About

Know your assets, like you know your customers

Published in the World Leasing Yearbook 2002

In times past when risk could be defined as purely credit risk, the prime requirement of Leasing systems, or perhaps a more accurate description Credit Finance systems, was to manage the credit risk associated with the customer or lessee. A customer centric view of exposure and relationships, including exposure or other involvement as a principal to a contract or guarantor, together with associated company relationships, including indemnities or buybacks, was the essential requirement.

But the World is changing. Credit risk is still a prime concern, lessons have been hard learnt that will not be easily forgotten, but in addition, asset risk is very much to fore for most Asset Finance companies. Taking real risk in assets requires a level of knowledge, expertise, skill and possibly good fortune. No longer is it appropriate to consider the business to be “won” when the deal is booked, managing assets mid term, end term and into secondary period is the opportunity for profit or the potential for loss for the naive, unwary or just unlucky.

Knowing your asset like you know your customers reflects the realities of the market place in which leasing operates today.

Lessors taking asset risk need the ability to assess, predict, manipulate and manage their assets, no mean feat; but through a combination of human skills and system capabilities it can be achieved.

Quality and accuracy of information captured, like in so many other processes, is the very foundation of good asset management. As the old adage states “what you get out is only as good as what you put in”. Free text boxes allowing “user flexibility” to enter asset descriptions may sound great in theory, but in practice they lead to in-discipline, misinterpretation, inaccuracies and poor quality data. Simply recording that a particular asset is a desktop PC might just suffice for marketing purposes, but it hardly supports accurate residual value forecasting.

System Solutions

System solutions are available to create and maintain manufacturer, dealer and reseller equipment data tables; system driven validations ensuring correctly formatted registration numbers and serial numbers; mandatory field validations; dynamic asset class GUI presentation for multi-asset type finance organisations. All are methods employed, not only to ensure data accuracy, consistency and quality but to help speed the processing of data whether electronic or manually applied.

Today’s market is a global market. The vehicle finance industry, for example, has to cope with an increasing requirement to fund imported and specialist vehicles. The history and origin of such vehicles can, at times, be best described as unclear, or, at worst unknown. Taking asset risk in these circumstances is a challenge.

When considering the vehicle market it is worth remembering that a global standard was introduced by the International Standards Organisation (ISO 3780) for World Manufacturer Identifier (WMI) and Vehicle Identification Number (VIN) throughout the World. The ISO agreement reached with the world’s motor manufacturers states that there should be a readily recognisable and standard form of vehicle numbering. This would be of a uniform length of 17 digits, and the number would be permanently stamped onto a metal part of the vehicle’s body or frame, in addition to the fitting of the VIN plate.

Analysis of the VIN can be used to check the vehicle’s true identity and provide validation of vehicle details.

Such analysis can now be accomplished via a global VIN database and accessed with specialist VIN de-coding software, as developed by APAK. The decoded VIN normally provides details of the vehicle manufacturer, country of origin, date of manufacture, model, derivative and other vehicle attributes such as transmission type, engine size, left or right hand steering etc. The physical location of the VIN number of the vehicle chassis is also provided. For the identification of suspect vehicles the VIN holds a level of detail that is critical. Police Authorities and Insurance Companies rely on VIN analysis to support their fraud prevention activities.

As the industry knows only too well, the residual value position is influenced by many factors, not least of which is the commercial need to secure the deal. Systems can of course provide the raw base information but ultimately the decision, like so many others, is a commercial judgement taken in the light of accurate information, experience, business relationships and gut feel.

So, the asset detail is captured, its validity confirmed and residual value set, the asset must now be managed.

Lease Management Software

The choice of Lease Management software comes to the fore in determining how contracts are administered and assets managed. For those legacy packages that provide contract rather than asset based accounting, the ability to offer customers multi- asset contracts with full upgrade, termination and add-on product capabilities, may well be determined by the degree of manual intervention the finance house is prepared to accommodate. Intervention that will not be restricted merely to the front-end new business and customer service activities, but that which will permeate throughout the organisation into accounting and treasury functions with the inevitable effect of increased manual workloads.

Lease Management systems that offer asset based accounting provide the flexibility to treat each asset individually. Assets have their own tax and accounting book depreciation rules, amortisation schedules, income and profitability schedules, termination and upgrade provisions, as well as asset based add-on products such as maintenance and insurance etc.

Managing the asset off, as well as on lease is supported by the use of a Fixed Asset Register. Asset depreciation for both tax and accounting books’ provides whole asset life profitability calculations and the maintenance of “soft” and “hard” asset cost management, including write ups and write downs.

