Canadian Equipment Finance Magazine Spring 2017

Spring 2017 • volume 5 • issue 1 | www.canadianequipmentfinance.com

The Future of Alternative Lending Transforming Vendor Captive Finance

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Understanding Fixtures Filings Big Data + Asset Funding Telematics... Now What?

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contents Spring 2017 Volume 5 Number 1 Publisher and Editor-in-Chief Steve Lloyd steve@canadianequipmentfinance.com Managing Editor Sarah O’Connor sarah@canadianequipmentfinance.com Creative Direction / Production Jennifer O’Neill jennifer@canadianequipmentfinance.com Photographer Gary Tannyan Advertising Sales Mark Henry mark@canadianequipmentfinance.com

NEWS »4

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FEatures

The Future of Alternative Lending or How Billions of Bits of Data Reshape Companies Data can make things easier for borrowers—and lessees »8

Understanding fixtures filings »14

Markham ON L3P 1Y2 t: 905.201.6600 • f: 905.201.6601 info@canadianequipmentfinance.com www.canadianequipmentfinance.com Subscriptions available for $40.00 year or $60.00 two years. ©2016 Lloydmedia Inc. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher. Printed in Canada. Reprint permission requests to use materials published in Canadian Equipment Finance should be directed to the publisher.

Big Data + Asset Funding = Do We Know Yet?

The Transforming World of Vendor Captive Finance »16

Leveraging data to boost the bottom line

»10

FinTech resistance is futile »13

Also Publishers of Payments Business www.paymentsbusiness.ca

FinTech: Opportunity or threat? »22

Canadian Treasurer www.canadiantreasurer.com Contact Management www.contactmanagement.ca

Direct Marketing www.dmn.ca Financial operations www.financialoperations.ca

Telematics Has Our Attention: Now What? How the benefits of telematics evolve as a company grows »18

How and why Scotiabank is embracing FinTech »26

Risk costs have declined for third year in a row »24

Made possible with the support of the Ontario Media Development Corporation Ontario Interactive Digital Media Tax Credit

canadianequipmentfinance.com | Spring 2017 | CANADIAN EQUIPMENT FINANCE

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News

More than half of firms yet to begin process of adopting new lease accounting standard: survey When the International Accounting Standards Board (IASB) issued a new standard on lease accounting in January 2016, companies had nearly three years before the first deadline. Recent research, however, suggests that more than a year in most companies have made no progress. Fiftysix per cent of Canadian CFOs in the Robert Half Management Resources survey said their organization has not begun the transition to the new standard. The new standard is designed to improve reporting of lease transactions, according to the IASB, and all organizations that lease assets, from real estate to equipment, are affected. The new regulations go into effect January 1, 2019. The research found that among the businesses that have started the transition to the new standard, more than eight in 10 (84 per cent) have completed the diagnostic work necessary to determine how much effort will be required. The top pain points described by CFOs who have taken steps toward compliance include staff training, assessing the changes that need to happen in the transition and upgrading technology. The good news for those who are working toward compliance: the majority have identified their team members and responsibilities for completing the transition (86 per cent) and 82 per cent have made an inventory to prioritize system changes that need to happen. More than threequarters (78 per cent) have begun or completed writing new accounting policies and a similar number have started or 4

completed new procedures (76 per cent). “Integrating the new lease accounting standard is a complex process that involves cooperation from all areas of the business,” said David King, Canadian president of Robert Half Management Resources. “Companies must anticipate the additional time and effort required and proactively lay the groundwork for a successful transition.” Chris Wright, managing director of the financial reporting remediation and compliance practice for global consulting firm and Robert Half subsidiary Protiviti, said the scope of the transition is creating challenges for companies. “The new guidance is much more than accounting,” said Wright. “It requires systems upgrades, new reporting processes throughout the business and updated training. The transition also necessitates a well-rounded changemanagement initiative, which is proving to be a massive effort, especially for large companies and particularly coming on the heels of the adoption of the new revenue recognition standard.” With the standard’s requirements being so new, firms are having difficulty finding individuals with the necessary expertise to support the transition, King added. “Organizations should employ professionals who have dealt with comparable compliance initiatives in the past and seek help from consultants with experience navigating the new lease accounting standard.”

CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

Research highlights by company size The largest companies, those with 1,000 or more employees, are the farthest behind. Only eight per cent of the largest businesses have begun the transition, compared to 36 per cent of the smallest companies (20-49 employees). A greater percentage of the largest firms have at least started writing new accounting policies, but they’re also the group least likely to have a project plan developed to address the gaps revealed through their diagnostic work. Conversely, the smallest companies are more likely than the largest to have made an inventory of systems changes to be made and begun new written accounting procedures. Similarly, companies with 100 to 249 and 250 to 499 employees are facing the most acute challenges in attempting to diagnose the needed changes. Research highlights by industry Only 26 per cent of wholesale businesses have begun the transition process. More construction (53 per cent) and manufacturing (47 per cent) companies have started the transition than organizations in other sectors. Less than half of financial companies (36 per cent)

currently in the adoption process have developed a project plan to identify gaps in the transition process. Professional services CFOs are experiencing the greatest difficulties in training staff and finding professionals with the needed expertise. Research highlights by market Companies in Saskatchewan, Ontario and Alberta are leading the pack when it comes to preparation. At least 43 per cent of businesses in each of these provinces have begun the transition to the new lease accounting standard and a minimum of 75 per cent of those firms have started their diagnostic work. On the other end of spectrum, only five per cent of Manitoba companies have begun the move to adopt the new standard. While almost all Quebec companies that have started the transition have also started the diagnostic work (99 per cent), only 29 per cent have developed a project plan to address gaps that have been diagnosed. While most provinces find that training staff is their biggest pain-point, Manitoba firms’ greatest challenge is finding employees with the necessary skills, the research found.

To send press announcements, please direct them to Steve Lloyd, Editor-in-Chief, at steve@canadianequipmentfinance.com

News

Bright prospects for the equipment finance industry: report White Clarke Group’s 20th annual Global Leasing Report reveals an optimistic industry outlook with positive growth and continued confidence. Overall global annual volumes reached the US$1 trillion milestone as leasing finally shrugged off the effects of the great recession, with growth in the industry outperforming that of the overall economy. North America remained at the top of the world’s largest leasing regions—increasing its lead on Europe, and the United States remained the world’s largest leasing market by double-digit growth.

Europe performed well. Its two largest and most mature leasing countries, UK and Germany, continued to improve, with the UK achieving a 14 per cent increase. The rise within both of these markets was driven in part by auto finance. Asia showed the fastest growth of any region. China continued its rapid rise towards top place, expanding its leasing market more than 25 per cent in one year. Business volumes were driven by infrastructure, manufacturing and a resilient car market. “2016 brought some

significant economic and political events, namely Brexit and the election of Donald Trump as U.S. president,” said Brendan Gleeson, Group CEO. “Both events have brought short-term volatility on the global foreign exchange and

stock markets. It is too early to assess how these events impact upon the economies of the world and the global leasing industry in the medium term—but there may be some resulting economic instability in 2017.”

