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Ironing out the wrinkles of consumption-based leasing

If consumption-based equipment leasing is to be widely taken up, its usage needs to be better predicted and measured and complications around its administration need to be sorted out, says Diane Croessmann, deputy practice leader of strategy and competitive alignment services at The Alta Group, a US-based equipment finance, asset finance and leasing advisory business.

What is the most pressing development equipment finance leaders need to understand about consumption-based, pay-per-use, financing?

Funders are gun-shy when asked about “consumption” models. Many of them associate these models with a payment that is 100 per cent variable. And that translates to less confidence in recovering their equipment investment over the contract period.

However, “consumption” doesn’t necessarily mean that the payment has no minimum. Many programmes today are introducing consumption models that provide the end-user with payments based on a sliding scale of usage that includes familiar “hell and high water” clauses to effectively guarantee collateral recovery.

Diane Croessmann, deputy practice leader of strategy and competitive alignment services, The Alta Group

Is the industry moving fast enough to meet customer demand for pay-per-use financing options?  

If you ask an end-user, the answer is probably no. In a perfect world, end-users might like to pay purely on usage and, more importantly, at a fair price.

Today, generally, one of those two requirements is at risk. For an original equipment manufacturer (OEM) or service provider, the reality is that the ability to predict and measure usage for many asset classes is still something that needs to be addressed before these options become widely available.

Consumption models are also more administratively complicated and require investment in processes and systems to properly invoice, collect and distribute payments. All these details have to be sorted out on a much broader scale.

Who are some of the industry leaders and innovators so far in this space?

Some sectors are more advanced than others. Today, because of more sophisticated intelligence built into many classes of assets, a “unit of measure” can be tracked remotely and turned into usage models. Technology, medical, vehicle and other sectors have introduced asset tracking. However, there are many asset classes that aren’t as far along so they will lag in developing consumption models.

The ingredients for success start with the ability to create and monitor a unit of measure and then require the ability to administer the process. Finally, you must be able to price the offering at a level that provides real value to the end-user.

Which challenges do companies find the most vexing about these initiatives? What’s your advice?   

If you’re a manufacturer, you’re trying to stay in step with the market. If the market is moving toward consumption, you’re forced to consider it. This could mean that you might be transitioning from an upfront cash model to a monthly payment model. If you haven’t used a funding partner in the past, you are trying to leapfrog over straightforward leasing programmes to something more complicated. If you get it wrong, it can wreck your balance sheet and administrative processes. Even with a pre-existing funding partner, you may not have the right one – someone who can manage the complexity of consumption offerings.

We see OEMs stuck in totally unfamiliar territory. It can be daunting to consider the first step toward something this different. The requirements necessary for change might push them to delay or not do anything versus trying to keep pace with the market. Overcoming the urge to “do nothing” requires a healthy commitment for change coupled with an understanding that change doesn’t have to be uncontrolled. It can be planned and executed in a practical and methodical manner.

Any common misconceptions we should clear up here about consumption-based finance models? 

I would encourage everyone to reconsider the definition of consumption. It’s not an “either/or” model. There can be degrees of consumption and adoption. The first step is to actually define an “output” that can be translated into something of value to the end-user. The next step might be to introduce consumption that includes assured recovery on a minimum payment. If the final objective is to enable an offering that includes a payment based on a 100 per cent variable consumption component, it’s something that can come with more intelligence about “usage” behaviours, but it doesn’t have to be the first step.

What are the most transformative challenges facing equipment finance today? 

The impact of the Covid-19 pandemic has been felt by every industry. Individuals and companies are transitioning to “uncertainty.” The new normal hasn’t been totally defined but we do know some of the major influences.

We’re seeing an incredible increase in investments in automation. This is especially true in some sectors. As an example, manufacturing plants that were shuttered during the pandemic are turning to increased robotic options to minimise future disruption. The massive shift to e-commerce has seen warehouse automation come to the rescue to keep pace with e-commerce giants, such as Amazon. It’s also true for smaller establishments, where restaurants are testing robotic greeters and taking orders with little human interaction.

All of this investment is actually good news for the equipment financing industry, but I anticipate we’ll see pockets of disruption, from private funding sources who aren’t constrained by regulatory restrictions. This could lead to much more rapid adoption of interesting rental, consumption and services models.