their own focus on asset cost and depreciation. Since the utilisation of most assets requires the consumption of some sort of fuel or energy, PPU can be a useful nudge towards improved environmental awareness and responsibility. However, that in itself is insufficient to claim reliable sustainability credentials.

Pay-per-use requires a change of mindset

PPU is not just another lease variation, a genuine PPU product will be based on a rental agreement. In many markets this is subject to specific legislation – often a different, usually lighter, regulatory touch, in comparison with finance and leasing.

From a provider’s perspective, the customer contract separates any one individual customer from the depreciation of the asset over its entire lifetime on the financier’s books. This makes the periodic rental for that same customer more affordable over the term of their asset-use than would be the case for a comparable, traditional, short-term lease which ends with the asset’s return and disposal or remarketing.

When the first customer has finished their use, the asset is returned to the owner and, subject to any refurbishment, made available to the next client. Yes, this introduces utilisation risk, as well as logistics and reconditioning costs, but the idea is that all these costs are amortised over an extended lifecycle with the asset owner, with the total duration of that lifecycle demonstrating increased environmental responsibility on their part. This is not about a financial institution discarding decades of credit-risk experience in favour of utilisation-risk, rather, it means embracing PPU to broaden their product ecosystem.

Customers are willing to pay for certainty and convenience

The evident challenge of PPU carrying increased provider costs arises not least because the conditions around termination of a rental agreement are less onerous to the customer and thus less advantageous to a lessor than they would be used to.

However, there is growing acceptance amongst customers, especially business users, that such convenience has an associated cost.

Indeed, some PPU and subscription providers explicitly offer alternative schemes, whereby the more flexible and less expensive the termination cost, the higher the regular contracted payment. The important perspective for the customer is the ability to terminate at short notice and at a pre-determined cost.

Ironically for many customers (and potentially a source of relief to PPU providers) there is growing evidence that just because the customers have the flexibility around early termination doesn’t mean that they exercise that option. One OEM offering a standard 12-month package is already seeing typical customers extending beyond 18 months.

Furthermore, retention rates with PPU products already appear to be higher than with conventional finance and leasing arrangements.

Usage data doesn’t just optimise the cost to the customer

The increase in variety and ready availability of use-data informs the customer of additional dimensions to their asset-use - not just the cost, but the overall effectiveness and efficiency of their use.

In the case of automotive assets, a typical lease would have an excess mileage clause, which can come as an unwanted surprise at the end of the contract.

A PPU product with a mileage component would keep the customer informed, as well as facilitate the customer’s payment, in real-time – especially convenient as any increased use-cost in a commercial environment would often be associated with correspondingly elevated revenue. And PPU is not just about mileage, it could be tonnage, time/duration of use, energy, and other consumables.

All such data keeps both operator and owner equally informed regarding service and maintenance scheduling and requirements. Over time, the provider will find themselves in possession of a substantial database, that can facilitate more accurate SMR, (service, maintenance and repair), cost estimation and pricing, as well as predictive maintenance, the identification of reliability issues, and reduced reliance on third-party data.

The road to electrification

In the case of automotive assets, there is already a tangible trend to associate PPU products with electrification, increasingly commercial vehicles and not just passenger cars. The battery-electric vehicle (BEV) boosts the ESG credentials of both the customer and financier, on whose balance sheet the assets sit. However, there are further and more subtle benefits that PPU brings to help accelerate BEV adoption, creating added value and convenience for the customer.

PPU usually includes additional services, and not just insurance – the fuel card is readily replaced by a charging service, which can cover access to physical charging points as well as a deal with the energy provider(s). The level of connectivity provided by modern vehicles in general, but BEVs in particular, includes online diagnostics and remote software updates, as well as recognition of low-emission zones where BEVs are, at least currently, advantageous. It is not difficult to see a straightforward connection to a wider road-pricing in future.

A series of small steps, rather than a big bang

Not one of these dimensions in isolation is likely to change the world for asset financiers in dealing with the growing demands for them to demonstrate their ESG credentials.

PPU however, and the information it provides, with its versatility, transparency and effectiveness, is a strong indicator and enabler of the desired direction of travel, as well as being a more holistic solution for customers and providers alike.

Whilst a viable and attractive product in its own right, especially when associated with specialist assets, or the introduction of new asset product lines and sales channels, PPU can be introduced to legacy clients at various touchpoints, such as asset-substitutions, contract extensions, or increasingly commonly, as a retention tool.

Many asset funders are gradually introducing and extending PPU offerings as part of a diverse finance product portfolio.

Building a proposition

We have now seen how PPU can be a driver of growth, provide a competitive advantage through data, and credibly support a financial institution’s ESG obligations.

Next time, in our final article in this series, we will look at the organisational levers to be pulled in order to build an attractive PPU proposition, whilst maximising the re-use of existing capacity and resources, as well as some ideas around the role to be played by technology in optimising the set-up.

Article by:

Simon Harris, Consulting Director, Finativ

Jake Rose, Head of Europe Sales, Asset Finance, FIS

Other articles in this series:

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