For breaking news and in-depth features, visit our website at www.canadianequipmentfinance.com

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canadianequipmentfinance.com | Spring 2017 | CANADIAN EQUIPMENT FINANCE

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News

EquipmentWatch announces highest retained value awardwinning equipment EquipmentWatch has announced its second annual list of Highest Retained Value Award winners— the industry’s only awards based on residual values of heavy equipment. Top honours in each category were given to the model/series projected to retain the highest percentage of its original value after five years. Twenty-eight awards were presented in all, recognizing winners in construction, agricultural and lift/access equipment categories. Caterpillar and John Deere tied for most awards won in 2017 with four each. Caterpillar maintains a slight all-time edge with a total of nine to Deere’s eight

accumulated since the program’s inception in 2016. Only five series continued their 2016 dominance and won again in 2017, a sign that residual values among the most popular types of equipment are very competitive. Repeat winners include Apache (self-propelled sprayers), CASE (backhoes), Gehl (small skid steer loaders), JLG (articulating boom lift) and SkyTrak (lift trucks – telehandlers). “The Highest Retained Value Award is indicative of excellence across a manufacturing organization,” said Garrett Schemmel, vice president of EquipmentWatch. “Product quality has the most obvious impact on

Award category

Make/model series

Backhoe Loaders

Case 580

Balers

New Holland BR

Boom Lift, Articulating

JLG A

Boom Lift, Telescopic

Haulotte HB

Combines

Case IH Axial-Flow 140

Dozers, Track, Large

Deere 850

Dozers, Track, Small

Deere 700

Drum Compactors

Bomag BW211

Electric Scissor Lifts

Custom Equipment HB

Excavators, Crawler, Large

Caterpillar 349

Excavators, Crawler, Medium

Volvo EC350

Excavators, Crawler, Small

Bobcat E85

Excavators, Compact

Volvo EC35

I.C. Scissor Lifts

JLG RT

Lift Trucks, Telehandlers

SkyTrak Telehandler

Lift Trucks, Warehouse/Narrow Aisle

Komatsu BX

Loaders, Compact Track

Kubota SVL90

Loaders, Skid Steer, Large

Caterpillar 262

Loaders, Skid Steer, Small

Gehl 4240

Loaders, Wheel, Large

Caterpillar 980

Loaders, Wheel, Medium

Komatsu WA320

Loaders, Wheel, Small

Hyundai HL740

Motor Graders

Komatsu GD655

Rear Dumps

Caterpillar 740

Sprayers, Self-Propelled

Apache AS

Tractors, Track

Challenger MT800

Tractors, Wheel, Large

Deere 8R

Tractors, Wheel, Small

Deere 5E

an asset’s performance on the secondary market, but residual values are also highly impacted by brand affinity and fair original pricing. A manufacturer must excel on all three fronts to gain recognition as a Highest Retained Value Award winner.“ While the largest brands (Caterpillar, Deere, Komatsu) continued to dominate certain categories, there were a notable number of specialized manufacturers with product series that showed significantly 6

CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

greater retained value than their competition, such as Bomag, Challenger and Hyundai. “For purchasers of equipment, there is perhaps no single measurement more influential in the buying decision process,” says Schemmel. “The residual value of an asset will have a significant impact on leasing terms and lifetime ownership costs. Informed buyers do well to weigh value retention heavily when considering equipment acquisition.”

News

ELFA releases “8 reasons to finance” infographic The vast majority (78 per cent) of U.S. businesses lease or finance their equipment. The Equipment Leasing and Finance Association released a new infographic highlighting why this method of equipment acquisition is so popular. The “8 Reasons to Finance Equipment for Your Business” infographic provides a visually inviting explanation of some of the key benefits businesses enjoy when they lease or finance the equipment they need to operate and grow. This new tool is the latest resource from ELFA’s Equipment Finance Advantage website for end-users, a onestop resource designed to help current and potential end-

users of equipment financing make the best possible decisions. The infographic showcases a variety of ways businesses can use equipment finance to their strategic advantage, including: ◉◉ Finance 100 per cent: Arrange 100 per cent financing of your equipment, software and services with zero per cent down payment. ◉◉ Save cash: Save your limited cash for other areas of your business, such as expansion, improvements, marketing or R&D. ◉◉ Keep up-to-date: Keep upto-date with technology by acquiring more and better equipment than you could if the financing option were

not available. ◉◉ Outsource asset management: Let your equipment financing company manage your equipment from delivery to disposal. ◉◉ Accelerate ROI: Rather than paying one lump sum for your equipment, make smaller payments while the equipment generates revenue. ◉◉ Customize your terms: Set customized payments to match your cash flow and even seasonal income fluctuations. ◉◉ Benefit from bundling: Bundle the equipment, installation, maintenance and more into a single,

easy-to-manage solution. ◉◉ Hedge against inflation: Lock in rates when you sign your lease to avoid inflation in the future. “There’s a reason nearly eight out of 10 companies lease or finance their equipment—it makes good business sense,” said Ralph Petta, ELFA’s president and CEO. “We are pleased to present this new infographic illustrating some of the important ways our industry equips business for success.” We encourage ELFA members to use and share this tool to help businesses of all types and sizes learn about the strategic benefits of equipment finance.”

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Fintech

The Future of Alternative Lending or How B Data can make things easier for borrowers—and lessees By David Gens

lternative lending is still very much the Wild West of financial services. With minimal consumer protection laws that can address the proliferation of technology and innovation happening in the industry, we are set to undergo a metamorphosis in the next year alone. Be on the lookout for the following signs of change.

A

Growing appetite for alternative options The alternative lending industry overall has seen explosive growth across North America in the last few years. With little or no inventory or overhead, it’s proven to be an attractive industry for startup entrepreneurs seeking opportunity. On the other hand the equipment leasing industry has been slow on this front because of intense competition and higher barriers to entry. In the last decade, the equipment financing industry has seen tremendous consolidation with many of the larger leasing companies in Canada having been acquired and now owned by the big banks. This has opened up a range of opportunities for new entrants into the market. Last year, we became the first alternative lender to extend a data science algorithm and process to the 8

equipment financing industry. Our model is using data—lots and lots of data—to establish the creditworthiness of its borrowers and has now launched an equipment leasing division, where businesses can lease-to-own their equipment. Right now, if you walked into a bank and wanted to borrow funds, you would have to submit an extensive business plan, all the while wondering: who has the time to read it all? In Silicon Valley, you would be tossed out immediately if your business plan’s page count went into the double digits, because people are busy—and so are you. One of the key opportunities in alternative lending right now is that there is only an emerging awareness around the existence of such financing options. Part of it is due to industry stigma stemming from the payday loan industry, which is a completely different model than how lenders like us operate. Increasingly, convenience, mobility and simplicity are key criteria people look for in their experience with any company. This is no different in the lending sphere, as now many will have the additional choice of approaching alternative lending options first before they head to the bank.

CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

Better technology Online lenders are appealing to small businesses and first-time borrowers for many reasons: one of which is that they actually have higher chances of securing a loan in the first place. For this demographic, their credit profile would normally see them turned away from banks or credit unions and underbanked customers with a low credit score or people who have experienced identity theft couldn’t get any loan at all, even if business was booming or they were set to grow, which can seem counterintuitive. Alternative lenders stepped in and help to fill this niche by using algorithms that look at data points to evaluate each applicant—in our case, more than 300. Alternative lenders and equipment lessors who have access to this data achieve significant efficiencies and can in turn keep a lid on the cost of each decision made to approve or decline. The thing is: data is precious. Data can only be collected with each real decision that a lender makes and its associated results, which in turn forms the basis for intelligent predictions over time. In essence, data helps alternative lenders stay competitive and flexible. Lending may seem like no more than any other commodity in the financial services industry but consider the

Fintech

Billions of Bits of Data Reshape Companies result of this technology learning over time. Lenders and equipment lessors can tailor the terms of a contract to the precise risk level of a borrower or lessee almost instantly and open up growth opportunities to more kinds of businesses. As technology-empowered lenders amass data and become more skilled in determining the present health of a business, we may see other applications for this data come into play. In the future, the lenders’ algorithms may even be able to accurately predict when a business is set to flounder simply by charting all of its data points, even if sales or cash flow are indicating the business is doing well. It’s not a far off future—credit card companies can already predict divorces before people even decide to have one due to monitoring changes in their customers’ purchasing patterns.

Better protection Business lending is a largely unregulated industry because business owners are assumed to have a certain level of savviness and knowledge. But that doesn’t stop time from being wasted or major irritants from entering your day by way of several phone calls a day if you sign up to receive more info from the wrong company.

Financial technology could benefit from regulation to better protect borrowers, as many lenders follow good practices only on a voluntary basis. For example, alternative lenders are not beholden to the disclosure of loan terms on the level of major banks, but we should be. This is one of the key gaps that has led to people becoming victims of loan stacking—where the company has chosen to ignore the fact that a borrower already has an existing loan to pay off and issue a new loan anyway. Consumer protection laws to address such practices would help those who are often turning to alternative lenders because they aren’t able to borrow from a bank but deserve the same treatment. Equipment leasing is a little easier to self-regulate, as bad players tend to get weeded out quickly. Regulation of FinTech startups has become a key issue in the last year at both the federal and provincial levels. Canada’s Competition Bureau will be releasing their study on financial technology firms, including lenders, this year and the B.C. Securities Commission recently launched a Tech Team devoted specifically to collaborating with FinTech companies in order to build a regulatory framework. The debate in the meantime will be coming to an agreement on how much

we should regulate the industry while still keeping the market in balance. This is one of the crucial conversations in the ongoing maturation of the alternative finance industry.

Moving forward What can we expect from this specialized area of FinTech in the period ahead? Among this new generation of alternative lenders and lessors we’re going to see more collaboration rather than consolidation. Increased competition in the market should bode well for clients of lenders and lessors in the long term, and many new entrants are poised to strike up bank partnerships to help banks reach the smaller businesses and smaller loans that they are not equipped to handle. As the data and technology matures and gains legitimacy in the industry, we’ll start to see new applications for the type of enhanced information collected on small businesses as they are made available. Governments are already starting to wrap their heads around the financial technology space and reaching out to consult closely with the community, so we should see (and welcome) the outcome of this collaboration soon. David Gens is the founder and CEO of Merchant Advance Capital.

canadianequipmentfinance.com | Spring 2017 | CANADIAN EQUIPMENT FINANCE

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Fintech

Big Data + Asset Funding = Do We Know Yet? Leveraging data to boost the bottom line

By Jan Pilbauer

he digital revolution has transformed a number of industries, music and film being the most widely known. What might be surprising is that it has also had a significant impact on payments, driving this industry into the limelight as companies begin to realize how they can reduce expenses and boost the bottom line simply by paying more attention to the way they “pay.” Organizations that experience a high volume of payments between suppliers, customers and partners—like equipment financiers— stand to benefit the most. Business leaders in these fields should be paying particular attention to a looming opportunity—it’s called ISO 20022 and

T

10

it’s all about data. According to recent research by RFI Consulting and Payments Canada, equipment and software payments rank third in value of business to business payments at $510 billion per year in Canada. Consumer to business payments for rentals, leases and bill payments tout equally impressive annual figures. So it is a particularly big problem for these industries that the current processing of business payments is quite inefficient. This inefficiency rests predominantly in accounting and treasury departments where payments are reconciled and it is costing companies huge dollars. But, before you go storming down the hall, rest assured that your accounts receivable and payable people are not at fault.

CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

They have been making do with what is available, namely inefficient electronic payments or old faithful, the cheque. Many large companies have moved to electronic payments and invoicing in an effort to streamline and expedite their processes; however, they remain hindered by current payment capabilities that don’t allow rich remittance data to travel with payments. As a result, a payment may arrive separately from an invoice or with no invoice data at all. This creates an issue of manual paymentinvoice matching that requires timeconsuming and error-prone re-keying. Not only does this mean resources must be allocated to process and match payments to data, but it can create enough friction in the system to delay

Fintech payment processing and collection and negatively impact cash flow. Take, for example, an instance where your organization—which sent, let’s say, eight invoices over the last two months to a customer—receives a lump sum payment of $10,000 with no accompanying information. While you are assuredly pleased to have been paid $10,000, your accounts receivable team is likely scrambling to balance books by tracking down the invoices the payment might be connected to, calculating sums, calling your customer to verify the match, correcting any inaccuracies or discounts and then keying information manually and, hopefully, accurately. And that’s just one instance for one of your many customers. You can imagine why your accounting department might be feeling a little harried. Many accounting and treasury teams have eased this burden by employing accounting software that creates an online invoicing and payments portal and helps to match the two. Many companies have seen value in this. Metroland Media, a company that sends more than one million invoices per year to advertisers, has publicly claimed the move to this type of accounting software reduced the number of days required to collect revenue after sales by 59 per cent. Vendors offering these solutions claim their accounting software can reduce accounts receivable costs by 40 to 60 per cent. These are impressive results that can have a significant impact on cash flow but, still, there remains a gap. So much so that lack of integration with accounting systems is cited as one of the primary reasons businesses don’t move to electronic payments and stick with the cheque. In fact, Payments Canada research shows that, while there are fewer cheques being written every year, the value of those cheques continues to rise by about two per cent each year. Businesses are the primary drivers of this statistic. Despite their inefficiencies, many businesses continue to use cheques because they are easier to reconcile. A cheque allows for certain amount of payment data directly on its surface and often included in the same envelope is more fulsome remittance information.

