Te c h n o l o gy : According to a recent ELAOnline

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1 Te c h n o l o gy : Use it or Lose it Lessors are beginning to take advantage of the newest credit tool for the leasing industry. by Suzanne Jackson According to a recent ELAOnline poll, 80 percent of respondents have changed their credit policy due to the economic downturn. Credit risk is increasingly more important and new technologies are arising to help manage it, such as the ELA-backed PAYNET system. Commercial lending to businesses was estimated to be more than $1.35 trillion in annual volume in 2000 with a historical growth of 7.3 percent annually in the last decade, according to published economic statistics. The leasing industry alone generated more than $220 billion in new volume and more than 10 million lease applications in 2000, forecast to grow 14 percent to more than $240 billion in originations in These are large numbers with large decisions behind them, especially from credit departments coast to coast. In leasing institutions today, the credit department has grown to more than just crunching numbers and making collection calls. The department is a valuable part of the company, helping the executives, operations and even the marketing and sales team. Common sense dictates that, with better information, credit personnel can make better decisions, which helps improve company profitability and reduce risk. Great hope rests on technology to help lessors make faster and better credit decisions and manage the paper trail from application to approval. Yet, even the newest credit officer will tell you the state of the data on the lease applicants is the key to good credit decisions. Utilizing imperfect or incomplete information still is the major issue in managing credit risk. No matter how quickly a decision can be made, if it s not made with the best data then speed is of little value, said Dan Michalek, chairman of PAYNET, Inc., Skokie, Illinois, ( The data behind the decision is where the rubber meets the road, profitability wise. PAY N E T Harnessing data on customers and potential customers is becoming the next level of managing credit risk. PAYNET is taking advantage of emerging new technologies for collecting, aggregating and transforming data that will Look for a major recasting of how corporate credit is originated and traded. ~ quoted from a recent article by DiamondCluster International,Inc. 50 October 2001

2 It s important for us to see how a proposed customer pays other leases and the amounts of those leases. transform credit data into valuable decisioning information. Payment habits of privately-held businesses now just being collected and made available to lenders similar to the collection and reporting of data that has occurred on consumer s payment habits will be available to lessors through the PAYNET system. The company was formed with the keen understanding that the processing of credit was going to change over the next two years as newer and more robust technologies a re implemented. PAYNET introduced its Payment Information Network this past summer to kudos from lending institutions; the PAYNET network operates and safeguards the nation s largest online, proprietary database of lease and loan payment history information to be used for credit decision purposes. A cooperative network of over 20 major commercial finance companies representing more than $160 billion net assets are committed to PAYNET s online database. Companies provide their payment history data, anonymously, to the online database. The members then gain access to PAYNET s exclusive information products and services. PAYNET uses its proprietary technology and the power of shared data to increase profitability, to improve operational efficiency, and to reduce credit losses for commercial finance companies, says PAYNET President, Bill Phelan. October

3 E xe c u t i ves See Delinquencies Rise The worst economic conditions in 10 years, are a pain in the portfolio. ELA s Executive Committee meeting is an annual event dealing with the management and planning of the Association. As such, it includes a wide-ranging discussion with the 14 officers and directors about the state of their businesses and the entire equipment leasing and finance industr y, to aid ELA in planning initiatives for the next year. During the Executive Committee meeting held September 5-6, conversation extensively covered leasing company portfolio performance-and the comments were universally pessimistic. The common feeling among these industry leaders is that things are bad now and, it will get worse before it gets better. Within the port folio discussion, t h ree themes dominated: FUNDING as everyone knows, funding is difficult for all but the largest companies right now. That in itself presents leasing companies with obvious major difficulties. But funding both affects and is affected by portfolio performance. Cautious funding sources are skeptical about credit on anything less than investment grade companies and transactions. As delinquencies grow, so does investor skittishness. Lessors must take transactions to more sources to get adequate funding. SLOWING ECONOMIC GROWTH Leasing is a lagging economic indicator and recent growth rates overstate the business flow. Companies are missing growth targets and are beginning to look for new growth areas and opportunities. DELINQUENCY IS GROWING and growing fast. Across the industry, it is nearly double recent year over year numbers. Depending on where the business comes from, lessors are seeing varying severity in the delinquency problem, depending on the source of the business. Business from bank referrals performs best, followed by vendorreferred. Wholesale the worst. Executive Committee consensus is that all companies are increasing their credit screening standards, and most directors mentioned the growing importance of character in the credit decision. Several indicated that they now will only do deals if they meet the customer and do the billing and collecting themselves. Attendees also discussed the importance of closely monitoring delinquencies, and taking rapid action on delinquent accounts, either working with delinquent customers to find solutions such as refinancing or, in some cases, taking equipment back when the market value is significant. Still, many lessors view the tough conditions from another perspective. Funding, delinquency and less business certainly are challenges, but they do not mean that companies cannot do well and that opportunities do not exist. There are, for example, portfolio purchase opportunities and opportunities to move in on markets and customers that have been abandoned because of a liquidity problem. And perhaps hard times are in the end better for the long term health of the industry. After all, Executive Commitee members said in a variety of ways, Times like this let the good companies separate themselves from the rest. Michael J. Fleming, ELA president High Costs for Data D r i ven Dow n Currently, lenders experience high costs for processing business credit and have relied on a limited source of credit information, forcing them to make large lending decisions with imperfect infor - mation. Industry leaders agree that shared data coupled with the power of the Internet is the best answer today to both access and cost of data. PAYNET s product offerings are expected to include information that, until now, lessors had only hoped to discover, including commercial credit card and banking information. I was excited when PAYNET came along, says Terry Robertson, vice president, risk management, GreatAmerica Leasing Corp., Cedar Rapids, Iowa. You ll be able to see the applicant s high credit outstanding as well as payment history. Our trade tapes from other sources don t show that. There wasn t a lot of data out there for us to gather payment histories, agrees Troy Mostaert at Farm Credit Leasing Services, Inc., Minneapolis. Until PAYNET debuted, the data that was primarily available came from a manual phone call to another lessor for a referral. That information is nearly impossible to input into the leasing company s automated credit scoring process. As a result, lessors make significant credit decisions without the most relevant data. Data elements from the PAYNET repository can be easily incorporated into a lessors credit process through a CPU to CPU link. Says Curt Zoerhof of Wells Fargo Equipment Finance, Minneapolis, When a new deal arises the standard practice would be to get credit references from other finance companies. If you were lucky you might get a hold of someone that day. It took a while. Then, 52 October 2001

