Auto and equipment finance providers know that customers want better service and more flexible financing. What does that look like and why is servitization the best way to provide it?

Auto and equipment buyers are no longer satisfied with simply financing an asset, the traditional way of paying for such things. Instead, they want maintenance and service included, and they expect more flexible payment plans. For lenders and lessors, adopting a servitization financing model is no simple matter—it’s a shift that impacts all areas of the business. But it is the future of financing.

What do we mean by servitization?

Servitization is not a new concept, but its adoption is growing rapidly across many industries, including auto and equipment finance. It refers to selling or leasing bundled assets and services. Customers pay a fee for a unit of service or outcome, while ownership of any physical goods and responsibility for their operational costs are retained by the finance organization.

The simplest form of servitization relates to individual products—product servitization. This is often described as product-as-a-service (PaaS). It usually involves packaging a product with related services, although in some cases it can mean replacing a product entirely with services.

A common example, software-as-a-service (SaaS), is becoming the norm in the software industry. For example, customers who ‘buy’ Office 365 applications pay a monthly or annual fee and receive the use of a bundle of applications. Free updates are included, so customers always have access to the latest version and new features.

In the auto and equipment finance sector, printer-copiers are an example of a PaaS. The buyer typically pays a per-copy subscription for the service of printing and copying and avoids having to acquire the machine itself. In this model, the provider offers state-of-the-art maintenance to ensure reliability for the customer while minimizing its own operating costs.

A more complex form is servitization of the business itself—business servitization. It involves reorienting the entire business so that it focuses on services rather than products. This type of servitization generally requires transformation on a much broader scale, including significant changes to business and pricing models.

Companies that offer full-service leasing of cars—including car maintenance, tire replacement, fuel costs, insurance and more—use a business servitization model.

What’s driving servitization?

Several trends are forcing financial services organizations, including auto and equipment lenders, to take a fresh look at their financing models.

  • Customer expectations are growing at an exponential rate. As customers, we’re all familiar with modern digital-first companies like Amazon and Apple and the experiences they provide, and we want those personalized services from every organization we interact with. Our preferences are shifting too, toward flexible pay-per-use models and bundled services that save us money and reduce the complexity of our lives with one-stop shopping. We expect the convenience of fast credit decisions, quick turnarounds, reliable billing and strong customer service. And we want a seamless experience across multiple channels.
  • Regulatory requirements are also evolving at a rapid pace. In financial services there’s a new focus on environmental, societal and governance (ESG) initiatives and sustainability. Customers are demanding that companies be transparent about these initiatives, and regulatory requirements are changing to reflect this push in the direction of a more efficient circular economy.
  • It’s also a time of tremendous opportunity with innovative new technology coming online every day. The cloud, for example, offers businesses the ability to scale in ways that are not possible with fixed on-premise systems. Cloud solutions are often more efficient and offer a better experience for customers and employees. Other technologies, like artificial intelligence (AI) and machine learning, are enabling businesses to leverage automation for more and more complex tasks, freeing up workers to perform higher-value work. And the Internet of Things is letting us connect devices and equipment to the Web so we can access their data. Forward-looking financial services companies are using this data along with powerful analytics to make better insight-driven decisions and to improve the customer experience.
  • New competitors are entering the market, developing new offerings and niches that meet customer needs at a competitive price. Auto and equipment lenders and lessors are responding by attempting to sell, lease or loan more complex offerings faster, while keeping their costs in check. But to do this, they need to reduce their reliance on outdated legacy technology, increase their refresh rate (how often they replace assets with newer models), ensure their payments streams match customer use, and find a way to finance products and services for borrowers with less credit history.

Servitization financing models offer an effective path forward

According to a recent IDC survey, 79% of respondents said that they wanted a bundle of equipment, software, services and maintenance within their future ‘pay as you go’ needs. So, we know there’s demand for more flexible finance solutions. But which model should you choose? Do you have the capacity to develop a robust implementation plan? And do you have the technology, processes and talent in place across your organization to ensure a successful transformation?

In the coming weeks, we’ll be releasing a new report describing four different servitization models. We’ll also talk about the concrete steps you can take on your servitization journey. Stayed tuned.

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