An impending development that is likely to transform all of this and help businesses finally let go of the cheque is the ISO 20022 payment message standard. As technical as that sounds, ISO 20022 is basically a global language for electronic payments that helps systems around the world talk to one another and transmit significantly more data with payments. Not only will it streamline cross-border payments for multi-nationals, but it will significantly curb the reconciliation problem.

integration, compliance, interoperability and fraud detection, to name a few. And while that makes it clear how the standard will benefit us in the grand scheme of things, the practical reality is that it will significantly reduce headaches at the working level for accounts receivable, accounts payable and treasury professionals. On the accounts payable and receivable side, providing more information with the payment—as opposed to sending that information separately or not at all—has

Payments Canada research indicates cost savings could be as high as $4.5 billion over five years if we eliminated cheques in favour of electronic payments. In late 2016, Payments Canada, which operates the core payment systems in Canada, announced the ISO 20022 message standard will be rolled out across all of its modernized systems as part of its mission to modernize the Canadian payments system. This means corporate Canada will begin to have access to the standard through their Canadian financial institutions as early as 2019. This is a long-awaited development by Canadian multinationals that have experienced the benefits in other jurisdictions. Worldwide, ISO 20022 is being adopted by businesses, financial institutions and financial market infrastructures and is evolving at a pace that will eventually make it the standard of choice for electronic funds transfers. Of course Canada is on board. ISO 20022 is expected to have significant economic benefits for Canada—Payments Canada research indicates cost savings could be as high as $4.5 billion over five years if we eliminated cheques in favour of electronic payments. That number does not even begin to quantify the additional benefits that would come from enhanced

two primary benefits. First, it means you are providing better service to your partners and customers by streamlining activities upon payment receipt. And, secondly, it reduces load on your customer service or accounting teams who, no doubt, are currently regularly responding to calls and inquiries about the applicability of payments made. Now they have the opportunity to focus on more productive work. On the treasury side, where teams are managing a business relationship with financial institutions, evaluating bank statements and overseeing balances, there will be a much clearer view of cash positions, greater automation of payments and trade transactions and a more consistent approach across banks— both domestic and international. Most companies, particularly multi-nationals, work with more than one bank for cash, trade and treasury and each will have its own processes. Greater visibility and standardized language will help to save considerable resources, time and cost in managing all of this. As part of Payments Canada’s Modernization initiative, ISO 20022

canadianequipmentfinance.com | Spring 2017 | CANADIAN EQUIPMENT FINANCE

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Fintech will become mandatory for Automated Funds Transfers—also known as batch payments or electronic funds transfers, typically used for payroll, bill payments or pre-authorized debits—in 2019. The plan also calls for ISO 20022 to be a foundational piece of the new core clearing and settlement and real time payments systems, which will be implemented over the next three to four

years. While ISO 20022 will become available, businesses in Canada have a role to play in bringing this to life so they can reap the benefits of the standard. Businesses will have access to “unstructured” data with their payments—140 characters, or a tweet’s worth of free form text—and they will be able to work with their financial institution to receive “structured” data

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CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

from business partners. This means they can use a customized dataset for things like invoice and customer numbers, amount paid, discount applied, invoice date—all the specific details you need to streamline your payments. This also allows for the input of data across multiple invoices, a particular benefit for those with complex and frequent exchanges between partners and vendors in any given month. It will also be important for businesses to connect with their key partners on ISO 20022, whether that’s suppliers, vendors or franchisees, because the value of the data is in the exchange of it. The more who use it, the more everyone stands to gain. As adoption increases domestically and globally, ISO 20022 is something you should come to expect from your future partners. The other key players in this are the solution providers, whether that is an enterprise resource planning (ERP) vendor or outsourced treasury service. Business leaders will want to ensure these partners are ISO 20022 enabled within the Canadian usage guidelines. Those that have large offerings will likely be ahead in this respect based on their global experience, but they need to validate for Canadian guidelines. Generally speaking, there are major opportunities for these outfits to get on board in preparation for the Canadian ISO 20022 mandate in the coming years. The practical benefits for accounting and treasury professionals are quite obvious and the even broader potential of ISO 20022 is highly anticipated. Access to more data always creates the opportunity for greater analysis, and it will be interesting to see how Canadian businesses could use this intelligence to better understand their customers, vendors and partners and shape their business practices. This remains to be seen and it is just another example of how the payments landscape continues to transform and is increasingly seen as a strategic focus for business leaders with an eye to the bottom line. Jan Pilbauer is executive director of the modernization program and CIO at Payments Canada.

Fintech

FinTech resistance is futile How Canada’s Big Six must study and learn from the high tech players to survive By Peter Veash

isrupt or die. That seems to be the message to the banking establishment. Customer expectations are changing, driven by new experiences across a whole range of sectors. With much of that change driven by technology and hungry FinTechs springing up ready to deliver on those expectations, it’s a challenging time for established brands. Canada’s Big Six are in an enviable position compared to many financial institutions in the rest of the world. Bucking the trend, a recent EY report reveals that 96 per cent of Canadian consumers trust their bank to keep their money safe—and in a time of heightened consumer suspicion around the financial sector, this is impressive. Ratifying that trust is the World Economic Forum, no less. It ranks Canada’s banks as among the soundest in the world in the past 10 years, calling them a “model of stability.” But this solidness doesn’t make them bulletproof. The same EY report shows that 19 per cent of Canadians have little or no trust that banks will provide unbiased advice. With a further 77 per cent going online first to research financial products, the sector is wide open to new entrants who satisfy that need.

D

Why FinTechs are gaining traction To date, FinTechs’ strengths have been three-fold: To satisfy consumer demand for digital-first environments; to satisfy the thirst for immediacy and transparency and to, quite simply, do things differently. Their clever use of integrated data and a focus on sleek user experience has proven very attractive. It has been difficult for the major banking brands to respond rapidly to these trends. Legacy systems, silos and long development cycles are all hurdles

holding them back. But it is the corporate culture where they are really struggling. FinTechs are able to respond quickly to rapid changes in the market because of their agile culture. Working with a fail fast mentality, they create, release and iterate rather than debate, create and debate again. This environment means they can attract skilled people with the most upto-date knowledge who are able to keep building on those skills in an environment focused purely on tech and data. This is an experience that is not easily repeatable in the established banking environment, at least not immediately.

What customers really want is the best of both worlds FinTech’s sleek interfaces and mobile banking capabilities may have responded to the 66 per cent of Canadian consumers who demand a digital presence but 60 per cent of those same consumers also think having bricks and mortar outlets is important—this is why incorporating elements of both will result in an experience and culture that the consumer wants. Creating a digital-focused, customerexperience-driven culture in a legacy-bound heritage bank is a significant piece of work, but so too is building a physical banking network from scratch—particularly in a geography as wide and varied as Canada and particularly if your company only began two years ago in an incubator. Working with external partners can give legacy brands immediate access to the necessary technology and culture of innovation which has helped the FinTechs experience their meteoric rise—crucially, while maintaining their brand stability and trust. Keeping up with the innovators could be what gives the established banks the shot in the arm they need to bring about cultural change. Much of what prevents cultural change is

the blind investment needed, both in terms of time and money. A great deal of change needs to happen before results are felt.

