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Fighting Fraud With Big Data

INNOVATIONS:The Confluence of Factoring & LeasingDavid Chaiton’s Three Laws of Commercial Finance

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contents

November/December 2013Volume 1 Number 5

Publisher and Editor-in-ChiefSteve [email protected] Direction / ProductionJennifer O’[email protected] TannyanAdvertising SalesMark [email protected] [email protected] [email protected] subscription, circulation and change of address information, contact [email protected] Mail Agreement No. 40050803Return undeliverable Canadian addresses to: Circulation Department

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Payments Achieving efficient payments processing

Succession Planning Call to action for Canadian private business owners

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the Magazine of risk capital and credit.

Navigating a Basel III worldCollaboration wins in supply chain finance

Financing harder for small Canadian public companies

2012

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FEATURESThe Confluence of Factoring and Leasing..Increasingly, we have been witnessing leasing companies stretching the rules

of the game in order to accommodate good customers or entering into deals that are progressively more removed from leasing, deals begin to encroach on other forms of financing. »12

Leases Re-ExposedBeyond accounting: What you need to know about the new leases landscape. Lease accounting is back in the spotlight, after the

IASB and FASB recently issued revised Exposure Drafts (revised ED) for public comment. »16

What You Need to Know About TabletsMobile devices fuel a new era of banking and cash management. »18

Fighting Fraud with Big DataHow we can use new predictive analytics to make a more secure system. »20

Cars on Credit Case StudyDriving growth with automation. Technology advances continues to drive growth in the leasing sector. »22

What’s Behind a Credit Score?Insights when your client is an individual owner. »24

OBSERvATiONS: An Appraiser’s Tale. What happens when “that third mound of snow on your left is probably the

machine you’re looking for.” »30

YOUR BUSiNESS »26

NEWSA round up of the industry’s most significant developments from the past month. »9

EvENTS: Find out where to go and what to see in 2013. »29

ASSOCiATiON REPORT:CFLA works to build better stronger industry through better data. The CFLA, asset-based financing, and leasing have become better known in government and media circles. It remains essential to the Association’s ability to successfully advocate for the industry and its interests to have as much quality information as possible on the strength of the industry and its contribution to the Canadian economy. Collecting and distributing industry size and benchmarking data is a primary role for the Association. Also members, large and small, constantly ask for industry statistics to help them assess their market share and business performance. »5

EFLA REPORT:Economic Outlook Forecasts 3.1 percent growth in Equipment and Software Investment in 2014. Equipment investment is expected to grow across most verticals, as underlying economic fundamentals continue to improve. Overall in 2014, growth is forecast to be mixed, with some sectors outperforming others. The Foundation’s report, which is focused on the $827 billion equipment leasing and finance industry, forecasts 2014 equipment investment and capital spending in the United States. »6

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insights, updates and breaking stories as they happen. Stay Informed. Keep Ahead.

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association rePort

5

The Canadian Finance and Leasing Association had an excellent year in 2014, expanding

its membership, growing its influence in the market and becoming a better known organization to government and media. There are about 220 member companies.

David Powell, the CFLA’s president and chief executive officer, outlined the activities of the association in the year-end annual report for 2012-2013, where he says it is essential to act as an advocate for the industry as a whole, noting its interests include having maximum quality information on the strength of the industry and its contribution to the Canadian economy. Members need industry statistics to help assess their market share and business performance.

However, challenges remain, including a reluctance to contribute proprietary data. More than 20 years ago, The Annual Survey of Industry Activity was developed for the CFLA to provide statistics but a lack of cooperation providing data means reports have become unreliable, the CFLA says.

“Reporting has been uneven and members participate some years but not others. There have been repeated revisions to industry data because of delays and inconsistencies in member reporting,” he wrote.

In 2014 the CFLA is working with CFLA Board member Hugh Swandel, Canadian Principal of The Alta Group, to plan how to overhaul the data collection and interpretation process to best reflect the asset-based fi nancing and leasing industry.

Powell notes, “The CFLA is also working with PayNet, Inc. to provide key indices and indicators that give members insight into credit quality and market growth trends. PayNet gathers data from fi nance companies and provides the industry with a diverse set of risk management products and services. Once an agreement is formalized, PayNet will provide the CFLA Business Credit Delinquency trends each quarter on 30 and 90 day financing delinquencies for Canadian businesses.”

A second PayNet index will show trends in commercial business financing, meaning an ongoing collaboration to enable CFLA to better report on the industry and build new data sources.

Other data projects include:PMG Intelligence will survey Canadian ◉business owners about anticipated commercial equipment spending and the frequency with which these companies use products offered by CFLA members, delivering insights the appetite for equipment acquisition. Desrosiers Automotive Consultants ◉is being looked at to provide market size statistics for new and used vehicle financing in Canada. This would provide an important set of industry data points.

The CFLA also says it will form a small committee of interested members to monitor and improve the development and use of other relevant sources of data.

Recruiting new talentThe CFLA has initiated two projects to focus on programs which invite new and talented younger people to examine the market for potential careers, and to retain the brightest young leaders of the future who are currently employed in the field.

For example the CFLA Student Co-Op Program offers full-time students in commerce and technology courses short-term co-op employment. The association facilitates the process, linking members with students thru their schools. A pilot project is already in place with Wilfred Laurier University. So far, 14 members of the CFLA have signed on, and some have already begun interviewing.

Meanwhile, the Young Talent Recruitment Program allows members to reach out to students and graduates to promote careers in their businesses. All of the efforts will help the CFLA develop a member took kit, with an eye to future on-campus events.

Some of the other recent industry developments or issues the CFLA has dealt with include:

IASB Lease Accounting Standards ◉

Federal Department of Finance Review ◉of GST-HST in Financial ServicesNational Vehicle Vicarious Liability ◉ProjectImplications of Basel III ◉Ontario Abuses of the Repair and ◉Storage Liens Act (RSLA)Ontario Auditor General Review of the ◉PPSA Registration SystemNational Fleet Fuel Card Fraud ◉Ontario Occupational Health and ◉Safety ActIBC Pilot Project on the Illegal Export ◉of Financed VehiclesAlberta Vehicle Seizures for Criminal ◉Code OffencesSaskatchewan Consumer Protection ◉and Business Practices ActManitoba Consumer Protection ◉Amendment and Business Practices AmendmentAlbert Collection of Recycling Charges ◉British Columbia Return to PST ◉Ontario PPSA Cash Collateral ◉ConsultationsOntario Mortgage Brokerages, Lenders ◉& Administrators Act

Member of the YearThe CFLA also named Angela Armstrong, president of Prime Capital and Forest Leasing, as member of the year (for the second time). The award recognizes individuals from member companies who help in many ways.

The CFLA said of her, “Over the last few years Angela has been a tireless supporter of the association. She took the initiative to involve more brokers in the association, founding the Broker-Funder Working Group: one of the results, the popular Funder-Broker Reception at the CFLA Conference.”

Member ServicesThe CFLA also instituted a number of member services in 2013, initiatives which provided new value to members and the industry as a whole. They include the student programs, 40th Anniversary commemorative projects, an expanded Government Relations Committee, and the Quarterly Equipment Leasing and Finance Index.

This reporT has been prepared by staff at Canadian Equipment Finance magazine using official CFLA sources, including the association’s annual report.)

CFLA works to build better stronger industry through better data

2014 ISSUES & EDITORIAL THEMES

Issue u January-February Industry Report Kick off the year with our Industry Report, which provides extensive insights on the state of the leasing and financing market in Canada and across North America. We feature contributions from a wide range of key

industry and association leaders who provide exclusive, personal viewpoints that our readers will use to shape their planning and strategy for 2014 and beyond.

Issue v March-April Lending ReportThe Lending Report is where our readers will get the word on the availability of capital from each of the

significant sectors which provide funding—leasing companies, bank subsidiaries, credit unions, captives, third party and independent lenders. Plus we delve into how the money supply is affecting individual sectors, such as

SME, medical technology, logistics companies, and telecommunications. ISSUE OUT: April 4th

Issue w May-June Technology ReportThere’s two ways that our Technology Report helps our readers manage their key software, systems and hardware decisions. We look at a range of key IT developments which companies are managing while taking the plunge to upgrade, enhance and expand their IT operations. Readers will read exclusive articles that show the way to best

practices in cloud computing, analytics, and more. ISSUE OUT: June 3rd

Issue x July-August Services ReportThis issue is our Services Report, which looks at Remarketing, Aftermarket, Appraisals and Auctions. Readers

will learn what they need to know to take full advantage of the offerings and opportunities in these key services. We feature contributions from the leaders of each area to provide advice on strategy, tactics and processes.

PLUS…Our 2014 CFLA Convention Preview looks at this year’s event in-depth. ISSUE OUT: July 25th

Issue y September-October Market ReportEach September, financing and leasing’s best and brightest and most influential gather for the annual industry convention. Our Market Report includes our convention issue and detailed industry forecasts. The issue focuses on hard decisions affecting our readers’ ability to fund their projects. Also features a series of industry leader

interviews in a one-on-one format. ISSUE OUT: September 5th

Issue z November-December Legal ReportWe close the year with our Legal Report, which provides an extensive report on the legislation, statutes, law

and ongoing government changes in Canada and across North America. We feature contributions from a wide range of legal experts who provide exclusive, fully vetted opinions that our readers will use to shape their deals,

contracts, agreements and structure for 2015 and beyond. ISSUE OUT: November 7th

Plus…Each issue includes Regular Editorial Columns which look at funding sources

…business management…real world case studies…vertical market insights …technological developments…major news stories…events and more.

