Evaluating your programme04/02/2012
Eric Gross, Chairman of ELFA’s Captive and Vendor Finance Business Council Steering Committee, and Director of Managed Services at Bank of the West, recently wrote on Captives’ choices, in an article in the latest Equipment Leasing & Finance Magazine. He starts by saying that lessons learned over the past few years are encouraging companies with vendor finance programmes to evaluate their go-to-market funding and servicing strategies. The uncertainty of the markets and potential accounting rule changes have introduced uncertainty into the normally predictable equation.
Naturally, it remains to be seen if the proposed accounting rule changes will place into question the self-funded model for captives. The proposed changes may drive customers to require more balance-sheet-friendly rental structures, structures requiring manufacturer support which may not be well suited for traditional bank lenders. A manufacturer that controls the servicing of its customer accounts will likely be in a stronger position to provide these.Gross refers to the fact that manufacturers who had become aligned with a number of funders in private label vendor programmes had become comfortable with the cost-benefit relationship of such programmes. The most notable benefit was the convenience of accessing a reliable and consistent funding platform. The price to be paid was the less-than-perfect customer experience resulting from working across multiple lenders, also customer credit concentration issues.This balance, which was once acceptable, has been disrupted by the instability of funding, thus putting the traditional vendor programme model out of balance.
As a result, companies are increasingly moving toward a hybrid alternative between a self-funded / self-serviced solution, and the traditional lender-funded / lender-serviced model. Under the hybrid model, companies continue to sell transactions to their lending partners but retain the ongoing servicing rights. The resulting programme provides the manufacturer the ability to have off-balance-sheet, non-recourse funding, complete control of the customer’s lifecycle and finance experience, plus the flexibility to mix and match lending partners.
There’s no doubt in Gross’ mind that employing a multi-funder model where the manufacturer retains the servicing is the path somewhat less travelled, and requires some initial effort to set up. Considerations need to be made regarding building or outsourcing of the back office, and greater coordination with lenders is required.He believes that perhaps the most overlooked benefit of a consolidated servicing platform is the ability for the manufacturer to own the historic customer and portfolio performance data and to have this information readily available and on a consolidated basis. Owning this information opens up significant future opportunities to the manufacturer to make smart decisions based on historical information regarding the direction of their programme.Adding in a servicing layer to a programme does come with an economic cost. Due to the greatly reduced level of servicing required by the lenders, it is possible some programmes will see a buy rate reduction to the vendor to help offset the servicing costs. The cost/benefit analysis will vary by programme with some programmes lending themselves more favorably to the structure than others.As would be expected, reaction from funders to any programme structure change is varied. Lenders with an attractive cost of funds and a strong and well-staffed credit shop have an inherent advantage when the services requested of them are boiled down to offering a competitive rate and credit box, and efficiently processing applications.
Whether or not this shift to a vendor controlling the customer experience is a fad or a long-term trend is anyone’s guess, in Gross’ mind. He says it should be noted that companies that establish a retained servicing programme model have historically kept the model in place. This lends credibility to the notion that while this trend may not become the industry norm, it will likely become more commonplace and accepted.