The time is now If a final push were needed, the simple fact is that not transforming digitally isn’t an option. Pressure is also going to come from the regulatory sector that will drive the need for the Big Six to get involved in more agile ways of working and fast, meaning now it really is ‘adapt or die’ for the titans of the Canadian banking world. Brands that enjoy their consumers’ trust today are certainly in a stronger position than those who don’t but in our rapidly changing world the status quo is by no means guaranteed. To succeed in a world driven by customer experience the banking world has to alter its outlook. In the UK, the Competitions & Markets Authority (CMA) has called on the largest retail banks to develop a set of core open APIs—a move which has the potential to transform competition in retail banking and actively shake things up. It will encourage innovation and boost competition across the sector and more legislative change like this is coming soon to other parts of the world. The most demanding task remains laying strong foundations for, and embedding, an innovation-led culture in banks’ colossal and often outdated infrastructures. It is unusual for change to come from within the company or industry, so outsourcing expertise is necessary in order for the Big Six to truly become competitive with digital players. By tapping into what makes the FinTech players great, Canada’s Big Six would be taking the first steps into a customer-experience-driven world. Their next challenge is to proactively ensure that the innovative culture influences and drives digital change across the whole organization. Peter Veash is CEO of The BIO Agency.

canadianequipmentfinance.com | Spring 2017 | CANADIAN EQUIPMENT FINANCE

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Feature

Understanding fixtures filings

By Diane Brooks

ost equipment lenders and mortgage lenders have heard the term “fixtures filing” and yet many are unaware of the implications of filing a notice against land to protect an interest in personal property. This article deals specifically with the Personal Property Security Act (Ontario) (the “PPSA”) and the relevant provisions of the Land Registration Reform Act (Ontario); however, most provinces with personal property legislation have similar concepts. Section 34 of the PPSA is the governing provision. It provides that a security interest that attaches before the goods become affixed to land will have priority over all existing interests

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in land. Therefore, if you have financed the goods and have filed your financing statement under the PPSA before the goods become affixed, you will have priority over the current owner of the land and any existing mortgagees. That said, if the land is sold or remortgaged at any time in the future, you will lose that priority to the new interests in the land, unless you register notice of your security interest against title to the land to which your goods have affixed. This is the fixtures filing. Under the Land Registration Reform Act (Ontario), this is referred to as a “Notice of Security Interest” and these terms are often used interchangeably. A fixtures filing must contain a complete description of the equipment which the equipment lender

CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

has financed and is claiming priority over. As an aside, if the security interest attaches after the goods became affixed to the land, the lender will not have priority over the equipment and must seek waivers from the existing interests in the land wherein they consent to the security interest in the goods and specifically disclaim any interest in the fixture. It must first be determined if the goods are really a fixture, necessitating a notice of security interest to protect the lender’s priority. This is mostly a question of fact and deals with the degree of annexation and whether the goods are affixed for the enjoyment of the goods themselves or whether they are for the improvement of the property. By way of an example, if a tenant leases

Feature the property and wants to bolt down some heavy manufacturing equipment, which bolts can later be removed to allow the equipment to be moved, then this is likely not a fixture. An HVAC system, on the other hand, is installed for the

security interest in the goods (either by a security agreement or through an equipment lease) and the lender determines the goods will become affixed to the land, the lender is entitled to register its notice of security interest

While often confusing, a fixtures filing is an ideal tool for an equipment lender to protect its priority over equipment it has financed. improvement of the property and would be characterized as a fixture requiring the protection of the fixtures filing. The two previous examples are likely obvious, but there are many categories of equipment in between them that are worthy of consideration. If there is any doubt as to whether the goods will become a fixture, the obvious solution would be to file a notice of security interest. A common misconception is that a fixtures filing gives the equipment lender an interest in the land, or a right to be paid out if and when the land is sold or remortgaged. This, however, is not the case. All that a fixtures filing entitles the secured equipment lender to do is to remove the collateral, provided that it reimburses any owner or mortgagee for the cost of repairing the premises caused by the removal (which for greater certainty, does not include the loss of value of the property without the fixture). Practically speaking, a lender of the HVAC system is not likely going to remove the fixture as the cost to repair the premises after removal may exceed the value of the collateral; however, the threat of such removal to an owner or mortgagee may result in the equipment lender being brought to the table in any enforcement discussions. It is important to note that a secured lender does not require any consent of the landowner or any mortgagee to file the notice of security interest. If the borrower has granted the lender a

against the land, even if the borrower or lessee is not the owner of the land. A landlord may not be happy with the fixtures filing and the borrower may have violated the terms of its premises lease; however this does not impact the secured creditor and it cannot be forced

to remove the notice from the land. Often a fixtures filing will cause a landowner or a mortgagee a great deal of grief as they may be unsure of the implications of the filing on their interest in the land. Upon a sale or refinance of the real property, an equipment lender with a fixtures filing will often be asked to postpone or discharge their interest. An equipment lender should not agree to this unless it is being paid out in full, as they are then giving the other party priority over their collateral. Instead, the equipment lender should explain that it is not claiming an interest in land, only in the specified equipment. A form of estoppel could be negotiated to satisfy those with an interest in the land. While often confusing, a fixtures filing is an ideal tool for an equipment lender to protect its priority over equipment it has financed. Diane Brooks is a partner at Blaney McMurtry LLP.

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Please contact Jason Bonneville • jason@advantleasing.com 905-335-3301 ext 224 • www.advantleasing.com canadianequipmentfinance.com | Spring 2017 | CANADIAN EQUIPMENT FINANCE

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Feature

The Transforming World of Vendor Captive Finance

By Paul W. Frechette, Valerie L. Gerard and David S. Wiener

aptive and vendor equipment finance organizations are transforming themselves in ways that were unpredictable even five years ago. With growth back at pre-recession levels, the sector is increasingly focused on offering bundled managed solutions transactions (MSTs) to maintain and expand market share. However, captives

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are also grappling with the changes in funding, technology and sales methods needed to offer more dynamic service. Some captives find themselves in the position of having to justify their shifting strategies to parent manufacturers whose expectations are based on older equipment finance models. Similarly, new product development activities emanating from manufacturers are causing captives and vendor equipment finance

CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

organizations to research and develop methods to provide customer financing for MSTs, formerly known to some as “financing the cloud.” We want to take a look at the size and scope of the sector, changes taking place in captive and vendor leasing, new challenges as well as evergreen concerns and financing innovations being introduced by captive lessors (note: the term “captives” refers to manufacturer

Feature

Captive lessors and vendor programs now are responsible for a majority of industry activity and their growth in originations has been particularly impressive.

captive lessors and the terms “vendors” or “vendor programs” refer to the vendor finance activities of other lessors).