Call us to learn more about how to leverage these editorial opportunities with Advertising, Online Campaigns, Editorial Roundtables, and more.

Phone: 905-201-6600 • Toll Free: 1-800-668-1838 • www.canadianequipmentfinance.com


eFla rePort

Investment in equipment and software is expected to grow 3.1% in 2014 as economic conditions solidify and business confidence continues to recover, according to the Annual 2014 Equipment Leasing & Finance U.S. Economic Outlook released by the Equipment Leasing & Finance Foundation.

Equipment investment is expected to grow across most verticals, as underlying economic fundamentals continue to improve. Overall in 2014, growth is forecast to be mixed, with some sectors outperforming others. The Foundation’s report, which is focused on the $827 billion equipment leasing and finance industry, forecasts 2014 equipment investment and capital spending in the United States and evaluates the effects of various related and external factors in play currently and into the foreseeable future. The report will be updated quarterly throughout 2014.

William G. Sutton, CAE, President of the Foundation and President and CEO of the Equipment Leasing and Finance Association, said, “Looking into 2014, businesses will be making financing decisions in a dynamic environment. While the threat remains that policy uncertainty could negatively impact the U.S. economy and capital investment, potential stability in the federal budgeting process and an increase in GDP growth will drive up demand for equipment finance.”

Highlights from the study include:The U.S. economy is expected to grow ◉3.0% in 2014, the fastest pace since the 2008-09 recession. Assuming there is a solution to the current budget discussions, economic growth will be driven by a number of positive factors. Specifically, a strong housing market recovery, falling natural gas prices, robust auto sales, record high

household wealth, steadily improving credit availability, and improving employment. However, these positive trends are counter-balanced by high oil prices, slow international growth, moderating fiscal consolidation and the continued threat of policy uncertainty.In 2014, more dependable economic ◉growth will help to generate stronger overall investment in equipment and software. Additionally, a rising interest rate environment could induce companies to lock in lower rates. Overall, these trends could yield a positive result for the equipment finance industry.

Trends in equipment investment include:Agriculture equipment investment is ◉expected to remain weak on a quarter-to-quarter basis, and is projected to decline by 4% in 2014.Computers & Software investment is ◉expected to continue growing at the current below average rate. Annual growth should be in the 2% to 4% range during Q4 of 2013.As expected, construction equipment ◉investment declined in Q3 of 2013, falling 2.8% year-over-year. After reaching record-levels of investment in 2013, this vertical will likely decline by 5% to 10% in 2014.Industrial equipment investment ◉accelerated to 5.0% annual growth in Q3, and is expected to maintain a steady growth trend going forward. Employment, new orders, and earnings data point to a positive 2014.Medical equipment investment grew ◉in Q3 but the sector’s leading indicators suggest little to no growth going forward.Transportation equipment investment ◉saw modest growth in the third quarter, and improving indicators

point stronger momentum over the next six to 12 months.

The Foundation produces the Equipment Leasing & Finance U.S. Economic Outlook report in partnership with economics and public policy consulting firm Keybridge Research. The annual economic forecast provides a three-to-six-month outlook for industry investment with data, including a summary of investment trends in key equipment markets, credit market conditions, the U.S. macroeconomic outlook and key economic indicators. The report will be updated quarterly throughout 2014.

Equipment Lease Finance Industry Confidence Decreases Slightly At Year-end The Equipment Leasing & Finance Foundation released the December 2013 Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI). Designed to collect leadership data, the index reports a qualitative assessment of both the prevailing business conditions and expectations for the future as reported by key executives from the $827 billion equipment finance sector. Overall, confidence in the equipment finance market is 55.8, a decrease from the November index of 56.9, reflecting industry concerns over uncertainty regarding capital expenditures (capex) and competitive market pressures in 2014, among other issues.

When asked about the outlook for the future, MCI survey respondent Anthony Cracchiolo, President and Chief Executive Officer, Vendor Services, U.S. Bank Equipment Finance, said, “The overall environment continues to be driven by uncertainty. The equipment finance industry is stable with low single digit

Association’s annual forecast shows probable 3.1 percent growth in 2014 and new demand for equipment

cANADIAN eQUIPmeNT FINANce | November/December 2013 | canadianequipmentfinance.com8

eFla rePort

growth. The industry is well positioned to address increasing demand when the economy improves evidenced by a higher GDP growth rate. There are no indicators currently that suggest stronger growth in the near term.”

December 2013 Survey Results:The overall MCI-EFI is 55.8, a decrease

from the November index of 56.9.When asked to assess their business ◉conditions over the next four months, 12% of executives responding said they believe business conditions will improve over the next four months, down from 17.2% in November. 78.8% of respondents believe business conditions will remain the same over the next four months, down from 79.3% in November. 9% believe business conditions will worsen, up from 3.4% who believed so the previous month.15.2% of survey respondents believe ◉demand for leases and loans to fund capex will increase over the next four

months, up from 13.8% in November. 78.8% believe demand will “remain the same” during the same four-month time period, up from 75.9% the previous month. 9% believe demand will decline, down from 10.3% who believed so in November.24% of executives expect more ◉access to capital to fund equipment acquisitions over the next four months, unchanged from November. 75.8% of survey respondents indicate they expect the “same” access to capital to fund business, up from 72.4% in November. No one expects “less” access to capital, down from 3.4% who expected less access in November. When asked, 27.3% of the executives ◉reported they expect to hire more employees over the next four months, unchanged from November. 60.6% expect no change in headcount over the next four months, down from 65.5% last month. 12% expect fewer employees, up from 6.9% who expected

fewer employees in November.6% of the leadership evaluates the ◉current U.S. economy as “excellent,” unchanged from last month. 85% of the leadership evaluates the current U.S. economy as “fair,” up from 76% last month. 9% rate it as “poor,” down from 17% in November.24.2% of the of survey respondents ◉believe that U.S. economic conditions will get “better” over the next six months, an increase from 17.2% who believed so in November. 66.7% of survey respondents indicate they believe the U.S. economy will “stay the same” over the next six months, a decrease from 72.4% in November. 9% believe economic conditions in the U.S. will worsen over the next six months, a decrease from 10.3% last month.In December, 30.3% of respondents ◉indicate they believe their company will increase spending on business development activities during the next six months, a decrease from 34.5% in November. 66.7% believe there will be


Nearly half of mining and metals companies believe credit availability is improving: EY report

“no change” in business development spending, an increase from 65.5% last month. 3% believe there will be a decrease in spending, an increase from no one who believed so last month.

December 2013 MCI Survey Comments from Industry Executive Leadership:

Depending on the market segment they represent, executives have differing points of view on the current and future outlook for the industry.

Independent, Small Ticket“The industry appears to be holding its own with new originations just slightly ahead of 2012 numbers. Lack of clarity on the tax side as well as the continuing saga of Dodd-Frank make our world a bit uncertain. New worries about the pullback of government stimulus make 2014 projections a bit tricky.” Valerie Hayes Jester, President, Brandywine Capital Associates, Inc

Bank, Small Ticket“There remains in the general market an imbalance between capex and capital liquidity. While this is good for our industry in the short run, competitive pressures are driving spreads and credit standards lower in the long run. This will present a challenge on those leasing companies that are ill-equipped to manage risk through the next downturn.” Paul Menzel, President & CEO, Financial Pacific Leasing, LLC

Bank, Middle Ticket“I anticipate 2014 new business volume

levels to be slightly better than 2013. My rationale is very simple: in 2013 most industries took a very cautious approach to capital equipment investment for both replacement and expansionary purposes. In 2014 many industries will be forced to acquire new equipment to replace equipment which has exceeded its useful life. It will simply be less expensive to acquire new equipment than to maintain existing equipment.” Thomas Jaschik, President, BB&T Equipment Finance

Why an MCI-EFI?Confidence in the U.S. economy and the capital markets is a critical driver to the equipment finance industry. Throughout history, when confidence increases, consumers and businesses are more apt to acquire more consumer goods, equipment and durables, and invest at prevailing prices. When confidence decreases, spending and risk-taking tend to fall. Investors are said to be confident when the news about the future is good and stock prices are rising.

Who participates in the MCI-EFI? The respondents are comprised of a wide cross section of industry executives, including large-ticket, middle-market and small-ticket banks, independents and captive equipment finance companies. The MCI-EFI uses the same pool of 50 organization leaders to respond monthly to ensure the survey’s integrity. Since the same organizations provide the data from month to month, the results constitute a consistent barometer of the industry’s confidence.

news digesteFla rePort

VANCOUVER--Improved credit availability is set to drive momentum in the mining and metals sector in the year ahead, according to EY’s Capital Confidence Barometer: Mining & metals sector. Fifty-five percent of companies are already focused on growth – compared to 38% in 2012.

“Transactions in the mining and metals industry have dropped considerably over the last year as companies struggled with capital allocation and access to capital challenges,” says Bruce Sprague, EY’s Canadian mining and metals leader. “Deal volume and value have fallen 36.9% and 58.1%, respectively, year over year in Canada alone. Now it looks as though that tide may be turning.”

