What does the post-Covid leasing industry look like?
In this edited version of a keynote address given by Alfa’s Chief Technology Officer at the Leasing Life Conference in Barcelona on 17 March 2022, Andrew Flegg argues that today’s uncertainties offer the global asset and automotive finance industry an opportunity for differentiation.
Since 2020, we’ve experienced situations we’d never have imagined. This has driven changes in behaviour we wouldn’t have expected, and given us all a greater appreciation of uncertainty, as many of us have carefully studied graphs from modelling groups and epidemiologists to try and make sense of the changing situation.
At Alfa, we were fortunate we had a pandemic plan that we tested in March 2019, and were used to working virtually, as colleagues often had to work together around the world. When we decided to enact that pandemic plan, we had no idea how long we’d be remote working, or the lasting changes to working practices that’d result, but our company culture allowed us to adapt.
The future is still uncertain - whether Covid, inflation/interest rates, or the climate crisis - but uncertainty is not always a bad thing. Although we need to prepare for ongoing uncertainty, that uncertainty also gives an opportunity for differentiation - and therefore competitive advantage - through both culture and technology.
First off, let’s recognise we’re not in a post-Covid world yet, and there’s increasing talk that we might never be.
We’re getting back together at conferences like Leasing Life, and day-to-day restrictions are starting to loosen. But covid is still prevalent across the world, and although omicron generally had less impact than earlier variants, that was helped by vaccines and other public health measures that aren’t universal. As we see case rates increasing again, it’d be premature to assume that another variant couldn’t emerge, which - if more transmissible or dangerous - would cause us to take a step back into the measures of 2020 and 2021.
On top of the uncertainty from pandemics, we know about many other risks. In the past few weeks and months, we’ve - of course - seen Russia invade Ukraine; as well as rapidly rising inflation; Cop26; and updates from the Intergovernmental Panel on Climate Change.
The IPCC’s working group on Impacts, Adaptation and Vulnerability concluded in its recent update that the climate crisis is an unequivocal threat to human well-being. It said: “Any further delay in concerted anticipatory global action on adaptation and mitigation will miss a brief, and rapidly closing, window of opportunity to secure a livable and sustainable future for all.”
End of Ice
One of the most significant global actions to help move towards net zero is the ban of internal combustion engine (ICE) - and even the move away from plug-in hybrid-based cars and vans over the next few decades to pure battery electric or fuel-cell vehicles (BEVs and FCEVs).
Scandinavia is particularly driving the trend here, with Norway giving the most ambitious target of 2025, from when it’ll only allow new vehicles to be powered by batteries or fuel cells.
How consumers and businesses will respond to these bans is unclear.
The transition to EVs has slowed recently by the continuing disruption to supply chains, particularly semiconductors - which have meant that 1 in 5 secondhand cars in the UK are now selling for more than their brand-new equivalents. This will have an impact on residual value (RV) modelling, and the finance products that should be offered in a market where used assets can be more in demand than new ones. But what will those RVs look like when new petrol and diesel car sales are banned? How should that risk be managed?
All of this means we’re in a world of increasing uncertainty, and not all of these will provide opportunities: it’s abhorrent to consider looking for commercial advantage when we can see the humanitarian crisis caused by Russia’s invasion of Ukraine.
However, some challenges do provide the environment to innovate through the development of new products, processes, and technologies.
At the start of the pandemic, many scientists said that vaccines couldn’t be relied on to be a short-term path out of Covid. Previously, the fastest vaccine to go from development to deployment was the mumps vaccine in the 1960s, which took about four years.
Fortunately, those scientists were wrong: the pace of the vaccine development in 2020 was unprecedented. And now the use of mRNA-based vaccines against further diseases, such as HIV and cancer, has been accelerated by a world eager to try new ideas to get back to some semblance of normality.