As an industry, the move towards usage based products seems to be gathering a pace. Such a move brings with it opportunities but also further challenges and risks. Challenges stem from a background of customer reluctance to feedback asset usage and management information, such information that is vital to the finance house, but not so for the customer; after all what’s in it for them, other than the potential of an additional charge? With this challenge, technology can help.

Devices available today provide for automatic data transfers, GPRS for example, from which the information received, such as time period or limit of use since last download, can be uploaded directly into the lease management system to initiate the bill and collect processes with all supporting financial postings. This is an example of high technology being applied to address low technology (faxes and letters) shortcomings. For those finance companies that take residual risk in high value equipment, usage management will be central to managing their RV exposures.

Managing Relationships

Technology should be used to manage the relationships with customers and assets beyond new business origination. Customer service facilities such as access to secure web based customer information for general account queries, statement requests, invoice reprints, payment queries etc., can be redefined to not only provide service and information to customers, but should be a means for them to provide information back, a two-way process. Added and shared communication opportunities with your customers will provide the mechanism to encourage feedback as to the location, usage and maintenance records for instance. These are the factors that will impact upon the future value and the residual value predictions previously made.

In the area of digital image technology a range of solutions can now be deployed to support asset management. The scope and extent to which any one finance company will use images will vary dependant upon the asset type, inherent asset risk and likely advantages to be gained. The insurance industry, for example, has embraced image technology to support damage assessment claims. For the leasing industry, the parallel can be drawn relating to a dispute over asset condition and conformance with return conditions. This is particularly relevant where multiple parties participate in the arbitration process, as the capability to distribute digital images efficiently will save time and cost.

Technology in itself is not the solution, it merely facilitates and enables parties to enact and deliver efficiently on their obligations to one another. A partnership between manufacturer and funder often requires a degree of openness and system integration. For example a manufacturer with re-purchase obligations would need information on the potential returns due and their likely condition, such information can be gleaned from most systems, but it is the timing, format and resulting actions that enhance relationship, essentially this means information on demand. With disparate systems and technology platforms, integration has in the past been complex and expensive, but today with the move to open standards and XML technologies, integration can be achieved in a timeframe and at a cost that justifies the effort.

Re – marketing the asset

Market sectors, asset types, funder preferences, third party arrangements all influence the dynamics of the asset re-marketing effort. Technology can play a part with once again the provision of information, whether that is through a general company asset disposal web site, third party auction site or an asset focused site, directed to a known purchaser population.

For example, motor financiers, manufacturers, dealers and specialist internet retailers have formed strategic partnerships over recent years in an attempt to make vehicles available to the trade and the consumer via internet motor portal sites. Despite the well publicised difficulties faced within the dot.com sector, particularly relating to the B2B channel, there have been some notable successes not only in the retailing but also in the financing of new and used vehicles.

Comprehensive, accurate and up to date information has been one of the key elements in this success. Whilst the individual dealerships possess the base data relating to individual vehicles, responsibility should lie with the motor finance providers, who service the independent and franchised dealer networks, to provide a consolidated view of available vehicles. It is possible to achieve this goal by offering the dealers incentives to include non-funded vehicles on stock locators held centrally by the financiers within wholesales ‘funding’ systems, driven by electronic feeds from dealer management systems. And what better incentive is there than the opportunity of increased sales through an alternative channel?

This is where the traditional financial system providers have a role to play.

APAK has provided wholesale stock locators to the motor finance industry for many years as an integral part of its WFS wholesale finance system. The stock locator has traditionally provided an electronic platform for the movement of stock throughout a dealer network, in order to satisfy demand for specific vehicles without the intervention of the manufacturer or finance company. Automation and streamlining of previously time consuming tasks, utilising interfaces with third party systems such as transport and logistics, being the key driver.

The move towards the provision, via the web, of ‘all’ vehicles within the dealer network, whether funded by the financier or not, has extended the stock locator to the consumer and retail finance sector and has given rise to integrated retailing and finance portals offering 10’s of thousands of vehicles.

APAK has taken this a step further by integrating the wholesale and retail finance functions, via a common web-based interface to its ASSET retail and WFS wholesale funding systems. This provides financiers with the ability to offer retail finance to consumers, via the web, for vehicles selected from the wholesale stock locator.

In conclusion, as leasing moves further towards the inevitable combination of asset and credit risk, the options open to lessors can be summarised as being; accept the risk, share the risk, convert the asset risk to more traditional and comfortable credit risk with manufacturer or third party arrangements. Whatever the option(s) chosen, and it will likely be more than one, a system strategy and software solution that has extensive and focused asset capability will be necessary to avoid the perils ahead.

Tony Langford
Business Manager
APAK Group plc
Published in Leasing Life - August 2001