Forty-seven percent of mining and metals companies believe credit availability is improving in the sector – and 72% believe the global economy is improving compared to 57% six months ago.

Investment decisions across the sector are currently focused on deploying low-risk capital for growth. Expect companies to pursue M&A that fits within their overall portfolio rather than just to achieve scale.

“We’re beginning to see companies slowly shift their focus back to growth,”

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news digest

STAMFORD--Basware, the leading provider of e-invoicing and purchase-to-pay solutions, anticipates several key trends that will impact finance and procurement in the coming year, including the fast growth of social, mobile and cloud computing that will fuel the rapid rise of e-invoicing and e-payment services. Additionally, as organizations continue to face intense pressure to improve cash flow, they will turn to innovative payment strategies to accomplish this goal.

“In 2013, companies have been focused on improving their cash flow and we expect this to continue as a key focus in 2014,” said Esa Tihilä, CEO of Basware. “Effective payment strategies will stay top of mind as organizations look to maximize working capital and ensure the financial stability of their suppliers.

“Additionally, in the coming year we expect more finance and procurement departments to use B2B e-commerce to improve financial management and increase responsiveness to internal users, customers and suppliers. This will enable them to gain better insight, improved processes and increased collaboration,” Tihilä added.

Basware predicts four key trends will transform B2B

commerce over the next twelve months:

2014 Will Be the Year Of 1. ‘E-Everything’ through Social, Mobile, Cloud

In today’s real-time social, mobile and cloud-based environment, business users are demanding access to information and the ability to process tasks in a matter of seconds or minutes. To meet these increasing demands, finance and procurement professionals will see rapid growth of e-invoicing, e-ordering and e-payment services. They will also expect an open, engaging digital experience and ease-of-use in their finance and procurement solutions.

Following in the footsteps of corporate buyers, suppliers are realizing how expedited invoicing can improve cash flow and allow them to benefit from real-time financial data. In 2014, we expect to see more suppliers using supplier portals as well as on-boarding services to increase the speed and accuracy of invoicing. Additionally, local governments will continue to play a pivotal role in encouraging their national governments to adopt e-invoicing.

The key to transitioning to ‘e-everything’ in 2014 and achieving financial success will be to become

says Sprague. “Just under half of survey respondents plan to invest capital in the year ahead. And another 24% plan to pursue an acquisition. But optimism isn’t necessarily translating into the closing of finance arrangements just yet.”

While bank lending appears to be available to well-capitalized, investment-grade borrowers, equity markets remain challenging, with junior follow-on proceeds and IPO volumes at historic lows. This is creating new opportunities for alternative finance and private capital providers looking to invest.

“In the absence of traditional investor interest, we’ve seen a number of new buyers come on the scene, including state-owned

enterprises, financial investors and commodity traders,” says Sprague. “Together, increased access to capital, improving credit availability and growing investor confidence are setting the stage for M&A activity throughout 2014.”

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

Basware predicts 2014 will be the ‘Year of E-Engagement’ for B2B commerce, driven by explosive growth of social, mobile, cloud


news digest

2

better connected in the business environment, just as consumers have become accustomed to in their everyday lives. One way companies will continue to increase their connectivity and collaboration is through business e-commerce networks, which will enable them to connect internal employee efforts to customers, suppliers and partners to gain market share, achieve higher margins and increase sales.

Savvy Buyers and Suppliers will Free 2. Up Cash Flow

In the U.S. e-payments typically have focused on the consumer retail space, but we will see it beginning to take hold in B2B due to increased market pressure and the availability of new solutions. Currently, cash flow concerns are being fueled by large companies that are extending their payment terms with suppliers to free up cash for their organizations. With terms at

these large companies now typically 60-100 days, the impact on suppliers – particularly smaller ones – can be severe, jeopardizing their financial stability as well as creating risk in the supply chain.

Over the next year we expect to see the rise of innovative e-payment solutions that will address both sides of the payment issue: speeding up slow invoice processing and invoice payment tasks to ensure that suppliers get paid quickly, while extending terms for buyers.

Leaders will Increase their 3. Competitive Advantage through Analytics

Now more than ever companies require immediate access to spend and cash flow information to better manage finances in real-time. In 2014, companies will rely even more heavily on analytics, not only across their purchase-to-pay process, but also across their whole network of buyers and suppliers, to aid their decision-making.

The use of real-time analytics will help identify financial bottlenecks and opportunities for cost savings. It will enable organizations to collate information from across the network to uncover trends that help improve cash-to-cash conversion cycles and critical performance indicators, such as days’ sales outstanding and days’ payment outstanding.

The Year of the Accounts Payable 4. Change Maker

In 2014 the accounts payable team, which has insight into the company’s actual spend, will further social, mobile and cloud-based e-invoicing and e-payment solutions to make information more accessible and drive collaboration and change across the organization. Additionally, the ability to measure key metrics will be the catalyst for the accounts payable change makers to work smarter and take performance to new levels.

To send press announcements, please direct them to Steve Lloyd, Editor in Chief, at [email protected]


Feature rePort

By David Chaitin

I ncreasingly, we have been witnessing leasing companies stretching the rules of the game

in order to accommodate good customers or entering into deals that are progressively more removed from leasing, deals begin to encroach on other forms of financing.

I call this “Chaiton’s first law of commercial finance”:

1. “Saturated markets show a tendency toward contractual entropy”Formal rigidity softens and gives way to non-traditional terms

Has the effect of supporting or increasing pricing to offset perception of increased risk

What makes this all possible? Once you stray from those comfortable forms, is it a lease anymore, or does it even matter? Will my commercial expectations be met if I agree to modify my deals to satisfy my customer?

This inquiry leads directly to Chaiton’s second law of commercial finance:

2. Entropy encourages the evolution of our legal forms of commerceMarket pressures lead to fresh ways of thinking and new rules develop around the way in which we do business

This process is mediated by legislation, innovative drafting and litigation

Charles Darwin observed species changes in the natural world and concluded that it was not a completely random affair. He called it “natural selection”.

This brings us to Chaiton’s third, and final, law of commercial finance:

3. The forces of entropy in commerce are asymmetrical yet do not act randomlyChanges occur because of demandDemand is directional

Not everything demanded occurs—hidden operators include public policy eg. Illegal contracts; consumer laws; usury laws

I offer up Chaiton’s three laws of commercial finance as an explanation of the conditions which hasten product innovation and diversification in finance.

Why talk about these abstractions? Because there have been many changes in the fabric of the leasing business community over the last several years.: Some consolidation has taken place, a number of new entrants have arrived, a tightening of credit during the recession put pressure on all of us just to survive and now we see a breakout from those restraints. Conditions for more rapid, dramatic change are evident everywhere and it merits a look at some of the ways these might affect us. I do so under the general rubric of “Innovation: the Confluence of Leasing and Factoring” as a backdrop for a discussion of their impact, but know this: these pressures

Innovations in financing:The Confluence of Factoring and Leasing


Feature rePort

have led to a more pervasive re-thinking of long-accepted rules. Finance companies are becoming more broadly-based, innovative participants, many of whom have recently expanded their operational scope to include factoring and similar forms of asset based lending. How are traditional lease operations suited to the requirements of factoring, and, importantly, what are the areas of divergence you need to know about if you’re considering expanding into other opportunities?

The tightening of credit over the past 5+ years opened gaping holes through which more entrepreneurial lenders walked with ease, comparatively free of competitive pressures relative to the largest institutions. Now that they are back the goliaths of competition are once again calling the shots in most forms of commercial finance. However, achieving the consistency, customer focus, product knowledge and flexibility to compete effectively in accounts receivable financing is tricky, although National Bank of Canada stands out as the indisputable leader in this arena in Canada. Even so, certain forms of asset based lending are much better suited to specialty firms which have traditionally found a home in the detritus of lumbering giants.

Historically, A/R has been viewed as but one of a number of supporting elements in commercial credit, undeserving of any special treatment. Standard formulas abound, by which big banks margin A/R quite restrictively: by aging, composition, customer density, industry concentration, and so on., And then typically, only allowing between 50% and 75% advances against fresh receivables, decreasing rapidly from there to a point where big banks consider them valueless for lending purposes. Even insured receivables!

In the meantime, borrowers have had to fend off attacks on two fronts as similar pressures were brought to bear against manufacturers and distributors

by their own customers who, for similar reasons, were having trouble securing sufficient credit from their own big banks as a result of credit and economic tensions which supported broad-sweep, lending policy changes. They too looked

elsewhere for easier credit and found it in their own supplier base: delaying and discounting payables became more pervasive and normalized. It’s a simple idea: “I’ll keep the cash I have for a longer time, so I’ll need less credit from the bank, and I’ll do it because I can: my suppliers need my business. This kind of bullying has been described as “just business”” but who are the losers: manufacturers and distributors, who at one time were the bulwark of the Canadian economy. These companies simultaneously suffer a pronounced slowdown in receivable turnover, and because of that unfortunate lending base formula of choice, which regards their A/R as increasingly exempt from margining, a double-whammy cut in available credit lines. At the centre of this whirling dervish of destruction--ultra-conservative credit policies that force customers to create quasi-credit by deferring payables.

Is there a legal device or artifice that will allow us to capitalize on this gap in A/R financing? If so, what conditions and processes gave rise to it?

