In our previous articles, we have seen how PPU can improve retention and grant access to new customer segments; understood the importance and value of the data opportunities provided by PPU; and learned that PPU can contribute towards tangible demonstration of a business’s ESG credentials.
What’s not to like? Why are we not seeing faster adoption, development and growth in PPU propositions? The answer is, we are, but it takes time, and it takes time because of the longer-term nature of the sustainable solutions that genuinely meet the challenges PPU brings, namely, scale, costs, (especially logistics), and technology.
As with any new product or sales channel, it is rarely a shortcut to overnight success and big margins, even with first-mover advantage, due to the need for upfront investment. One of the tricks with PPU is to deliberately start small, experiment with existing resources and test discreetly. This lessens risk and allows for retreat without a big loss of face. In actual fact, one of the most obvious starting points in any case carries very limited risk and that is in the area of CRM and retention. These initiatives should not need complex new customer or user interfaces and can be introduced with little fanfare.
A financial services provider should have a ready supply of assets coming to the end of their primary lifecycle, which commonly also means with an already flattening depreciation curve. This makes for a straightforward “extension” calculation to generate additional revenue on a largely amortised asset. Such an offer may be attractive not just to retain a customer looking for a replacement asset, but also to a customer in need of a contract extension, as well as to bridge a delivery delay for a new customer.
Apart from the configuration of a new product and the ability to recognise and bill variable payments, there should be little to change in any reasonable back-office componentry, and back-office processes will shadow very closely those for a full-service leasing product. There is a difference in the up-front calculation logic, most particularly insofar as holding costs and depreciation costs are predetermined, rather than calculated in real-time as an individual quotation.
This would seem to suggest the need for additional, new functionality, which is unlikely to be available within a legacy finance & leasing system. However, the nature of a rental-based product and its pre-determined elements means that something as simple as a spreadsheet formula would suffice for a pilot. Certainly, there is more than one apparently sizeable, well-established business still running on that basis today.
Of course, a certain amount of validation and rigour must also be in place, but starting in such a way also facilitates agility and flexibility. And by performing the calculations upfront and outside of the existing tech landscape, the back-office IT would no longer be required to perform the calculations, but instead simply consume the results, in the form of revenue.
Asset lenders have built up considerable expertise around the disposal of assets, currently geared around contract end. As assets are recycled rather than remarketed, then it stands to reason that some of the existing remarketing capacity can, in fact, be repurposed for preparing assets for the next customer. New skills and processes will have to be learned, but most of the principles remain the same – minimise turnaround time between asset return/collection and the next deployment, keep tight controls on reconditioning costs, and define in advance clear and fair rules around which expenses are to be charged back to the client and those to be absorbed by the provider. All of that could be understood as “internal” visibility. The new dimension is around making these assets visible and available to potential clients. The PPU Contribution to ESG
Most financiers, especially those already most active in vendor relationships, are familiar with the idea of point-of-sale presentation, embedding the finance in the asset sale process.
However, PPU requires a change of mindset which, while perhaps initially a little uncomfortable for vendors and OEMs, should be welcomed by the financial institutions.
The reason for this is that the PPU product becomes as important as the asset at its core. This becomes even more interesting when additional usage dimensions are added to the payment calculation, for example in the case of a commercial vehicle, the distance travelled and the tonnage transported in the charging period, not to mention the consumption of energy/fuel and ancillary services.
For a business user already familiar with the concept of TCO (Total Cost of Ownership) and looking for predictability in costs, with a tangible link to revenue, this starts to look like a very attractive proposition. It also strengthens the relationship between provider and user.
Unsurprisingly, the technology required to present all of this to the client differs from conventional finance point-of-sale, as well as diverging from traditional asset configurators, not to mention requiring the addition of the new usage components.
Perhaps less expected, is that the nature of the technical solution to these challenges should come with a surprisingly accessible price tag. One of the reasons is that a good platform, focused entirely on presenting the combined finance/asset proposition to the user, should complement and not duplicate existing solutions. The new platform consumes the asset data information flow in place.
Whilst there might be some new circuitry required to play with the usage data, the depreciation and funding costs of the asset will already reside in, and can be obtained from, elsewhere in the digital ecosystem.
