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April 7, 2017

A cycle of innovation and disruption

Leasing Life’s inaugural Chief Executives’ Lending Forum took place on 29 March at Holborn Bars, London. The event brought together banks, lessors and others to discuss key trends and developments relating to the future of lending to SMEs. Saad Ahmed reports back with an early overview.

By Saad Ahmed

Leasing Life’s inaugural Chief Executives’ Lending Forum took place on 29 March at Holborn Bars, London. The event brought together banks, lessors and others to discuss key trends and developments relating to the future of lending to SMEs. Saad Ahmed reports back with an early overview


"We really want to provoke the debate, and even a little bit of controversy,” said Lindsay Town, chief executive officer of IAA-Advisory, as he introduced the first session of the inaugural Leasing Life Chief Executives’ Lending Forum.

The event brought together a variety of companies, including challenger banks, fintechs, industry bodies and lessors to discuss the landscape for SME lending, and the future of asset finance. Firmly on the agenda was the need to move towards a more digitised business model, to see off competition from rising fintechs.

On the day the UK government triggered Article 50, Brexit could not escape a mention. Upcoming threats, both technological and economic, were firmly on the agenda, as the industry considered how to respond to a quickly shifting lending landscape.

Staying ahead Nathan Mollett, head of asset finance at Metro Bank, began the discussions by talking about the rise of challenger banks in recent years, and their impact on the competitive landscape.

“You can’t be new forever,” Mollet warned, adding that challenger banks involved in the asset finance and leasing market needed to think about their strategic priorities. He argued that specialist lenders must focus on the areas where they are already present, and “maintain a relatively simple business model” in order to continue growing.

Mollet concluded by calling for the destruction of the ‘challenger bank’ label, claiming that it no longer applied. “If you think about the different types, the operating and service models are so different that I don’t believe it’s particularly helpful,” he argued.

Dealflo’s chief executive officer, Abe Smith, made a call for increased technology and automation in financial contracts, particularly in onboarding. “We process €20bn in transactions every year; we do it for a range of asset finance providers and other financial services companies,” he said.

Smith explained that onboarding a client was typically the first stage of a financial contract, and automation, he argued, avoided human-related errors. “Since 2008, just in our target market base of the US and Europe, our clients have been subject to $200bn in regulatory fines,” he said, suggesting that technology could have resulted in fewer breaches.

Mollet and Smith were joined by Simon Goldie, head of asset finance at the Finance and Leasing Association (FLA) for the first expert panel discussion of the day. Chaired by Town, the panellists spoke about the rise of intermediaries and alternative funding options.

“Technology is one of the biggest challenges for the broker market,” said Goldie. “It’s quite difficult to know quite what that impact is going to be.”

Goldie added that rather than an “Uber of leasing” emerging to disrupt the industry, something more drastic could appear, but added: “That could take time to happen.”

Disintermediation, Goldie said, was not an immediate threat, but it would change the industry. “Brokers aren’t going to disappear,” Goldie noted, “but whatever shape that technology takes will influence how they do business.”

Market opportunities Jo Davis, partner at Locke Lord and head of the firm’s asset finance division, chaired the second session. Entering this stage, the discussion shifted to how lenders could unleash the market potential in the SME sector.

Adrian Reeve, chief executive officer of YesGrowth, discussed the rise of alternative, non-traditional lenders and new forms of lending. Reeve said that although the SME funding landscape had become crowded, businesses were still not fully aware of their options. “Between 30% and 40% of SMEs don’t know about the opportunities other than the bank,” he said.

Mollet said that lenders had a range of response options to deal with the rise of alternative lenders. They could try to compete; partner with them, following the example of MarketInvoice, which partnered with Xero; create their own alternative funding solution; or stage an acquisition.

Tahir Ahmed, head of short-term products at UK Export Finance (UKEF), the Export Credit Guarantee Department, said the entity sought to “reach as many SMEs as possible”. He said that UKEF worked with financing partners and brokers, and was not there to compete.

Following the financial crisis, UKEF introduced some short-term products. Currently, Ahmed said, it was involved in areas such as supply credit financing, which included lease payments, and operated an export insurance policy. Ahmed said UKEF was hoping to do more business in the years to come, which would include SME lending.

JCB Finance managing director Paul Jennings addressed upcoming challenges in the industry. Jennings explained that JCB Finance provided hire purchase and leasing only, adding that it grew during the recession. “We are the largest manufacturer lessee,” he said.

Jennings voiced his concerns about what he thought was an erosion of traditional asset finance skills as algorithms became more prevalent in conducting business. He also thought that the market was heading towards an oversupply of SME lenders, and asked the audience whether the industry was adequately pricing for upcoming risks.

As he drew to a close, Jennings came to the elephant in the room: Brexit. “Brexit is going to be really there in the middle of agreements that we’re writing today,” he said. “Are we really pricing for that?”

The speakers convened for the second panel discussion of the day, chaired by Davis. Reeve predicted that the number of SME lenders could not simply grow indefinitely, and anticipated alliances and mergers. “There will be consolidation, because we can’t all chip away at the same market,” he said.