The pledgeThe first form of security device known to civilization was the pledge. A pledge is simply the delivery of personal property to another to be held by him until some debt is paid or obligation fulfilled. The efficacy of the pledge is best appreciated from the fact that it continues to be so popular today. Consider, for example, the following:

Pledge of securitiesEscrow agreementLockbox arrangementsA pawnAll of these are modern examples

of a very ancient security device. What better security can you have than actual money/thing of value in the hand? And barring

the unforeseen, the typical pledge is a complete assurance of payment.

So, why did we need to conceive of anything more than or different from a pledge?

“For a very long time, the progression of commerce was seriously hobbled.”


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Let’s imagine a farmer somewhere in Ancient Mesopotamia. Agriculture has just caught on. Man now has a way to feed himself even when scarcity prevails locally, just by saving and storing for a rainy day the grains he could grow.

But our farmer, let’s call him Fred, doesn’t have a plough to help him till the land. He’d seen his buddy Sam, who had this device called a “plough” and with it, he witnessed how Sam was able to plant ten times more seed than Fred. What to do? Fred embarks upon one of the earliest recorded buy/finance decisions. He would really prefer to buy it, but the plough is out of reach for a farmer of his means. So, Fred will have to borrow the shekels he needs to get a plough and heads over to Harry the lender,, to ask for a loan. Harry, who was quite happy to oblige so long as Fred gave him good security in pledge, thought that the plough itself would do quite nicely.

But how would that help Fred? He still wouldn’t have the use of the plough if he did that deal until everything was repaid. Even so, it was better than nothing at all—at least he would eventually get hold of the plough once it was paid off. And it was a great deal for Harry because he would have the use of it until that time. That’s the way pledges worked in those days.

Birth of the chattel mortgageWhat was needed was a mechanism under which the use of the plough might be given to the borrower even while the loan was outstanding, while still encouraging payment. Thus was born the chattel mortgage, which allowed the farmer to use the plough while making payments, but if he failed to make payment promptly when it fell due, the lender was entitled to obtain possession of the plough under his chattel mortgage security. It was too late for Fred’s deal, however, as the chattel mortgage did not become a part of our law until around the 1600’s.

So for a very long time, the progression of commerce was seriously hobbled. You would not believe the hoops that the law had to jump through in order to recognize the creation of this form of security. First, it had to explicate the legal nature of the relationship between

the parties. To achieve this, the courts invented the notion of equitable or beneficial title [which is what the debtor in possession had in relation to the plough] and legal title, held by the lender, which carried with it all the traditional rights associated with ownership, save for a conditional carve-out of the right of possession. The notion of “ownership” comprised the idea that property could be divided into an infinite number of interests. He who continued to own rights after all other interests were accounted for [was the person we would regard as the true owner. Consider now the ramifications of this reasoning: it permitted a separation of ownership and possession. You are all familiar with the phrase, “possession is nine tenths of the law” It means many different things in many different situations, but fundamentally underscores the importance which our law attaches to physical possession of a thing. Chattel mortgages also introduced efficiencies that were not present before by permitting the use of personal property even before it was owned outright by the user. Its elucidation put the economy on warp drive and led to the facilitation of the industrial revolution.

This same sort of story can be told about conditional sale contracts; hire-purchase agreements and even leases, although leases came well before most of these devices., The earliest known reference to the rental of agricultural implements occurred in the ancient Samarian city of Ur in 2010 BCE, where priests let them out to farmers and recorded their agreement on clay tablets. Several of these were discovered as recently as 1984. In 1750 BCE Babylon, the great king Hammurabai acknowledged leases of personal property in his famous code of laws. So advanced had the underlying analytics become that in about 550 BCE the Greeks’ and Romans’ Justinian Codex actually distinguished between finance leases and rental agreements. The Phoenicians made and chartered ships under long term bare boat charter agreements that actually contained “hell or high water” payment provisions!

In summary:The “forms” that you use in business 1. had their origins a long time ago and were conceived and developed in response to the needs of commerce.Legal innovations and market 2. innovations go hand in hand—one propitiates the other.More recently, this second 3. proposition, linking legal and market innovations, is best seen in the rapidly developing area of intellectual property. The idea used to be that a picture is worth a thousand words; now it’s that a picture is worth a thousand bucks, or more! The ability to traffic in IP rights (ie license and sell) depends entirely on the legal recognition they receive. For example, when taking a security interest in artwork, you need to get a waiver of “moral rights” alongside the security agreement if you want to vary the work in any way: ie put a moustache on Mona Lisa; streamers on a sculpture (Snow v T. Eaton Company Ltd.)

The next business opportunity will most likely involve some corresponding development in legal thought. Perhaps the very best illustration of that proposition is the Personal Property Security Act, (“PPSA”), which completely re-vamped our ideas about security, describing all the old forms, and by extension, anything yet to be devised, as “security agreements”. Now, any form of agreement that in substance creates a “security interest” in personal property will be recognized as a viable form of security, regardless of its form or the person who holds title. Only creative drafting separates us from the clever relationships which have yet to be thought up in lawyers’ and financiers’ offices throughout PPSA jurisdictions everywhere.

abouT The auThor: David is widely recognized as an expert in equipment financing, leasing, asset-based lending, corporate finance and banking matters, has been involved in complex bankruptcy and receivership engagements and represents banks, insurance companies, leasing companies and other purveyors of financial services. A director of the Canadian Finance & Leasing Association, David is a member of its legal committee and was recognized for his contribution to the development of the vehicle leasing and equipment finance industry in Canada when he received its member of the year award.


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L ease accounting is back in the spotlight, after the IASB and FASB recently issued revised Exposure Drafts (revised ED) for

public comment. The proposed revisions would fundamentally change lease accounting for most lessees and lessors, and require significant effort right at the outset – even before the accounting changes take effect.

The revised ED proposes a right-of-use model that would require lessees to recognize most leases on their balance sheets, while bringing greater consistency between International Financial Reporting Standards (IFRS) and US Generally Accepted Principles (US GAAP).

Some firms feel greater impact Because of proposed changes to both their balance sheets and income statements, companies that apply operating lease accounting to their equipment leases (such as aircraft, manufacturing, telecommunications, transportation or mining) today are more likely to see the greatest impact. Those who lease land and buildings, however, may not see a significant change to their income statements, since their balance sheets would be grossed-up for the asset and the lease liability. Meanwhile, lessor accounting for both property and non-property leases would be affected.

While Boards have attempted to improve the current accounting for leases in order to provide greater transparency in financial reporting and address previously raised criticisms and concerns of financial statement users, it’s less clear whether the additional cost and complexities introduced by the revised ED would outweigh the perceived benefits.

Reactions have been unfavourable The initial reaction to the proposed requirements has been, for the most part, unfavourable. Preparers from a number of industries across the various geographies continue to express concern about the anticipated cost and complexity of implementing the requirements of an entirely new leasing standard.

No doubt, the challenges will go well beyond just accounting. The changes, on their own or in combination with each other, are likely to have far-reaching implications for business processes, systems, and controls.

By George Prieksaitis

Beyond accounting:

What you need to

know about the new

leases landscape

Leases re-exposed


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What are the challenges of the revised ED? Data collection and ongoing data managementData requirements – specifically, how companies are managing, tracking, and storing their lease-related data – is quickly becoming a top issue. As such, companies will need to create and examine an inventory of present lease arrangements to assess how the revised ED will impact both the balance sheet and income statement.

The judgements and estimates required to account for leases under the revised ED would demand in-depth knowledge from accounting personnel, as well as treasury, corporate real estate, business operations, legal, IT and tax. Therefore, a cross-functional project team may be required to gather the data needed to identify and initially record the lease, to perform the required periodic assessments of lease payments and discount rate, and assess the impact of lease modifications.

Some companies would also need to evaluate their existing lease processes to make sure they know where the information is, and that it’s complete and accurate. While most preparers use existing spreadsheets and programs, they are unlikely to have all the information required to facilitate the calculations and judgements necessary to comply with the proposed new lease accounting requirements. Because of that, it’s vital that companies assess how their current spreadsheet solutions might be able to implement the revised ED requirements.

Lease procurement and structuringAs they negotiate and evaluate new lease arrangements,

companies should already be thinking about the potential impact of the revised ED.

Lessors who use leasing as a primary market strategy should understand how the revised ED may affect their lessee customers’ behaviour. For example, certain lessees may look for shorter terms or a higher proportion of variable rents to minimize the financial statement impact.

Furthermore, because the proposed lease accounting model differs significantly from current accounting, some lessees may reassess whether buying the asset would be more advantageous. Lessors also may consider modifying their offerings so that they don’t contain lease components under the revised definition of a lease.

At a minimum, companies entering into new leases today should be aware of the potential future impact of the revised ED on their financial statements. While companies should generally not make economic decisions based on accounting results, they should be aware of the accounting consequences of their decisions.

IT system, processes, and controlsMany lease arrangements are managed through a variety of spreadsheets or software programs that would not be sufficient to handle the proposed accounting requirements going forward. Companies need to think about whether existing systems can be modified or if new systems would be required to meet the requirements. As part of implementing any IT system, it would be important to develop processes and controls to

maintain documentation of management’s judgements and estimates.

