Is increasing competition in the UK asset finance market driving a race to the bottom on pricing?
After ING left the UK market in 2012, it left a vacuum of business, estimated at around £1bn (€1.33bn).
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That vacuum of business was absorbed by the UK’s other bank-backed players and asset finance firms.
It was also part of the inspiration for the new wave of so-called challenger banks to get set-up in the UK market.
Additionally, foreign investment has flowed into the UK market and backed new leasing businesses, which have been availing of this global liquidity and investment.
The Finance & Leasing Association figures returned a 10% asset finance growth rate in November. It’s a staggering cross-industry, cross-sector average for FLA members – the sort of double-digit return that attracts private equity funds.
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By GlobalDataPE houses have therefore set up in the market in force and that has only increased competition.
Some of the tactics that have been engaged in order to win business or market share might not be in the industry’s best interests. Or in the interest of those who are developing these practices.
Rumours abound about ‘gazumping’ contracts, where panel brokers have arranged leases through a funder, and have then been undercut by up to half their deal value by a second funder, in order to swing the broker and the client at the eleventh hour.
Pricing business in order to win it over competition is a risky practice – engaged in because players are trying to win market share.
Yet selling super cheap leases at unfeasibly low prices does not give businesses the margins of support they need on their leases to survive should there be a change in the economy and default rates start to rise among lessees.
With the volatility of global equity markets, most notably resulting in a major sell warning by RBS in the Financial Times this month, SMEs have to be careful.
A global correction in the value of equities, a global slowdown should China’s economy crash, or a higher than expected rise in the base interest rate by the Bank of England could cause serious problems for leases that are not priced responsibly.
As quickly as we see the number of market entrants rise, we could see the total number of businesses fall.
The answer, as we have been developing, is not a race downwards in pricing, but in a race to develop services that are useful to the client as a value add-on.
That is a truly sustainable business practice.
The ‘Brexit’ question is bad for business in the short term
The EU question that’s hanging over Britain is not helping matters when it comes to pipeline business for funders.
Whatever your politics, when it comes to the EU, certainty is best for business.
I know a lot of funders breathed a sigh of relief after the UK’s general election if only because it provided certainty for at least the next four years.
Domestically it might seem that once UK Prime Minister David Cameron sets a date for an EU referendum, SME owners might think twice about entering into a lease contract in the months preceding the date, assuming the lease duration lasts several years.
Whatever the effect of a Brexit on the leasing market: the damage to new business figures in the run-up to the date could cause a few problems too.
