Collaborations between capital-poor start-ups and innovators, with the backing of manufacturers, offer a way forward for lenders in this ever-changing landscape, says John Phillipou of Paragon Bank.
In the early days of Tesla, Elon Musk embarked on an audacious journey. He began by crafting high-end electric vehicles, a move that seemed counterintuitive at the time. Yet, his strategy was clear: demonstrate the viability of electric technology, create a buzz around the brand, and substantiate the business case. It worked, not only winning over investors but also charting the course for Tesla’s expansion into the mass market. Today, Tesla stands as a pioneering symbol of green technology.
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However, as we approach the year 2050, with the Government’s commitment to achieving net zero carbon emissions, many industries are venturing into uncharted territory. They are developing green technologies with no historical precedent or established track record. This new landscape presents formidable challenges for the asset finance sector, as it currently exists.
Banks have long held a preference for certainty. They thrive on data that reveals an asset’s performance, its anticipated residual value, and the strength of the secondary market for that particular asset. This preference has been ingrained in the sector’s evolution, from its inception in the 1950s, when high street banks pioneered asset and leasing finance primarily for tax purposes, to the present day, where we encounter an array of funding options.
Paragon Bank, like other financial institutions, has been a part of this evolution. Yet, at the core of most lending decisions within this sector remains a reliance on the historical performance of the underlying assets. The apprehension arises when customers cease payments, leaving lenders with assets that have uncertain resale prospects.
As we look to the future, the Government is laying down mandates for industries to adapt and align with the 2050 targets. For instance, starting in 2035, new vehicles in the UK will no longer be allowed to rely on petrol and diesel-powered combustion engines, though recent adjustments to this policy have been made. This shift necessitates a significant realignment for vehicle manufacturers, their supply chains, and the requisite infrastructure to support alternative fuel vehicles.
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By GlobalDataIn the world of asset finance, adaptation is also imperative. Today, if a bank seeks to finance assets devoid of a robust historical data stream, it must allocate additional capital until the asset’s performance is proven. This practice, though essential for risk management, poses significant expenses and diminishes the attractiveness of funding emerging technologies.
The inherent risk associated with untested technologies is substantial. From governance issues to performance uncertainties to customer acceptance, the development of new technology is fraught with unpredictability, and banks are duty-bound to manage these risks cautiously.
Trend I: Diversified funding
In this swiftly changing landscape, two key trends are emerging in the asset finance sector. The first revolves around a diversified funding landscape, ranging from traditional banks to disruptors such as Amazon. Private equity and peer-to-peer finance are set to play an increasingly significant role, alongside institutional debt. With mounting competition, lenders must embrace digitisation and data-driven decision-making, leveraging the innovations introduced by fintech rather than resisting them.
Trends II: Symbiosis in financing
The second trend centres on the symbiotic relationship between innovators and traditional manufacturers. Innovators often possess ground-breaking ideas but lack the necessary financial backing. Banks, on the other hand, hold the capital but exhibit risk aversion due to the uncertain prospects of new technology. In this context, manufacturers must position themselves for the future, but they cannot generate all the ideas independently. Collaborations between capital-poor start-ups and innovators, with the backing of manufacturers, offer a nurturing environment for innovation, provide manufacturers with fresh technology, and instil confidence in funders regarding the financial robustness of the partnership.
In this ever-changing landscape, one certainty remains: change itself, driven by legally binding Government commitments. For the asset finance industry, this means adaptation is not an option; it is an imperative. Failure to evolve risks ceding our position to a new breed of funders.
At Paragon Bank, we are committed to navigating these uncharted waters, embracing innovation, and ensuring that our clients are well-prepared for the dynamic future that awaits us all.
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