Identifying, developing and implementing changes to IT systems are not easy, and the amount of time necessary would depend on the legacy systems in place. Companies that are currently designing or upgrading IT financial reporting systems should consider the revised ED as part of their current IT development efforts, in order to reduce the risk of costly re-work and re-design later. Companies should also be mindful that although IT programs can help accumulate data and perform the calculations required by the revised ED, they’re not a magic solution – no program can make the critical

estimates or judgements the revised ED would require.

What should companies do now?As currently proposed, an accounting change of this magnitude would present a daunting challenge for organizations with large volumes of leases or complex lease contracts. Understanding how the proposal will affect your company is critical, and starting early is the best way to reduce the overall cost of implementation, while avoiding unwanted surprises and costly missteps.

abouT The auThor: George W. Prieksaitis, Partner, National Leader, Financial Accounting Advisory Services, Ernst & Young. George W. Prieksaitis has over 20 years of experience with a focus on financial services clients, with a strong background in derivative valuation, complex financial instruments, merchant banking, loan-loss accounting and securitization issues, as well as extensive experience in capital markets transactions, including prospectuses and initial public offerings.

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F rom the days of the ancient Egyptian Pharaohs, the tablet has been the tool of choice for

treasurers to record their daily transactions. Admittedly the form-factor has changed over the years, with the silicon chip replacing clay as the medium of choice, but the basic premise remains – a handheld device is the ‘must-have’ accessory for the busy, on-the-go finance executive

Today, globalization, increased regulation and the expectation of 24x7 availability has fuelled the banking industry’s massive investment in technology. Few industries have harnessed technology as aggressively as the financial services sector, where there is now a vast interconnected network of correspondent banks, clearing houses and payment systems capable of processing trillions of transactions each and every day. In fact at Citi we sometimes refer to ourselves as ‘a technology company with a banking license.’

Experts predict the tablet will outsell PCs and laptops by 2015At the heart of this technology lies the tablet – the handheld device that Gartner and other technology analysts predict will eclipse sales of PCs and laptops by 20151. This year, Gartner estimates tablet sales will rise by 54.3 percent compared with 2012, to 184 million units globally, while traditional desktop and laptop computer sales will fall by 11.2 percent to 303 million units over the same period. One of the key drivers for the tablet’s popularity is the proliferation of Apps that are being developed, not just for consumers, but for

business executives including bankers and treasurers.

Citi’s Treasury and Trade Solutions (TTS) leads the way in offering the industry’s most comprehensive range of digitally-enabled treasury, trade and liquidity management solutions. Earlier this year Citi’s TTS business won numerous prestigious accolades at The Banker’s 2013 Innovation in Banking Technology Awards, including the Innovation in Cash Management Award for its ReceivablesVisionSM and Payment Analytics solution, Most Innovative Transaction Bank from the Americas, and Most Innovative Global Transaction Bank. These solutions are accessible through Citi’s online banking portal, CitiDirect BESM (Banking Evolution) and CitiDirect BE Mobile, which, as the name suggests, connects corporate, public sector and financial clients to an array of mobile banking services.

Uptake of CitiDirect BE Mobile has been nothing short of spectacular as the service is rolled out country by country in smart phone and tablet form. The keys to its success are its intuitive dashboard

display and analytic functionality that allow senior executives to initiate payments, authorize transactions, analyze payment trends and maintain the business intelligence necessary to optimize working capital, wherever they are in the world - be it a mine in the North West Territories, a board room on Bay Street or a hotel in Dubai.

Albert Einstein once said: “If I had 60 minutes to solve a problem, I’d spend 55 minutes defining it and five minutes solving it.”Citi has worked hard to create the framework for this technology

By John Landry

What You Need to Know About TabletsMobile devices are fuelling a new

era of banking, cash management

“Citi Canada’s John Landry, head of global transactions services, wants you to think about the way technology changes your business”


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leadership, an example being the creation of Citi’s Innovation Labs in San Francisco, Dublin and Singapore, and software production studios in Miami and Singapore. As Albert Einstein once said: “If I had 60 minutes to solve a problem, I’d spend 55 minutes defining it and five minutes solving it.” Einstein’s quote reflects the spirit of Citi’s technology innovation process. At Citi Innovation Labs we bring together clients, product teams and technology experts to define the needs and examine the aspirations and behaviours of those for whom these solutions are being designed. This is how CitiDirect BE Tablet and BE Mobile came to fruition. We first focused on the problem through intensive research, then explored possible solutions, developed a prototype and finally pilot-tested and scaled the solution.

It’s not enough simply to have a smart idea. Success is determined by how well that idea is executed, which in turn depends on how smartly and thoroughly the problem was originally defined. Case in point is ‘going mobile.’ Many financial institutions have simply tried to emulate the online banking experience by copying it to a mobile device. However, Citi’s research showed users didn’t want this. They didn’t need the full functionality of online banking, they just wanted easy (and secure) access to a few ‘Must Have’ features while away from the office.

Mobile executives don’t need full online banking functionality – they want easy (and secure) access to a few ‘Must Have’ features while away from the officeThese ‘Must Have’ mobile features include the ability to perform activities such as accessing account balances and the status of transactions, authorizing and releasing payments, initiating pre-formatted payments for domestic and international fund transfers, and receiving event notifications. But it goes further than that. It’s not as simple as developing a single mobile solution. Smart phones and tablets demand different application-development models and present different opportunities to customize the

user experience. CitiDirect BE Mobile for smart phone for example looks and feels different from the tablet version and offers quite different functionality.

Major corporations around the world, including many in Canada, are adopting CitiDirect BE to manage accounts and transactions globally. For example, a financial clerk in Toronto can enter a series of payments into CitiDirect BE for the purchase of heavy machinery in Chile, then submit them for approval to the regional treasurer in Vancouver. The treasurer, while on a business trip to India, can review and authorize the payments using a mobile phone, only hours after they were entered. Meanwhile it’s morning in London, where the CFO is preparing for the CEO’s weekly management meeting. From the boardroom, the CFO can use CitiDirect BE Tablet to quickly check the company’s global cash position and see that the series of payments have been made in Chile. With a few taps he (or she) can drill down on a map or graph to see the resulting balances and then subsequently confirm the execution of the company’s strategy at the meeting.

Canada is a world leader when it comes to the adoption of mobile banking functions in the corporate space. Last year, one of Citi’s clients – a Canadian gold mining company – was the largest single maker of payments from a handheld device anywhere in the world. This year, that company has once again made more than $1 billion in corporate treasury payments via Blackberry. This isn’t just a testament to Citi’s technology-based platform, but it also serves to underline the progressive thinking and willingness to adopt new approaches that is culturally engrained in corporate Canada. Recently I visited more than 20 clients at their head offices throughout Europe. Nowhere did I find the same level of openness to corporate treasury management and transaction initiation from the handheld device as I see from our Canadian clients.

This type of up-to-the-minute business intelligence would have been unthinkable just a few short years ago - now it’s set to become the norm. At the touch of a button, finance executives

and treasurers can get answers almost instantaneously to questions about market positions, currency risk, funding sources and operating needs, from almost anywhere around the world – the type of information that can often provide a competitive advantage.

Significantly, some of the fastest growth in mobile services comes from countries where transactions were previously dominated by cash or where banking penetration has traditionally been low. In many of these countries, for example in Africa, Latin America and Asia, mobile technology is being used to leapfrog a generation of banking infrastructure. This is good news for Canadian companies doing business in these countries, where monitoring counterparty risk, liquidity, supply chain management and supply chain finance are part and parcel of the treasurer’s role, and where mobile banking technology simplifies this process. But Canada’s finance executives and treasurers can’t afford complacency. If they fail to embrace new mobile banking technology themselves, they may miss out on the benefits of dynamic business intelligence, streamlined payment processing, optimized working capital and improved risk management, and find themselves being leapfrogged by those who have ‘gone mobile’ and achieved that business edge.

Right now, Canada is well placed to take advantage of new mobile technology. We have good penetration of tablets at the consumer and corporate level (26 percent of Canadians over 18 owned a tablet in Fall 20122) and a strong track record in m-commerce. With CitiDirect BE Tablet and Mobile now available in Canada, our corporate treasurers have the tools and expertise to take advantage of this brave new world of banking and cash management.

abouT The auThor: John Landry is the Head of Citi’s Global Transaction Services business in Canada. He is responsible for GTS’ team of professionals across Toronto, Montreal, Ottawa and Calgary and their delivery of class-leading Fund Services, Custody, Cash Management and Trade Finance & Services. He was appointed President and CEO of Citibank Fund Services Corporation in November 2012.

1. Forecast: Devices by Operating System and User Type, Worldwide, 2010-2017, 1Q13 Update”, Gartner, March 28, 2013. 2. The Rise of Tablet Computers: CBC Media Technology Monitor, February 2013:


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M ore than three billion dollars are lost to online fraud every year while one in six consumers have

experienced some form of credit fraud in 2012. Technology advances such as mobile banking and social networking create great opportunities to better serve customers, but these new technologies also open the door for new fraud threats. As a response, the banking industry must create a more flexible and agile approach to enterprise fraud management. If approached the right way, the promise of Big Data can help banks gain competitive advantages and tighten the defenses against fraud.

The growing fraud threatBanks are facing many different threats today including money laundering, first party and third party fraud on applications for mortgages and payment cards, as well as fraudulent electronic and mobile payments. The traditional fraud defenses look at the issues in silos which can make them largely blind to the increasing number of new maneuvers.