There is no need for new customer onboarding processes and systems, there is no difference in the verification and approval processes and, as already seen, from the moment the client contract is activated, PPU will function with similar processes to existing, more conventional products.
Clearly, APIs will play a critical role in the functioning of this new ecosystem, but crucially, the development of the capabilities and the building of scale must be agile.
In the same way that a PPU product gives the end-customer the ability to influence the amount they pay with the way they utilise the asset, so the cost of the platform to the PPU-provider should in some way reflect the success of the PPU product.
An agile development and delivery means you only pay for the incremental functionality that you need and that you have defined, so avoiding the duplication of anything you have in your current ecosystem. And once the system is deployed, you can expect to pay the solution-provider based on your PPU business volumes, rather than an onerous license fee, payable regardless of how much or how little you use it.
By its very nature, such a platform is readily integrated within a wider ecosystem. If it is sophisticated enough to cope with PPU and it already has interfaces to onboarding and back-office processes, as well as presenting a polished face to the customer for PPU, why not other, existing finance and lease products too?
An increasing number of asset finance providers are seeing the logic in having a consistent and compelling combined asset/finance proposition across their entire product portfolio, whilst the technology itself is especially relevant and appropriate in any D2C channel.
Furthermore, when it is the gateway to the D2C channel, why wouldn’t it form the basis of any point-of-sale presentation layer?
Once in place, thereafter it is only a matter of configuring a particular user-type and access-category. The PPU Contribution to ESG
As illustrated in an earlier article in this series, one of the main sources of the added value of PPU to both customer and provider comes from the data it delivers. So, the extra tech is also required to secure the usage data that deliver the bespoke product. The digital ecosystem must translate that data into variable payment amounts, reflecting whatever the customer has determined should be the variables in their agreement.
As with the PPU product configuration requirement, the functionality of consuming the data and translating them into invoices and receivables should be within the capabilities of a reliable back-office system.
That said, this is also an essential prerequisite, being the actual delivery of the PPU promise and creating the “stickiness”, loyalty and longevity that make PPU the sustainable product it should be.
The technological change required to facilitate PPU is the perfect place to start a transformational journey, whether in terms of an agile development of new tech, or the incremental changes needed within a legacy landscape. In both cases, the internal know-how and resource required is likely to be quite concentrated, the time required should be reasonable, the risk and scope are manageable, and the cost controllable.
This all means that delivery should be sooner rather than later, and thus equally the demonstration and measurement of success. Because transformation is not a project, it’s a journey, PPU is exactly the sort of initiative than can act as a catalyst for wider business change, far beyond the impact of PPU itself.
There is a growing number of apparently conservative, broad-based financial services businesses who are testing the water and having success with the introduction of innovative new financial products and services and simultaneously taking the opportunity to radically overhaul their digital ecosystem.
Many of them already have significant scale, so it is easy to imagine a business-case discussion where PPU is regarded as being “too difficult”, or “non-core”, or “not moving the needle”.
Nevertheless, they have taken the decision to proceed, with financial innovation and technology innovation working hand-in-hand, and are quietly seeing positive results. They are seeing improved customer satisfaction and retention, a growing customer-base with new customer segments, a broader product portfolio with reduced concentration risk, a more flexible tech landscape with the promise of reducing overheads in the longer term, a readiness to capitalise on wider macro-economic and market developments everything from vehicle electrification to changes in tax regulation – and a business on a solid and sustainable growth trajectory, even in the face of strong economic headwinds.
The challenge for businesses without plans for PPU is that when it finally does take off, they will be playing catch-up, at which point controllable, gradual, organic initiatives will no longer be feasible.
A number of OEMs with captive financing arms are already compelling those companies to make the investment and prepare themselves. In the meantime, some of the larger, independent institutions, even those with sizeable vendor relationships, seem reluctant to take action, even at a time when arguably, they already have the scale and the resource to give it a try.
The question for them is when will fear of the unknown be supplanted by fear of missing out?
Article co-authored with:
Jake Rose, Head of Europe Sales, Asset Finance, FIS