4 PAYNET debuted with seven major lessors and will double that number of participants in the next two months. there s the whole competitive thing tipping competitors off to a deal, which isn t good. That s why I like PAYNET. I can go in online and quickly pull up XYZ company and see what they ve done, anonymously, quickly, and with a fair amount of detail. Technological Pro m i s e s But how is it really working? The road to profitability is littered with broken promises of technological miracles. Lessors actively using the PAYNET system sing its praises. Said Farm Credit s Mostaert, Everything I ve seen as far as reports, structure and information looks good. The information from PAYNET is the best data available from fellow leasing sources since D&B dropped their Lease Interchange Report a few years, said Robertson. It s important for us to see how a proposed customer pays other leases and the amounts of those leases. We ve pulled reports and they look great, continued Zoerhof. Now we want to go back and get last two years worth of data. Once we get trend data we can really use the system. Zoerhof said PAYNET s simple screen layout showing trends, such as seasonal dips and declines, will be very useful. This way, if they are delinquent every March you can see that maybe they are seasonal and make a decision based on that. The data will help verify with a customer that they have a slow period, he said. Easy A c c e s s Sounds great, but what does it take? The system is actually very easy to use, said the companies who are actively involved with PAYNET. The payment history data is downloaded monthly directly from the leasing company via an interface to their systems. The data is transmitted confidentially through the Internet and then run through a battery of data accuracy tests in PAYNET s proprietary technology, ensuring the data is usable, relevant and consistent. Users of the system not only tout the data s accuracy? but also the ease of use. The Payment Information Network may be accessed via the Internet or through a CPU to CPU link-up. The way the system is designed eventually you can implement it into your whole front end, said Mostaert. A lessor can automatically have a report sent and pull different data elements out of it. PAYNET was easy to use. Just get on the Internet. To do the download of our data required a nodule to our system, but pulling reports only required Internet access, said Mostaert. And, one of the keys to us was that PAYNET work with our current system. Jumping on the B a n d w a gon Clearly, PAYNET has garnered much interest from lessors. Yet, critical mass has been cited as a key factor to PAYNET s success. Now we just need a [critical mass] of companies using PAYNET and it s going to make a big difference to us, summed up Zoerhof. PAYNET debuted with seven major 53 October 2001 October

5 lessors and will double that number of participants in the next two months. The company has a significant sales pipeline ensuring major companies, who have expressed serious interest, are on board as quickly as possible. Currently, the PAYNET database houses much information about the trucking industry; the office equipment segment is next to debut. With the commercial equipment finance industry representing more than $550 billion in Net Assets and its volume translating to more than 60 million credit applications annually, technologies such as PAYNET should find a strong following. Those companies that do not at least take a look at new technologies may find the credit landscape shifting without them. PAYNET will make things easier for us, said Mostaert. We provide references to other lessors. Now we can tell people we report to PAYNET, so you ll need to get involved there. I encourage anyone who hasn t looked into it, to do so, added Zoerhof. PAYNET offers beyond payment history information. In the long run you will be able to save some money and get better information more specific to your finance histories a better value for your dollar. You don t get charged for pulling data, only if something comes back. So how can you lose? summed up GreatAmerica s Robertson. And losing isn t what lessors set out to do. Suzanne Jackson is a public relations consultant,specializing in the high technology and commercial finance markets.write to her at sj@cornerstonedelivers.com 54 October 2001