Mobile banking is an important and growing trend that capitalizes on the increasing number of smartphones, tablets and other mobile devices. The number of connected devices is expected to grow from 9 billion in 2011 to 24 billion in 2020. To stay competitive, banks may launch new online and mobile services under time-to-market pressure without adequate defenses against the new opportunities for exploitation that these services bring with them. The newness of the services, and the unknowns about how fraudulent and legitimate users will behave, make it difficult to extend protection with traditional fraud detection methods alone.

Banks have been discussing Enterprise Fraud Management for more than a decade, and we are now seeing the leaders embrace a new approach that uses a combination of traditional and new analytics-based systems that address specific fraud management needs, linking and potentially replacing legacy systems as needed to provide centralized insight and control. The new approach comes with a new philosophy that integrates the promise of Big Data in smart ways.

Approaching Big Data with the right mindsetBig Data will make banking more secure, just not in the way many people might think about it. Big data is not only about access to vast amounts of data or having the right predictive analytics technology; it is, as Economist data editor Kenneth Cukier recently observed, about having the right mindset: the ability to think differently about data, to see its possibilities.

Here is an example about this new type of approach; in fraud detection, traditionally a big focus has been on negative data in credit scoring. However, FICO research has shown that in many regions, positive credit data makes credit bureau scores like the FICO® Score much more predictive than negative-only data. The inclusion of both positive and negative data, like Australia’s credit bureau is planning for 2014, show that thinking differently about data is as important as the amount of data used.

Any increase in data has the potential to be valuable; but Big Data in banking is about an intelligent approach to all data rather than just a focus on new data that’s not already in use. Much has been written about the vast amounts of Big Data “out there” because the sheer size is amazing: almost 3 trillion gigabytes of data was

created or replicated in 2012, and 2.5 quintillion bytes of data are created every day. The total amount of data doubles every two years.

But banks already have a lot of Big Data in-house. While external data, for example from social networking, is extremely helpful too, a first step should be to find that Big Data is already collected by banks: attrition triggers, salary deposit patterns, actual income, and repayment percentages.

The right approach with the right technology innovationsNew fraud detection technologies can bring the available data together in new and meaningful ways, and make connections between internal and external data. This includes innovations like application fraud prevention technology that covers advanced analytics for addressing both third-party and first-party fraud types. By turning to these types of more flexible and less costly approaches, banks can rapidly deploy fraud solutions focused on specific customer interaction channels or customer asset classes, and then link them as needed for higher-level customer protection. And while it is often difficult to replace proven channel-specific defenses, these new technologies provide the means to connect these systems with new capabilities and with each other.

With the integration of new software capabilities into the fraud management process, financial services companies are also now able to use comprehensive social link analysis to examine personal profiles across different databases, including social networks like Facebook, Twitter or LinkedIn. This method identifies connections between people with shared attributes, helps gain greater insight into criminal networks, and

Fighting Fraud with Big DataHow we can use new predictive analytics

to make a more secure system

By Cheryl Woodburn


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significantly mitigates current and future losses from fraudulent activities.

Thousands of banks now use predictive analytics software that looks at transactions in real time as they “fly by” in a stream. The software records certain characteristic information about transactions – things like velocity, different spending types, and favorites in terms of where you shop and spend. The inherent neural network models that work almost like a nervous system allow it to predict if a particular transaction is fraudulent. It also looks for activities that are out of character for a customer.

Another example of an integrated solution is linking application fraud management with ongoing transactional fraud management. A bank might use rules and a custom application first-party fraud model to make decisions about new account applications. When applications are rejected because of high fraud scores, the application data, score and decision can then be shared with other areas within the bank to determine if the fraudulent applicant has any linkages, such as common phone numbers or addresses, with accounts already on the bank’s books.

Some of these linked accounts may already be in the collections process; by identifying them, banks can treat them appropriately, preventing further waste of collections resources who are spending time trying to collect on fraudsters. Other accounts may still be transacting, without giving

signs of the true risk they represent; by identifying these early, banks can act in time to prevent balance build up and bust-out fraud schemes from succeeding.

From Big Data to Big ValueInnovation has elevated decision management and predictive analytics to new levels in the past year. New advanced technology systems make it possible to include and combine both in-house and external data - including the analysis of social media profiles and activities – and provide banks with more and better insights for better decision management, and, ultimately, more security.

Banks need to realize that there is tremendous opportunity in the way Big Data is changing the analytics paradigm and upping the ante on fraud detection and prevention. But they need to look inside the organization as much as they need to look outside.

As Big Data grows bigger, the response is to make analytics and fraud detection smarter. This way banks can extend the three “Vs” of Big Data – volume, variety and velocity – by adding a fourth V that is critical for success: value. The technology for Big Data-based predictive analytics and decision management is here today, and it will help create a more secure system.

abouT The auThor: Cheryl Woodburn is Senior Director of Client Services at FICO Canada, a global leader in predictive analytics and decision management technology. FICO’s innovative solutions include the FICO® Score, along with industry-leading solutions for managing credit accounts, identifying and minimizing the impact of fraud, and customizing consumer offers with pinpoint accuracy. Most of the world’s top banks, as well as leading insurers, retailers, pharmaceutical businesses and government agencies rely on FICO solutions to accelerate growth, control risk, boost profits and meet regulatory and competitive demands.


tech rePort

Technology advances continues to drive growth in the leasing sector. Companies who provide

financing, as well as the clients who use the funds to obtain equipment, are always eager to find new tools to lower costs, improve efficiencies, and expand operations.

The automotive sector has turned technology into a selling point these days, and by extension, vehicle leasing firms have had to do the same. Loan management platforms are one line of automation that is a key for Cars on Credit.

“Maximizing automation is how we’re going to grow faster and more profitable than our peers,” said Chris McMunn, President and CEO of Cars on Credit. “Using an integrated platform allows us

to manage our loan portfolio with half the resources that a company of our size would typically require.”

“We found plenty of loan and leasing systems out there,” McMunn said. “But not all of them offered everything we needed. We wanted integrated accounting, loan management, bank transfers, and document automation. Dealers and auction houses can access our credit system from the web, as well. We’re implementing improved origination and collection processes, and because it’s a complete banking platform, we’ll be able to offer more services and products as we grow. We’re not limited.”

Before Cars on Credit installed the Portfolio Plus integrated banking platform from SIT, the employees had to manage the entry of information into

multiple systems, including a leasing software package and accounting software. On top of that, they were faced with endless time-consuming manual tasks. They had to send faxes between dealer systems, transfer funds to and from bank accounts, contact credit bureaus, register vehicle identification numbers (VINs), and manage collections using spreadsheet reports. Portfolio Plus offered a completely integrated banking software solution that eliminated the redundancy of re-entering data and maximized automation.

Inventory on credit“In addition to reducing costs, Portfolio Plus also has sales-driven functionality like AuctionWeb and DealerWeb to enable dealerships to originate their own

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loans and to manage their own floor plans,” McMunn said. “This is a dramatic step forward for our industry.”

DealerWeb and AuctionWeb are parts of the Portfolio Plus platform that automate the management of dealer and auction financing over the web. DealerWeb allows dealers to see all the details of their current floor plan, including all vehicles and available credit. When dealers want to purchase a new asset, they simply enter the VIN and the price that they have paid for the car, and DealerWeb automates the approval process. This automated process can include queries to Black Book and CarProof. AuctionWeb is a product that lets dealers arrange financing automatically from the auction house and incorporate any loans into their existing floor plan.

Smarter credit decisions“It’s no secret that Cars on Credit is a lender to turn to when traditional lenders won’t approve a credit application,” said McMunn. “And we’re proud that we can be instrumental in repairing someone’s credit. But we need to price accordingly. Using Portfolio Plus Prospector, which is a data-mining and analysis tool from SIT, we can dig deep to analyze our existing portfolio and be confident in how we price our loans.”

The flexibility of Portfolio Plus allows SIT to work with small and large financial institutions, lenders, leasing companies, governments, manufacturers, and non-traditional financial companies. This experience has been incorporated into the implementation methodology that SIT uses to ensure customer success.

“SIT uses something they call an Implementation Strategy Workshop to assign responsibilities for the team that will be involved in the implementation,” said McMunn. “If you’re looking for a competitive advantage by using Portfolio Plus, you have to invest the time and effort required to work closely

with SIT to migrate your processes to take full advantage of the banking software platform. In our case, SIT’s project manager guided us through the implementation of all the products we wanted and continues to assist as we add more functionality.

based in sharon, Ontario, the On Credit Group has been providing financial services since 2006 and has originated over $30 million in

leases and loans to date. Cars on Credit and Inventory on Credit are the On Credit Group’s two automotive business arms. Cars on Credit offers indirect lending to independent and franchise dealers in Ontario, Manitoba, Saskatchewan, New Brunswick, Nova Scotia, Newfoundland, and Alberta. Its automotive lending programs assist customers who cannot get approved at traditional banking sources. Inventory on Credit assists mainly independent dealers, helping them grow their used car inventory. It provides dealer partners with finance options when other lenders don’t. The more inventory dealers have, the more cars they can sell. Inventory on Credit looks for quality used car dealers to set them up for success. SIT’s banking software platform, Portfolio Plus, enables automobile and vehicle finance companies to take advantage of a banking system that integrates loans, leasing, accounting, web interfaces, bank transfers, dealer systems, credit bureaus, and more.