Size and scope Captive lessors and vendor programs have increased their share of the U.S. equipment finance industry in the past decade. They now are responsible for a majority of industry activity and their growth in originations has been

particularly impressive. Together, captives and vendors generated 53 per cent of industry volumes in 2015 compared with 47 per cent in 2005. Their originations grew 33 per cent over the same time frame, from $49 billion to $65 billion in the representative annual Survey of Equipment Finance Activity conducted by the Equipment Leasing and Finance Association (ELFA). A broader underlying trend is also evident in the 2005–2015 data. Financing decisions are being made nearer the time of equipment selection than they were in the past and may be delegated to procurement or the plant or office management—not centralized by the Treasury/CFO office as may be the case with direct originated activity. Additionally, equipment finance activity noted during the Great Recession years of 2008–2009 evidenced that captives and vendors stepped up originations as a means of promoting their products during the economic downturn. Even today, as a class of lessors, captives tend to approve a higher proportion of lease and loan applications than do their industry peers. With a primary mission to be aligned with the sales objectives of their manufacturer parent and the dealers they serve, captives must also pay closer attention to portfolio management. Captive and vendor equipment finance organizations in the U.S. represent a range of vertical industries including

agriculture, information technology, office products, construction, mining, trucks/trailers, buses and medical products. The most recent Monitor 100 ranked the largest captives in the U.S. as John Deere Financial, Caterpillar Financial, IBM Global Financing, Volvo Financial, CNH Capital, HewlettPackard, PACCAR Financial, Dell Financial Services and Canon Financial. There are at least 20 other important captives also operating in the country who are not reported among the list in the Monitor 100. Captive finance organizations can have varying structures. In a true captive, the vendor/manufacturer itself provides financing, complete with all traditional leasing company functions including underwriting, documentation, billing and collection. In other cases, the captive is an internal department of the parent. Alternatively, some parents fund all or some of their captive business through financing partners and may construct a “virtual joint venture” or “virtual captive” with that company. The partner may provide funding and administration, while the manufacturer may provide asset management expertise and may share in credit and operational risks. Vendor programs, too, can come in different flavors. In a manufacturer/ dealer vendor program, the manufacturer/dealer originates the financing business, structures payments, and prepares and executes documents

canadianequipmentfinance.com | Spring 2017 | CANADIAN EQUIPMENT FINANCE

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with customers. Financing instruments are then either sold outright to financing partners, including payments and residuals, or the payment streams alone are sold to partners. Credit and operational risks are borne by the funders, but program agreements are structured to protect funders from document and administrative risks since the manufacturer/dealer is the one preparing documents and dealing directly with customers. Referral programs represent a kind of vendor program in which the manufacturer/dealer offers financing to customers but does not have the capabilities to develop or administer the financing. When financing opportunities arise, the prospective customer is referred to a third-party funder. In these cases, the funder pays the manufacturer/ dealer for the equipment and the financing contract commences with the 18

funder providing all administration, assuming all credit and operational risks and typically assuming all risks and rewards related to residuals. Lastly, companies can provide financing through private label vendor programs. This usually occurs when a larger vendor wants to offer financing services in its own name. Funding partners develop documents to create the private label structure, (typically) name the captive/ manufacturer/vendor as the lessor and outline terms where the financing instrument may be sold or assigned to others. Private label structures can be evident in captive finance programs, dealer/manufacturer programs and sometimes in referral programs.

Changes and challenges Recently, captives were primarily focused on accounting sales treatment and strategies to help parent companies take

CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

control of their assets. This is shifting as more captives enter the world of MSTs, which bundle products with related services into a single transaction for the customer. MSTs represent a distinct growth opportunity that could generate more than 22 per cent of equipment leasing and finance industry volumes in the next three to five years, according to a study by The Alta Group. Some captives refer to MSTs as “managed services” or “cloud financing.” Whatever the terminology, MSTs are placing new demands on captives, vendors and parent manufacturers. MSTs allow customers to pay over time for services and assets that are not always documented on the captive’s own books. In some cases, the user may be able to cancel subscriptions with little notice, at any time. These issues can certainly be seen as legal liabilities by bank funding sources. When moving

Feature forward with MSTs to maintain and grow market share, then, it is important for captives to identify potential problems up front and determine whether or not their MST products have the ability to be funded by outside parties. In some cases, for example, captives will need to be able to show outside partners that the parent can provide certain performance guarantees that will better enable financing partners to book transactions. Setting aside MSTs, captives and vendors have been facing mounting pressures from parent companies eager for results in promoting product sales. The need for training sales teams to sell equipment finance to customers—not just sell “products”—is an ongoing issue. Certainly, most captives would agree that enabling product sales remains a top priority, but the equation is more complicated for companies moving toward MST offerings. A product that is now part of a $5,000/month, 60-month MST can look like weaker sales to the parent company, because MSTs often generate revenue that can only be realized as payments are received. Some captives say that their parent companies are questioning why they are costing them the same amount of money for seemingly lower sales. So, educating parent companies about MST trends and their implications is imperative for today’s captives. Captives are also reporting a greater need for technology solutions and, again, the issue is complicated by the increase in MSTs. Some captives that sell most of their transactions to banks may not have in-house digital lease management systems to manage and track the customer financing business and they are challenged to secure budget approval to acquire and implement these systems. As MSTs grow in size, these captives are realizing that they have fallen behind in acquiring systems to manage and evaluate the complexities of their equipment financing offering. They are now at a critical stage, having to scrutinize available lease management system options that will integrate with the parent’s general ledger systems— under tight deadlines. Further, MST

portfolios have a different set of risks to manage, however the tools to do so are not readily available on the market. Captives also face evergreen challenges such as the quest to retain employees. Often the stiffest competition is the captive’s own parent company. Some employees take positions in captive departments or subsidiaries as a door into the parent company and their real interests lie in equipment industries such as technology, agriculture or healthcare. These employees, and those seeking advancement not readily available in the captive, can be lured away by other jobs within and outside the parent company. To stem the tide and attract long-term employees, captives often need to refresh what they offer in terms of incentives and professional development. Another continuing need for multinational captives is entering new international markets. Even if their parents are already operating in target areas, captives can identify the legal, administrative and compliance issues involved in expanding into new geographic regions that are quite difficult to navigate. In doing so, they can become a better partner to the parent. Expert help may be needed to successfully grow equipment finance offerings internationally. An analysis of the top captives operating in the U.S. shows that other challenges they face include recessions within their vertical industries, such as agriculture and mining at this time, flat sales and/or organizational developments within the company such as division spin-offs. Captive finance companies with equipment specialties dependent on the health of the sectors served by their parent companies may experience the risk of more turbulent volume fluctuations due to specific industry downturns or recessions. For example, commodity prices for coal, oil and farm products adversely affected mining and farm equipment sales respectively for the likes of John Deere Financial, Caterpillar Financial and CNH Industrial Capital. Business retooling, such as the breakup of HP and the IBM, focus on software development and solutions consulting impacted the new volume trends of their

respective captive subsidiaries.