The development of various covid vaccines is one of many examples from history of new technologies and innovation being driven by adversity. This pattern has been recognised and used by governments, with the UK’s Green Finance Strategy aiming to align private sector financial flows with clean, environmentally sustainable and resilient growth, and strengthen the competitiveness of the UK financial sector under three pillars:
- Greening finance
- Financing green
- And capturing the opportunity
All three are sensible in their own right. But the opportunity of ‘financing green’ is more than just the obvious move to electric vehicles; as it encompasses opportunities for the leasing of charging points and the wider aspects of the green economy, such as reduced-carbon or carbon-free plant and equipment.
Of course, technical innovation isn’t just driven by changing regulation. Customers’ expectations have also changed. Both B2C and B2B customers increasingly want always-on, on-demand, digital interactions - so this provides an opportunity for differentiation.
Beyond getting the service they need - where, when and how they want it - the pandemic has highlighted the benefits of truly understanding customers’ changing needs.
Responsiveness and agility
We’ve seen customers value their finance companies showing appreciation of the circumstances affecting them. That goes beyond tweeting out messages of support - finance companies need to demonstrate compassion and responsiveness, in the light of often difficult circumstances, such as natural disasters, pandemics or conflict.
This means finance companies need to be able to react more quickly than ever before. The agility we need to embrace as an industry, and as individual companies, is proportional to the level of uncertainty the world, our customers, and we, face.
So, what does flexibility mean? What does it look like to have an adaptable company, configurable business processes, and a responsive technology landscape? And what steps can be taken to be more agile in all these areas?
Let me give you two examples where companies’ flexibility allowed them to deliver great customer experience during the pandemic.
The first example is a challenger bank who went live for new business the week before the UK went into lockdown. Focused on time-to-value, the initial plan had been for the existing portfolio to be either left to run off or migrated at some later point.
But they quickly realised that plan needed to change: they now needed to provide forbearance to existing customers; and the legacy banking system they were on didn’t have the flexible in-life contract management options that they now had.
By pivoting quickly to bring forward the migration, they brought together a culture of agility, customer understanding and their recent technology choices to quickly move off the legacy system.
This meant they could offer existing customers the same payment holidays they were able to offer new ones. And, as they were hosted on a secure cloud platform, they increased their volume by about 100x without having to worry about scalability or performance - instead concentrating on delivering customer value.
My second example is a car finance company, which runs one of the world’s largest auto portfolios. When the pandemic began, their focus on the challenges their customers were facing, and how they’d changed, helped them realise they needed to act. But the number of customers affected meant they couldn’t handle this through their existing customer service channels.
They worked quickly to create an online solution that would provide payment flexibility to eligible customers who needed their assistance. They innovated across their teams to develop an online self-service tool, a process that normally would take them three months, in only five days.
These tools allowed customers to defer payments, make a catch-up payment plan and other contract changes, to help them get through the pandemic.
The web site provided customers with the ability to get the help they needed, at any time, without human interaction. It did this by invoking our API, which verified the customer’s eligibility through business rules, applied an automatic restructuring of the contract, and notified the customer of the result without any human interaction to complete the process.
It was a great success: in the first month, over a million customers had put their payments on pause.
And it was a success they were responsible for: we hadn’t had to make any software changes on our side. Again, the combination of focusing on the customer experience, process agility and technology allowed them to do something transformative for those struggling through financial difficulty.
Keys to success
Let’s look through the four common elements that will distinguish successful companies in the face of this uncertainty.
The companies above developed and maintained a culture focused on customer success, and through that their own success. A culture that fosters openness and collaboration without politics or silos.
I mentioned earlier that our culture at Alfa allowed us to work together: within Alfa, with our partners, and with our customers, to carry on delivering despite the pandemic. Our values reflect our culture, and we can use them to identify behaviours we want to encourage.
An open, collaborative culture aligned on the business strategy, supports an approach to projects and process change that enables agile delivery.
“Agile” is more than just “iterative waterfall”: it’s also responding to changing circumstances, using the iteration to avoid sunk cost fallacies, and so not be afraid to pivot when necessary.
This means that agile, incremental delivery doesn’t increase risk; it reduces it.
For example, we’re increasingly seeing customers go live with out-of-the-box configurations of our software offering; allowing pilots, new business-first or minimum viable product deployments. Once live, and gaining value, further work is done to evolve the processes to be more optimised for the business.