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L ooking at the scoreboard during my son’s volleyball game, I began to think about the scores and

how relative they are to the scores the credit information companies produce. Now hear me out... Like a score in a

volleyball game (or in just about any other game for that matter) the higher it is, the better is it. My son and his team (who won by the way) worked really hard for that score that won the game for them. In the world of consumer lending, the consumer too needs to work hard to maintain their own credit scores. There is no denying that the higher a credit

score, the better position a consumer is in to “win” the credit they need or want.

Information found in an individual’s credit report is used to calculate a variety of different types of scores. For the lender, these credit scores greatly increases the efficiency of the adjudication process for granting credit, but many of us don’t give much thought to what goes on behind the

Insights when your client is an individual ownerBy Thomas Higgins

Credit Score?What’s Behind a


Funding

scenes in order to create them. Just as in volleyball, there is a lot more that goes into a credit score.

Credit scores are calculated using information from an individual’s credit file. An individual’s credit file information is constantly being updated by lenders and other information providers for use in calculating scores. When a score is generated, it is taking into account information from various categories found within a credit information company’s database. Surprisingly, some can be calculated with as little as one trade-line or account. It is important to note that only the information found within an individual’s own credit file (and not that of their spouse or partner), is being used in determining his or her credit score.

In general, there are four key categories of credit information typically used in the majority of credit scores. The categories’ impact is weighted based on what the score has been developed to determine, e.g. new account opening or general risk, and the predictive value of each one. Of all these categories, payment history or how often an individual is paying their financial obligations on time usually has the largest impact on an individual’s score. Any previous delinquencies, collections or bankruptcies will have a negative impact. At the very least, people should be making their minimum payment each month in order to maintain a good score.

Another major category that is taken into account are any current amounts owed. Credit scores look at how large a consumer’s balance is across all open and active credit accounts and how much of the credit limit is currently being used. Both balance and utilization can have an important impact on scores.

The other two key categories include length of credit history and those with new accounts and credit inquiries. The longer the credit history of a consumer,

the more information is available to review to identify future credit behaviour, and the more predictive scores can become. Those having many credit inquires, particularly in a recent period (i.e. weeks or months) are generally a higher risk. It is also important to note that a consumer who inquires on their own credit file as well as any “soft” inquiries (e.g. employment and insurance inquiries) have NO impact on the score. Most credit scores will come with a “scorecard indicator” that allows the lender to know what type of credit file the consumer’s score was calculated on (e.g.. new file with limited history or a possibly older thin file with limited credit lines open). If we were to look at all these categories together as a percentage of what makes up a credit score it would generally look something like this:

Payment History - 35% ◉Current Amounts Owned - 35% ◉Newly Opened Accounts and Credit ◉Inquiries - 20%Length of Credit History - 10% ◉

So how did the industry come up with the design for the credit score? The concept of credit scoring is to predict the likelihood or odds of a specific event occurring over a future period of time. Most credit scores focus on the likelihood of a consumer having at least one (1) trade becoming 90+ days past due or worse over a 12 to 24 months period. So using a score gives lenders predictive insight into how a consumer will probably behave.

Building a credit score is based on the statistical notion that past behaviour is a good predictor of future behaviour. Using the credit file information, statisticians identify key information characteristics that align with a consumer either being delinquent or not. With this analysis, the statistician will create a mathematical formula, very similar to what you did in your high school algebra class, which will assign the highest possible score to those

people that will perform well.Now, contrary to some beliefs out there,

credit scores do not take into account any cultural, demographic or psychographic information such as where someone lives, race, gender, marital status, income, occupation or employment history. They are purely based on credit past and present behaviour.

You may not be aware that these scores can also be useful in many other aspects of business, well beyond traditional scoring and risk management. Besides new applications, many lenders can use credit scores throughout the rest of the customer lifecycle such as account management and collection recoveries. There is a lot more going on in the background when it comes to credit scores and because of this, they can provide a wealth of assistance well beyond standard risk management. In the end, it is about giving access to credit that consumers have earned, allowing the purchase of a car with the best possible rates on a Saturday afternoon or opening a charge account - on the spot - at their favorite department store.

At the end of 2012, the average Canadian held over $27,000 in non-mortgage credit debt. Given the amount of credit granted in the Canadian economy and the differences in the management of individual finances you can image how important it is for lenders more than ever to consider using credit scores to determine the credit worthiness of their customers. Like any score, whether it’s in a game of volleyball or a credit evaluation, the higher the score, the bigger the win!

abouT The auThor: Tom Higgins is vice present of Analytics and Decision services for TransUnion of Canada. He oversees the design, development and implementation of complex generic and customer scoring systems, segmentation analysis, desicioning platforms and other customer analytics for TransUnion’s clients in Canada. Prior to joining TransUnion in 2007, Mr. Higgins has worked for five years in the Canadian credit Industry with a focus on analytics. Previous employers include CIBC Visa and American Express; He is a 1992 graduate of McMaster University in Ontario where he obtained a Master of Business Administration. He also holds a bachelor’s degree in business from Simon Fraser University in British Columbia.

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


your Business

Tax time is almost here. For employers, that means filing year-end tax slips and

implementing new compliance measures for the first payroll run of 2014. For employees, that means understanding how legislative changes could affect their paycheque in 2014.

“The Canadian Payroll Association (CPA) is dedicated to helping payroll, finance and human resources professionals have the smoothest year-end possible,” said Steven Van Alstine, Vice President, Education for the Canadian Payroll Association. “This is crucial to mitigating risk and avoiding compliance audits and penalties.”

Read this brief summary of notable 2013 tax year reporting requirements and compliance measures now in effect. Payroll practitioners wanting more information can enroll in the CPA’s popular one-day ‘Year-end’ seminar held across Canada. Visit payroll.ca.

taxaBle BeneFits clariFication1. AD&D and Critical Illness -Insurance Premiums: The Canada Revenue Agency (CRA) clarified that employer-paid AD&D and Critical Illness insurance premiums are a taxable benefit to employees, effective January 1, 2013.Education Benefits: - Education benefits to non-employees (for example, family members) are not included in the employee’s taxable income.

Social or Athletic Club Memberships: -Employer-paid memberships to such facilities are not considered a taxable benefit if it is principally for the employer’s advantage.

canada Pension Plan 2. contriButions and Form cPt30

Effective January 1, 2012, CPP -contributions became mandatory for all employees between 60 and 65, even for individuals previously exempted because they were receiving their Canada Pension Plan (CPP) benefits. Employees age 65-70 who are receiving a CPP or Quebec Pension Plan (QPP) benefit can opt out of continued CPP contributions if they file a CPT30 form with the Canada Revenue Agency and their employer.

new BeneFit For Parents oF 3. critically ill or injured children A new Employment Insurance (EI) -benefit became available on June 9, 2013, which could provide up to 35 weeks of leave to parents who are absent from work to provide care or support to their critically ill or injured children.

QueBec rl-1 Box g rePorting 4. PensionaBle earnings The 2013 QPP contribution rate is -higher than the CPP rate, creating some administrative issues for employers that transfer employees in and out of the province of Quebec.

ontario emPloyer health tax5. Pending the passing of legislation, -the 2014 annual exemption of the Employer Health Tax (EHT) for organizations with an Ontario payroll will increase from $400,000 to $450,000. The exemption would be eliminated for private-sector employers with an Ontario payroll of $5 million or more.

cra weB access code6. For those who file year-end slips -electronically, a web access code (WAC) provided in 2012 is valid for all future filings. Employers can retrieve a lost WAC by contacting the CRA.Year-end slips and summaries must -be filed with the CRA or Revenu Québec on or before February 28, 2014. There is still time to enroll in the CPA’s Year-end seminars, offered in select cities through January 2014. For more information on the Canadian Payroll Association’s Professional Development Seminars, Certification Programs, and the Benefits of Membership visit payroll.ca.

abouT The Cpa: The Canadian Payroll Association (CPA) has influenced the payroll compliance practices and processes of hundreds of thousands of employers since 1978. As the authoritative source of Canadian payroll knowledge, the CPA affects the legislative processes and practices of payroll service and software providers, as well as hundreds of thousands of small, medium and large employers. Payroll professionals in 1.5 million organizations across Canada are responsible for ensuring the timely and accurate payment of $830 billion in wages and taxable benefits, $260 billion in statutory remittances to the federal and provincial governments and $90 billion in health and retirement benefits, while complying with more than 190 regulatory requirements.

Six Year-end Tax Reminders for Employers

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your Business

By Nancy Harris

As Calgary and the surrounding affected areas are still recovering and rebuilding from the recent

floods, this unfortunate situation also serves as a reminder that disasters can occur without much notice. The Calgary floods, wild fires, tornadoes and mudslides, while infrequent, can take an emotional, physical and financial toll on those who live and do business. However, such events are proof of the strength of those who are able to overcome such chaos and serve as a reminder that it’s important to be as prepared as possible for adversity.

A study of Canadian small businesses owners conducted by Sage North America showed that Canadian businesses may not be sufficiently prepared for a crisis. While 98 per cent of respondents said they back up their financial data, 71 per cent of surveyed owners said they do not have a formal emergency or disaster preparedness plan in place. Respondents cited that they haven’t had any issues in the past that influenced the decision to develop a plan (41%), they hadn’t thought about it (33%) or they don’t think it’s important for their business as reasons for not having a plan.