Ahmed said that UKEF had “lost touch” with smaller asset financiers, as there had been a perception that it was only interested in big-ticket assets. “Our supply credit finance scheme is hardly used,” he revealed. “I would be delighted to see more demand for it.”

Tarun Mistry, partner at Grant Thornton, asked Jennings if the benign credit and risk environment of low defaults made lessors less likely to adequately price risk.

“I am concerned that the terms have thinned too much,” he said, adding that the UK’s economy had become unsettled. He warned lessors against a lack of information about a potential lessee’s financial situation. “If I win a transaction from another captive too easily, then I worry that there must be a reason for that,” he said. “We do let go of tight asset finance principles at our peril, and I’m beginning to see that.”

Innovation Graham Olive, deputy chief executive of OakNorth Bank, discussed how lenders could learn from technology to improve decision making.

Olive explained that OakNorth was the first UK bank to have all its systems on the cloud, and claimed that the “large and static oligopoly” of the UK lending space could be solved by technology.

“[This is] a sector in need of structural change,” he said, adding that 90% of SME lending was still provided by the five biggest banks in the UK.

Olive warned that UK lenders were failing to properly utilise technology, and this resulted in inflexible decisions. Olive suggested that banks could learn from the best elements of private equity, such as its flexibility, to deliver a debt finance proposition to SMEs.

Peter Galka, partner, financial services – transaction advisory services at accounting firm EY, spoke about due diligence, but first addressed the financial outlook for the asset finance industry in post-Brexit Britain. He said that in recent years there had been an increase in merger and acquisition (M&A) activity in UK leasing.

 “In the low-interest-rate environment leasing has been a great attraction as a source of yield,” Galka said, predicting that the M&A trends would continue post-Brexit. “However, there are going to be tough political negotiations that will flow through into consumer and business confidence, and cost of risk,” he said.

Galka said EY thought the rise in the cost of risk would hit other financial industries first. “If cost of risk does increase, the first people to retrench from the lending market will be the very big banks,” he said, adding that this could create opportunities for challenger banks.

Peter Alderson, group managing director at LDF, told the attendees about the importance of digitisation, and discussed why the hybrid funder came to set up its online SME lending platform, lendinghive. “There’s not a move towards online execution for asset finance, and we think there’s an opportunity there.”

Alderson continued by explaining that he expected the role of the broker to change, particularly over the next five years. “The distribution model that has been used for SME finance for many years is being shaken up,” he said.

Olive, Galka and Alderson were joined by Andrew Scotting, financial solutions manager – UK and Ireland at Cisco Capital, for a discussion and audience Q&A. Alderson responded to an audience question about how LDF adapted the culture of the business and staff skillsets to enable lendinghive. “We’ve had to completely upskill the marketing department, and we’ve grown our IT team,” he said, adding that he had put the technology, marketing and data teams in closer proximity to aid co-operation.

IAA-Advisory’s Town asked Scotting how captives in the industry should respond to challenges presented by the rise of pay-per-use models. “We’re having discussions about the outcome, rather than the technology that’s going into that deal, and how we’re financing it,” Town said. Scotting replied that Cisco was moving a lot of business towards subscription, and stated that this was the way lessors needed to move in order to stay relevant.

The future of lending Grant Thornton’s Mistry chaired the final session, as the delegates wondered about the future of UK lending. Atul Madahar, a former venture capitalist, spoke about venture leasing, an asset finance proposition for early-stage companies with venture capitalist backing.

He explained that the product combined elements of a traditional lease with the equity function of venture capital investment. “The lease has lease payments, but there’s an equity component,” he said, adding that “none of these firms have any profitability.”

“Venture leasing has been around in the US for a long time,” he noted, adding that it had yet to properly take off in Europe. He said that despite the fact that Europe had more venture capital firms than the US, it had just 40% of the US’s venture capital funds.

Madahar also pointed out that the composition of the companies that venture capitalists preferred was different in Europe, where the life science industry was favoured.

Disruption was the word when Peter Thomas, executive director of the Leasing Foundation, presented the final talk of the conference. “The asset finance industry…has a lot to learn about technology,” he said. “It’s evolving really quickly, and it’s difficult to keep up.”

Thomas discussed the impact of technology and how it could disrupt the asset finance industry in the near future. Disruption, he said, came in two forms, low-end disruption, where entrants capture low-price customers and incumbents focus on higher value, and new-market disruption, where an entrant creates a new market. “Incumbents are squeezed [and] eventually driven out of the market,” he said.

“We’re in a constant cycle of innovation and disruption,” Thomas continued. “Established businesses are faced with the innovator’s dilemma.” He explained that asset finance providers faced the decision of whether to compete and try to offer a better service to the same customers than encroaching fintechs, or adopt new models and seek new markets.

For the closing expert discussion, Madahar and Thomas were joined by OakNorth Bank’s Olive, and Andrew Bloom, chief executive officer of Masthaven. Mistry chaired the panel as the panellists and attendants discussed the future of the UK economic landscape and the effects on the lending landscape.

The panellists wondered whether fintechs would take more of traditional banking functions, such as payments and clearing. Fundamentally, they concluded that lessors needed to adopt new technologies and learn from potential disruptors, to keep and enhance their place in the SME lending landscape.

Please see next month’s LL for more in-depth coverage from the event.

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