Using that cycle of iterative, incremental delivery in the implementation sets up a culture of continuous improvement, reducing the effort and risk associated with infrequent, multi-year, major upgrades to processes and technology. Continuous delivery requires the discipline of pursuing higher value by following the adage “if it’s hard, do it more often”.
We’re increasingly seeing this model adopted for even our largest, and longest running portfolios, with a number taking each version we release, every four weeks, into production.
With the right culture and delivery approach having the right technology enables companies to move quickly, with low-code or no-code capabilities reducing the dependency on others to implement features. System flexibility, both in terms of functional configuration and technical options, enable processes to be open and adaptable by the customer.
There are many different ways of designing flexibility into your systems. At Alfa, we believe we get the most flexibility by having a single, global, platform used everywhere from Sydney to Stockholm, financing submarines to satellites - and everything in between. Different markets and geographies can use features that were developed for another.
However you achieve it, having systems that are quickly changeable, and easily interoperable, provides the flexibility to respond to uncertainty, whether that’s new products to deal with customer behaviour changes because of inflation, or the increase in leasing driven by the move to EVs.
As an aside, consider that growth in leasing EVs is stunning, in the first nine months of 2021, 63% of battery electric vehicles registered in the UK were through British Vehicle Rental and Leasing Association members; compared with the long-term average of about half of new registrations going through the BVRLA for all power trains.
And that’s only growing: the third quarter was up 87% - helping the auto finance industry get back on track after the pandemic.
This all means companies can be successful on their own, and owning the customer value chain is a key, core competency for finance companies. However, for things that aren’t core competencies, or are emerging working with others in partnership, allows companies to focus on delivering customer value.
Partnerships have many benefits.
Firstly, they allow offloading activities that aren’t competitive differentiators - such as running IT infrastructure - which is driving the growth of cloud-based services. About a third of our customers are now running in our managed service, utilising the scalability, performance and security benefits of our automated, infrastructure-as-code approach.
Partnerships also mean that challenger companies can compete with the larger, existing incumbents. Our biggest customers often have digital skills in-house, allowing them to quickly innovate to integrate into existing, group-level portals.
But the costs of developing and maintaining these solutions for smaller companies can be prohibitive, with the cost of software developers only going up. Partnerships can be a cost-effective way of getting those skills in when you need them, scaling them as required.
And that same approach also allows de-risking emerging areas, where the value hasn’t yet been demonstrated. Artificial intelligence and machine learning is a great example here. Building an in-house capability to just explore the potential value will be time consuming and expensive when there’s uncertain returns and so many possibilities - from top-line activities such as customer behaviour modelling, like credit; fraud and delinquency; to bottom-line activities like new machine-driven methods of business process optimisation.
Partners with experience in AI & ML, who understand how it might be used in the future can allow the benefits to be explored in your specific circumstances, without needing to recruit and integrate data scientists and engineers into your organisation.
Some activities are too big for almost any company. For example, the variety of considerations for consumer finance means some form of credit reference agency almost always needs to be used: no-one has enough data for their underwriters to make an informed decision. Similarly, an auction house or a company like 3stepIT has the depth of product, experience and logistics to allow assets to be resold, reused or recycled most efficiently at the end of a lease.
When selecting partners, particularly if they’re going to have access to your end-customer data, it’s important to have an efficient supplier assessment process. Looking for certifications, like ISO 27001 & SOC 1 & 2 - and using pre-built questionnaires for standardised information gathering - can ensure you’re getting partners you can trust while also getting value delivered more quickly.
The rate of change of people’s expectations - whether customers or staff - has accelerated through the pandemic. Cop26 and the IPCC have highlighted how far we still must go to address the climate crisis. We don’t yet know where the new normal will settle.
But, by working together, we can innovate and challenge in multiple markets, achieving operational agility and, through leading-edge technology: always-on, 24/7, omnichannel experiences.
All together these can result in a harmonious, end-to-end tech ecosystem for finance and while uncertainty naturally leads to nervousness, I’m also excited for the opportunities ahead.