Innovation Some captives are rethinking their long-standing selling strategies and developing new, in-house equipment finance capabilities as various markets evolve. For one captive, this has meant re-evaluating a major product that has been offered for cash or rented through a third party for decades. Realizing that the third party was making significant profits by renting out the product and controlling the financed asset if/when it was ultimately returned, the captive decided to research the possibility of offering its own equipment financing in a way that had never been attempted with similar products in the industry. The company worked with advisors to evaluate the market, set pricing and train their sales teams on selling equipment financing. They now have also improved asset management capabilities to maintain and maximize the product throughout its life cycle.

Closing thoughts To be successful in offering financing for products sold directly or through dealers there must be goal alignment between the manufacturer and the captive or vendor program. The manufacturer that is assessing the utilization of an internal captive or third-party vendor program must clearly understand the drivers and criteria for success of a companion equipment finance product, including key financial metrics, capital structure constraints, desired financial product features, essential operational functions, equipment issues and client profiles in terms of current state and future state characteristics. With continued changes, challenges and competition facing the contemporary manufacturer seeking to serve customers with innovative financial product solutions, an ongoing assessment of the captive and vendor program arsenal is essential to remain customer centric and relevant. Valerie L. Gerard is a managing director of The Alta Group and head of its vendor and captive finance practice as well as its management consulting practice. Paul W. Frechette is a director of client relations and consulting for The Alta Group. David S. Wiener, a managing director of client relations for The Alta Group, researched captive/vendor industry data for this article.

canadianequipmentfinance.com | Spring 2017 | CANADIAN EQUIPMENT FINANCE

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Telematics Has Our Attention: Now What? How the benefits of telematics evolve as a company grows

By Chris Coker

ne of the challenges of being a telematics provider is to be able to meet the needs of many diverse customers. Fleet customers can be as small as having only a couple assets, or as large as having thousands of them. Customers also have all levels of capability in operating a telematics user interface. Some are quite comfortable operating such technology, others are not. A good telematics system can make use of features such as automated email reports to help technologically

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When choosing a telematics provider make sure to find one that takes the time to learn what your company’s needs are and strives to fulfill them. challenged users along. A big user of telematics is the construction industry. Very often a contracting company is founded with one or two pieces of equipment. The

CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

initial requirement is theft recovery for the equipment. Equipment theft is a billion dollar problem. Deductibles alone are in the $10,000 range. The next asset purchase is usually a heavy truck

Feature to move the equipment around. With trucks a major concern is ensuring that the vehicle is used efficiently and safely. From there, more equipment and often some pickup trucks for employees to drive. The resulting asset list ends up being both light and heavy trucks and equipment. As the company grows still larger, on the equipment side very often working hours are monitored to see that maintenance is performed at the correct time. Also utilization is tracked to see that the assets are sent to where they can do the most work and identify when it is time to add further machines. Idling can be monitored to minimize fuel consumption. On the trucking side, driver accountability is paramount. A good telematics platform watches for over speed warnings, harsh braking, excessive acceleration and unsafe cornering forces. Identify the driver who is unsafe, council them to alter their ways and if they don’t you have all the proof you need to let them go. Better that then risk an accident and an insurance claim. Back in the office, when the company is small its usually the founder that accesses the telematics platform. It gives them the ability to quickly see what their assets have been up to. Ignition on at eight o’clock on Friday morning shows him Joe, the operator, was on time for work. Ignition off at five o’clock in the afternoon means you got a full day’s work from him. It is a good idea to set aside a specific time each week to use the system. If a machine gets stolen, the last thing that you want to find out is that at the last service the GPS was mistakenly disconnected by an errant technician. As the company grows it usually falls to an administrative person to monitor the telematics platform. One popular misconception fleets have is that the telematics company monitors their assets. As a rule we do not. Having hundreds or thousands of assets under tracking it would simply not be possible. Besides we would have no idea what would be considered aberrant behavior. The telematics user interface is a tool that the end user must frequent in order to review the data generated by the fleet’s movements. As the fleet grows

often several people share the duties of watching the telematics platform and acting on its results. One person might be in charge of watching for excess speeding and moving violations, while still another be in charge of working hours, service schedules and machine efficiency. When choosing a telematics provider make sure to find one that takes the

time to learn what your company’s needs are and strives to fulfill them. In the unbeatable words of Toromont CAT, find a company that is “committed to customer success.” Chris Coker is the president and founder of Threshold Inc. A graduate of Wilfred Laurier University, he has piloted Threshold for 28 years. He is an expert in telematics, GPS solutions, data communications, and DC equipment installation.

canadianequipmentfinance.com | Spring 2017 | CANADIAN EQUIPMENT FINANCE

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Fintech

FinTech: Opportunity or threat? By Michael Dubowec

round the world, FinTech is disrupting the financial services industry—but is it really a disruption or a welcome change? I’m a big believer that competition is always healthy and forces companies to change and strive to be the best. An inability to change might mean an established lender becomes a legacy company that could soon be out of the marketplace. National Leasing is embracing FinTech’s presence and learning from it in several areas. Through measuring data, FinTechs understand what drives consumer behaviour. Their operations are small and flat, so they’re agile and quickly adjust operations to meet customer needs. They started building their companies based off of a digital experience, so for them, digital comes first. All of these things are creating a culture shift where consumers expect personal advice in real time. It’s an exciting transformation. National Leasing is building a foundation for success by taking a systems-based approach to innovation. We’re training people on how to foster meaningfully unique ideas and build the business case to get them approved. A business transformation team then takes the ideas and figures out how to make them a reality. This allows grassroots ideas to gain traction, which is engaging for employees. They get to create the change, rather than being told to change. One of these projects is a rewrite of our internal core technology system. Over the years, sub-systems were added that did not talk to each other, causing silos between departments. For a legacy company, this could become inefficient and unmanageable. Instead, we’re rewriting our system and eliminating

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the sub-systems. This allows for automation, saving the customer time and our company money. Employees’ days will become more meaningful, instead of manual, as they will be able to wear many hats and support customers at each stage of their National Leasing experience versus being stuck in one role. Overall, we’ll increase efficiency as we eliminate silos. One often hears, if you don’t grow you die. That is true, but today and in tougher economic times, if you don’t become more efficient in your processes and enhance the customer experience, you’ll also die. Externally, we’re striving to be an invaluable partner for equipment dealers—one they can’t live without. For example, National Leasing Interactive creates a digital quoting experience for equipment dealers while allowing us complete control over variable pricing that we’ve customized to each dealer. Before, we had no hard data on how often dealers quoted end users and they easily could’ve used out-of-date rates. There’s now complete transparency we can control at the click of a button. Dealers on any handheld device can also access customer information, including portfolio management capabilities. Our dream is to provide equipment dealers the ability to have all lease transactions and activities at their fingertips, from sales origination to adjudication to complete fulfillment and payment. Amongst all of this, lenders can’t forget about the end-user—especially because that’s where FinTech’s focus lies. Our equipment dealer network is our core business, but there’s an opportunity to better satisfy the end user in that sale. For example, we mapped our end users’ customer journey, identifying each touch point along the way. The next step is to optimize and streamline these touch points, ensuring the customer

CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

has what they need to do business with National Leasing easier and faster than ever before. If we can provide a better customer experience for our end user customers, it will have a ripple effect and better support our diverse equipment dealer network. While we all dream of a digital lease experience that takes place in seconds, I recognize regulators play an important role in the future of our economy. I hope regulators adapt current legislation or create a new framework that allows for co-operation between FinTech startups and established finance companies. That means finding a balance between ensuring a stable economy while keeping up with consumer preferences for doing business online. For example, what’s more reliable, an algorithm based on hard data proving someone’s credit worthiness, or an analyst sifting through mountains of information and then making a personal judgement call? There needs to be a reasonable medium while ensuring sound decisions are maintained. Ultimately, would any of us be where we are today if there wasn’t a push from FinTech to improve? Would we still invest more in technology than ever before? Would we still create fulfilling careers for employees instead of buttonpushing jobs? Would we still make decisions based on data instead of a gut feeling? Would we still listen to the customer and respond to their needs? I’d like to think so, but who knows? Instead, I’m going to thank FinTech and say “bring it on.” During his 25-year career at National Leasing, Michael Dubowec built up a national 60-person sales team and an elite broker network to drive $2 billion in applications from over 60,000 customers in recent years. Currently he’s focused on the operations side of the business, working to reduce silos and increase efficiency to provide a customer-first experience. Learn more about this company at www.nationalleasing.com.

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Feature

Risk costs have declined for third year in a row

espite rising uncertainty and increasingly more complex risk profiles, businesses saw a decline in the total cost of risk (TCOR) for the third year in a row, according to the 2017 RIMS Benchmark Survey. The survey, produced with Advisen, defines TCOR as the cost of insurance, plus the costs of the losses that are retained and the administrative costs of the risk management department.

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Key findings from this year’s RIMS Benchmark Survey: ◉◉ Technological advances have caused a seismic shift in the risk landscape, creating new types of claims and forcing insurers to consider new products and solutions for customers. ◉◉ Insurers ended 2016 with average capital and surplus at its highest level in 10 years. However, excess capacity is undermining profitability, as seen by falling net income and return on average equity. ◉◉ The personal insurance space is in the midst of a consumer-centric revolution, offering customers new 24

transaction platforms, better metrics and more flexible pricing and coverage options. Commercial insurance is expected to adopt a similar focus, transforming the way business is transacted. ◉◉ Predicted rate increases for cyber, E&O and workers’ compensation failed to materialize across the board. Projections for 2017 are more moderate, with property and most liability lines flat to down 10 per cent. ◉◉ Emerging trends in the 2017 risk landscape include the tech revolution, security issues, natural catastrophes and political upheaval. The annual RIMS survey, produced with Advisen Ltd., is a single source of benchmark statistics with industry data for more than 20,000 insurance policies from 759 organizations, 553 of whom contributed data in 2016. These insurance programs represent over $4 billion in premium. It tracks changes in insurance policy renewal prices, retained loss costs and administrative costs as reported by North American corporate

CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

risk managers. Advisen compiles policy information within 10 insurance coverage lines and reports on 14 distinct industry groups, in addition to aggregating a summary of all responses. “The RIMS Benchmark Survey chronicles the evolution of corporate risk management costs over time. This year’s edition highlights how risk managers have effectively managed costs in a time of evolving risks and demands, enabling them to do more with less,” said Jim Blinn, executive vice president of client solutions at Advisen. “Organizations lean on their risk professionals to inform strategic decision making,” said RIMS President Nowell Seaman. “The RIMS/Advisen Benchmark Survey puts valuable data in risk professionals’ hands. It allows them to see and understand where others in their industry have made significant risk management investments, where they have saved and highlights great opportunities to further enhance their risk programs.” From a report and study conducted and issued by the Risk Management Society.

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Fintech

How and why Scotiabank is embracing FinTech By Jeff Marshall

irst off, let me dispel a fallacy: financial technology companies (FinTechs) and banks are not at war with one another, despite what certain media outlets would have you believe. In fact, both share the common goal of providing a better banking experience. And the similarities don’t stop there. We live in an increasingly digital economy. Today, more than half of Canadians’ interactions with banks use digital channels. Moreover, FinTechs are on the rise, with more than 80 of them in Canada, most headquartered in Toronto, Waterloo and Vancouver. Yes, some natural competition exists, but that friction doesn’t preclude collaboration. At banks, we’re pushing FinTechs and vice versa, and that leads to better results for everyone. More importantly, we’re working together on a variety of projects. What does that collaboration look like in practical terms? Both startups and big banks focus heavily on consumer

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experience. FinTechs concentrate on new products that enhance tracking, lending and spending. Widespread adoption still hasn’t taken hold; it’s on the horizon. That’s one of the places we come in. At Scotiabank, we believe we have the resources to help accelerate this progress. Last year, we launched Scotiabank’s Digital Factory to do just that. Come this fall, we will move into a new home in Toronto, which will house a team of more than 350 tech specialists focused on identifying, developing and disseminating new services and products and redefining banking from a digital perspective. Teaming up is the way forward. MaRs has predicted that the Canadian financial sector’s investment in technology will hit $18 billion by 2018. We’re not the only industry investing heavily in tech, of course. Look at what’s happening in healthcare. Many recent advancements, including electronic medical records, smartphone diagnostic tools and remote treatment were the result of collaboration between established companies and startups. We’ve also seen

CANADIAN EQUIPMENT FINANCE | Spring 2017 | canadianequipmentfinance.com

it in music, where platforms like Spotify and iTunes work directly with musicians. eBay is partnering with retailers. Similarly, Netflix—a tech company— worked with studios to help reinvigorate the film world. At Scotiabank, digital transformation is a major priority. Collaboration will make that possible—and it aligns with the way we approach other areas. For instance, we currently work with universities and non-profits (e.g. the Richard Ivey School of Business, Queens University and the Ladies Learning Code program). While these endeavours may appear substantially different, they have the same elements at their core. As we forge ahead, we must continue to explore ways to work together and communicate openly. There has never been a better time to work in banking technology. Sure, there are tensions between FinTechs and banks, but neither of us live in silos. In tandem, we will revolutionize and transform banking faster and more efficiently. Jeff Marshall is SVP, Digital Banking – Canada at Scotiabank.

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