Although some companies may believe they are not at risk for disaster, it is crucial to always prepare for a worst case scenario. Below are a few tips for small businesses to consider – a starting point to help prepare for, deal with and overcome an emergency situation.

develoP a Basic emergency Plan1. – Outlining the main issues your business could potentially face and the actions that you would need to take to prevent and/or resolve crisis situations will give you a great advantage if an emergency does occur. Research government agency or business association websites, such as the Canadian Centre for Emergency Preparedness, for resources and strategies to deal with both natural and manmade disasters.

educate and PrePare your staFF 2. – For the plan to be fully successful, your employees must be aware of the procedures it describes. Only share sensitive information in the plan with those who need to know it, but do share general actions and perform emergency drills and exercises. The more prepared they are for an emergency, the more they will be able to help your business respond and recover from such a situation.

designate an emergency Point 3. Person – It is essential that more than one person knows critical information such as passwords or the location of important documents. Select a trusted person who can implement the emergency plan, handle financial or legal matters, or recover information in the event that you are unable to do it.

Back uP essential data4. – Whether you choose an on-site system, an off-site server or the cloud, backing up your information could be the difference between emergency recovery and the end of your business. Backups should be performed a few times a week and whenever you upload a large amount of information. If you live in tornado-, hurricane- or earthquake-prone regions, an off-site server or the cloud may be your best option. Make sure you choose a solution with a strong brand that has a proven track record for providing secure systems. Your accounting software provider, like Sage, can be a good source.

develoP a Business continuity 5. Plan – After developing an emergency plan, your team should know what their responsibilities are and how to react should those circumstances arise. But what happens after the emergency situation happens? How do you keep your business running while you’re still recovering from the effects of an event? This is where a business continuity plan comes into play. It is a proactive

plan that ensures that operations continue during a disruption.

create an exit strategy6. – The Sage survey found that 57 per cent of small businesses do not have an exit strategy. Although you may think this step is not essential to your business, defining an exit plan may save you trouble in case of an unforeseeable situation.

have a lawyer availaBle 7. – Hiring an attorney has become an important part of doing business. A lawyer can help guide and protect you through the legal aspects of preventing or solving an issue, such as an accident in your facilities or a product recall.

invest in Prevention8. –Whether it is the installation of a security system or a waterproof safe, investing now may save you thousands if and when a crisis hits.

get insurance9. – Although insurance may be costly and seem unnecessary for a rare, potential event, you’ll be glad your business is covered if the situation does arise. The best return on insurance is no return at all.

consult with a ProFessional10. – If you are unsure about how to identify the potential issues that your business needs to be prepared for, or how to plan for recovery, it’s a good idea to speak with a business consultant. A professional will not only be able to recognize possible crises you may not have considered, but also inform you of the best solutions for your type of business.

Life is full of unexpected events. The more you prepare your business for potential emergencies, the easier and cheaper it will be for your business to recover.

abouT The auThor: Nancy Harris is senior vice president and general manager for Sage 50 Accounting–Canadian Edition. Nancy is responsible for driving the strategic and product direction for Sage 50 and oversees key functional areas including sales and marketing and research and development. A primary focus of her role is strengthening relationships with and cultivating an exceptional customer experience for Sage’s small business customers, partner channels, accountants and bookkeepers.

Ten Tips to Prepare Your Business for an Emergency


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events

WHERE TO GO. WHAT TO SEE.Find out more about the conferences, exhibitions, seminars and meetings in your industry

January 26-29, 2014American Securitization ForumASF 2014Las Vegas, NVwww.americansecuritization.com

February 23-25, 2014Equipment Leasing & Finance AssociationELFA Equipment Management ConferencePhoenix, AZwww.elfaonline.org

March 9-11, 2014Equipment Leasing & Finance AssociationELFA Executive RoundtableBonita Springs, FLwww.elfaonline.org

March 20, 2014Equipment Leasing & Finance Association13th Annual IMN/ELFA Investors ConferenceNew York, NYwww.elfaonline.org

April 2-4, 2014National Equipment Finance AssociationNEFA 2014 National Equipment Finance SummitScottsdale, AZwww.nefassociation.org

April 23, 2014Equipment Leasing & Finance AssociationELFA Bank Best Practices RoundtableChicago, ILwww.elfaonline.org

April 23, 2014Equipment Leasing & Finance AssociationELFA Captives Best Practices RoundtableChicago, ILwww.elfaonline.org

April 23, 2014Equipment Leasing & Finance AssociationELFA Independent Best Practices RoundtableChicago, ILwww.elfaonline.org

April 23, 2014Equipment Leasing & Finance AssociationELFA 26th Annual National Funding ConferenceChicago, ILwww.elfaonline.org

May 1-3, 2014Nat’l Assoc of Equip Leasing BrokersNAELB 2014 Annual ConferenceOrlando, FLwww.naelb.org

May 4-6, 2014Equipment Leasing & Finance AssociationELFA Legal ForumWashington, D.C.www.elfaonline.org

May 7-9, 2014Equipment Leasing & Finance AssociationPublic Sector Finance ForumWashington, DCwww.elfaonline.org

May 14-15, 2014Equipment Leasing & Finance AssociationELFA Capitol ConnectionsWashington, D.C.www.elfaonline.org

June 1-3, 2014Equipment Leasing & Finance AssociationELFA Credit & Collections Management ConferenceCincinnati, OHwww.elfaonline.org

September 8-9, 2014Equipment Leasing & Finance AssociationELFA Operations & Technology ConferenceAtlanta, GAwww.elfaonline.org

September 8-10, 2014Equipment Leasing & Finance AssociationLease & Finance Accountants ConferenceAtlanta, GAwww.elfaonline.org

September 10-12, 2014Canadian Finance & Leasing AssociationCLFA Annual Conference 2014Whistler, BCwww.cfla-acfl.ca

October 19-21, 2014Equipment Leasing & Finance AssociationELFA 53rd Annual ConventionSan Diego, CAwww.elfaonline.org


oBservations

S everal weeks ago I paused for a moment to contemplate the nature of equipment inspections

while trudging through 2 feet of Northern Alberta snow. At the time, I was following directions to a 320 excavator – directions that sounded something like “that third mound of snow on your left is probably the machine you’re looking for.”

It is important to consider the purpose of the appraisal when determining the requirement to lay eyes on assets. Inspection objectives may be to verify serial numbers, to determine the current operating condition of equipment, to independently verify that modification or assembly of assets has been completed and, in some cases, to simply verify that the asset exists!

With individual unit appraisals, coordination of the physical inspection is a no-brainer – verification of the serial number, the accumulated operating hours or mileage, and the visible condition of the unit is a critical part of identifying the value of the asset. High inspection ratios in fleet appraisals frequently result in interesting challenges when trying to balance timely inspections with completing the assignment on-time and on-budget.

When the equipment owner operates at a single site, coordination of physical inspection can be quite straightforward. We recently completed an assignment in which we were requested to inspect 100% of an inventory of rental trash pumps

and light stands. I hoped that I would walk into the shop and the equipment owner would have pulled the required units together and lined them up in a neat row. Each unit would be clean and dry, and a sticky note would be attached showing the location of the clearly legible serial number plate. Taped to each unit would be a Ziploc bag containing the original purchase documents as well as a complete maintenance history for each

unit…all sorted in date sequence with pre-tax and pre-labour invoice amounts highlighted in yellow. Unfortunately, the actual inspection instructions more closely resembled “I think most of the equipment is out behind the shop and the rest might be in the back of my pickup”.

Mobile fleets where units are spread across many sites in multiple provinces are challenging. One assignment that stands out required a 100% inspection of 15 dry van trailers which were “on the road”. Over the course of two days, we were able to coordinate locating and inspecting 14 of the units, but the 15th was quite elusive. The equipment owner knew that the trailer was out on runs, but wasn’t sure of the exact location at any point in time. Our team was directed to

5 different locations, each time finding out that we “just missed” the trailer and, frankly, I was beginning to think that the unit was a “virtual trailer”. It wasn’t until a week later that we confirmed a location and complete the inspection.

Throughout the inspection process, the single largest challenge an appraiser faces in the field is actually locating each of the required units while managing the expectations of the equipment owner and

financing account teams. In many cases, an inability to meet inspection thresholds can be mitigated basing thresholds based on a percentage of asset value. In construction fleets, this allows inspection efforts to be focused on a comparatively fewer number of high value assets while avoiding attempts to coordinate inspection of a pickup truck located at a sick employee’s home (seriously, we’ve been there!). The goal is always to perform an inspection of all assets and to complete the assignment ahead of schedule and under budget!

abouT The auThor: Rob Birnie is a Certified Machinery and Equipment Appraiser (CMEA), Master Marine Surveyor (MMS), Senior Business Analyst (SBA) and an active member of the Vancouver Board of Trade. Rob has applied his hands-on experience in mechanical and marine repairs and more than 19 years of insurance damage appraisal, valuation and loss settlement experience to create and direct Verus Valuations. He doesn’t mind the snow. Much.

By Rob Birnie

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innovations: the confluence of factoring & leasing equipment... · 2014-01-21 · succession...

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