December, 2000 -- Credit is the foundation on which lessors do business. Without it, they are operating on quicksand. Leasing companies realize that there is always some room for improvement in their current credit process particularly in the current environment of declining credit quality which is partially responsible for low company valuations. Thanks to the Internet and new data aggregation models, technology is changing the way credit information is obtained and used. Given today’s credit crunch environment, this is very good news.

The e-commerce marketplace has been the largest contributor to improved credit information. Figures vary, but widely-accepted projections estimate that by 2004, business to business (B2B) e-commerce will represent upwards of $2.5 trillion in transactions. This commerce will have a profound effect in many ways. For the leasing industry, experts agree it will recast how corporate credit is originated and obtained.

The flood of data from electronic transactions means data-mining and credit information will become more available to businesses. At the very least, the Internet allows for the easier transfer of credit data. The real benefit, however, lies in sophisticated database technologies making scoring, modeling and mining faster, cheaper, more accurate and relevant¾particularly to the small and mid-size borrowers for whom lessors have had to rely on imperfect data.

Today and Tomorrow
Today, lessors find payment history data on applicants in one of two ways:

1. Call other lessors to obtain a lease payment history on the applicant. Unfortunately, this alerts the competition to a pending deal.
2. Use a credit reporting agency or a combination of agencies that measure business trade payment history or personal trade experience.

These options are not ideal. Nor are they necessary.

Lessors’ ideal credit process would yield data that supports more informed credit decisions, increase approvals, and lower delinquencies and write-offs. It also would produce data that is more relevant to their credit decisions than traditional sources of credit history. The data would be accurate, quality information without having to check references with competitors. Ideally, lessors would want electronic access to relevant term debt payment experience.

Enter technology. Technology now allows leasing companies to exchange data in such a way that one needn’t tip off the competition. It also speeds up the transfer and collection of data, and, most importantly, adds value to information.

In order for data to be useful, it must be relevant. For the commercial equipment finance industry, lease payment history is the most relevant credit information available. Simply put, there is no better credit data than a lessee’s own history as an indicator for making lease payments. This data, used in a custom model, would greatly improve predictiveness, helping lessors control risk better.

Individually, lessors do collect lease payment history. When this data is pooled, however, the information moves from individual experience to a value-added product for everyone involved in commercial equipment finance. The best way for lessors to bring value to their own credit information is to exchange it with each other.

Business guru Tom Peters recently said the key to e-commerce success is the ability to establish meaningful partnerships, which most companies are unable to do.

"You need to insanely share proprietary data with your partners," said Peters. "Unfortunately, I don't know one Fortune 500 company in 200 that is capable of doing that."

The leasing industry, however, has an opportunity to do just that¾pool their lease payment history data in order to enhance its value. In fact, lessors would find that by improving the credit process of all lessors, they would enhance the value of the industry. This may sound counter-intuitive. But, every time a leasing company goes out of business due to delinquencies, write-offs, etc., then the capital markets tighten up and all companies suffer. Low market valuations in the leasing industry highlight the need for a system that will ultimately help the viability of the industry through more informed decision-making.

Exchanging lease payment history data with other lessors does not help the competition in their marketing efforts. After all, the sale has already been made. And, the truth is, industry members already do release data into credit bureaus and to other credit reporting systems. Exchanging credit data simply provides the ability for the entire leasing industry to make better-informed credit decisions, which has enormous benefits for both the leasing community and the individual lessor.

ELA President Michael Fleming stated that it’s shortsighted for people to not be willing to exchange credit information anonymously into a situation that is an open market. "Leasing companies are going around checking with other lessors anyway," he said.

For all the reasons above, the Equipment Leasing Association and PayNet, Northbrook, Illinois, have joined forces to help manage the changing credit environment for lessors and perhaps make credit decisions a little easier and more profitable.

How? PayNet is helping commercial finance companies exchange proprietary data -- sanely, confidentially and successfully¾through its PayNet Alliance. The PayNet Alliance is basically a network of commercial finance companies contributing their lease payment history on applicants to an online database. Participating companies are then able to obtain valuable payment history data via the Internet.

Some of the largest commercial lenders including Textron Financial, Key Equipment Finance Group, Firstar Equipment Finance, Navistar Leasing, Pitney Bowes Financial Services, De Lage Landen Financial Services and others have jumped feet-first into PayNet’ PayNet Alliance.

How It Works
Leasing companies participating in the PayNet Alliance will provide a monthly download of their customers’ lease payment experiences to PayNet. A one-time technological set-up is required, but thereafter the monthly downloads will be handled automatically ensuring that minimal staff time and technological resources are required. PayNet subscribers may access the pooled data and pull Payment History Reports online for a low fee per report. Downloads directly into lessors’ credit scoring systems also are available.

PayNet promises real savings in both time and money. With reports costing as little as $5 each, and by eliminating the more manual method of having to call competitors to check references lessors can realize not only a more efficient process but also more profitability. It streamlines the process and reduces the man-power involved.

In addition, in today’s environment timing is everything. Making a credit decision today versus tomorrow also could save a deal. Technology has been the answer, but also the driver in today’s business. Because information is more readily available, there’s a demand for speedy credit decisions. Expectations are high and applicants expect you can make a credit decision quickly.

Participating lessors will immediately realize the benefits of consolidating their portfolio’s payment history data into one central network, with the ability to immediately begin combing through the database to produce a Payment History Report. Confidentiality is secured as the name of the leasing company supplying the data will not be disclosed on the reports. Also, PayNet data will not be sold for marketing purposes.

An easy-to-use system is key for adopting any technological solution, and PayNet is no exception. As businesses continually seek to streamline processes they should vehemently avoid cumbersome solutions, technological or otherwise.

PayNet is working with leasing company service providers to ensure the technological solution is user-friendly and compatible with most lessor systems.

Again, most leasing companies could improve their credit processes, which keeps them from profiting as they should. Participating in the PayNet Alliance is one way for lessors to use technology to their advantage.

By Suzanne Jackson of Cornerstone Communications
Reprinted with permission from the December 2000 issue of "Monitor Daily"