How To Overcome The Challenges of Adopting Pay-Per-Use Financing
We already heard a lot today and yesterday about pay-per-use, new industry business models, and relating topics, so before I dive into my subject and start to discuss how machine manufacturers can adopt a pay-per-use business model, I would like to provide you with a little background.
Why are we discussing this topic today?
Quite simply, we are becoming more and more exposed to a megatrend of the sharing economy. The majority are familiar with the "everything as a service” model, mainly from the B2C sector, where consumers want to own less and rent more of the products they desire. The best example is perhaps the e-scooters, which I’m sure everyone is already familiar with, but of course, all of this innovation is made possible thanks to its pay-per-use model. Another example involves Microsoft and how they offer entire server farms backed by various service models. Also, Photoshop can no longer be purchased, only rented.
With the service model adoption expanding into more markets, the big question arises of how can other businesses apply this whole pay-per-use model into their industry? You see, more and more producers want to own less and manage less on their own balance sheets, but at the same time desire to use the best products.
When discussing machine manufacturers, I always have to ask myself the question: Well, this product is good, but is it good enough to own it and not just use it? What should I do? The solution may be a service-driven business model, but what steps do I need to take to get on board? For those who are looking to explore this opportunity-rich avenue, my team and I at Linxfour and Erste Group have identified two key points that you need to support your transition:
The first thing OEMs need is a great data and IoT partner. We heard from other speakers today that data is the new gold, and I’m here to tell that the same principle applies for service models and that data gets even more important in a pay-per-use business model.
It's really crucial to harness this data in pay-per-use models because if you can't trust the information presented to you or if you have a hard time capturing or interpreting it, then you put yourself in a terrible position. In fact, you’re prone to earning less money since this whole entire model is capitalized based on the information presented. So that’s why it’s essential to work with a trustful data and IoT provider.
The second element required to adopt a successful pay-per-use model is a notable banking partner who is willing to take certain risks and act more flexibly to finance your initiatives.
That’s why Erste Group came first to our minds. I initially thought, well, if Linxfour and Erste Group collaborate, we’d have an innovative start-up uniting it’s 15 years of IoT expertise alongside a traditional bank who together have set itself the goal of making it easy for machinery manufacturers to transition into a pay-per-use business. Together we combine the best parts out of each sector.
And that’s exactly what we did.
Together, we’ve developed a usage-based financing model that plays off existing service models.
Think about it for a moment, when your customers are externally financing a machine, no matter how much they actually use that machine, they have to pay back the same amortization rate every month.
Now, imagine that when you lease a car, you know that you’ll drive a thousand kilometers, maybe at best, but once you leave on vacation, you’re still required to pay the same rate, which may not be fair, convenient, and financially doable for many people.
That's why we've developed pay-per-use financing, with defined minimum-maximum limits, where there's a living, breathing financial product supporting its operations. There are various expansion stages where equipment usage data is linked to the repayment rate of the financial product so that OEMs have a certain flexibility and can take the first step into pay-per-use.
How does the one-stop solution that we’re developing together with Erste Group currently look like? I want to go through this thematically.
The manufacturer needs new equipment, but they face many challenges with traditional financing methods, like adverse balance sheet effects, high investment hurdles, rigid payments, and usage forecasts. As a response to these customer hurdles, the OEM machine manager says: "All right then I understand your concerns, but my business is to build and sell machines, not finance or service them." That’s where Linxfour and Erste Group step in.
Good news for the OEM, they can help their customers overcome their buying hurdle by offering pay-per-use financing and still receive 100% of the sales payment thanks to Linxfour’s industry-leading financial partnerships. From this point on, we can give the OEM access to our platform with which they can calculate a pay-per-use price for their unit output quantity in just a few easy steps.
The pay-per-use scenario would look something like this: The OEM offers usage-based financing to his manufacturing customer and says: “Ok, you can have my machine, but instead of paying, for example, 1 million upfront, you need to pay me five cents for every unit of output you produce over the course of five years.
Now, the bank steps in and tells the OEM, “No problem OEM, we’ll finance 100% of the sales price for you, so that you don't have that pressure on your balance sheet or take the risk of payment failure, leaving your cash flow and working capital unaffected. In fact, we'll take care of the whole pay-per-use financing process together with your customer and manage the responsibilities of invoicing the manufacturer every period so that you, the OEM, can focus on the core of your business; to sell more equipment.
In the manufacturer's case, they will have to pay back the bank for every unit they produced.
You see, everyone in this entire operation wins and has a significant advantage. The OEM removes their customer’s buying hurdle, lowers their company’s payment risk, all the while optimizing their balance sheet, cash flow statement, and working capital. The customer can operate their business more flexible thanks to lower investment hurdles, which in turn also optimizes their cash flow. And, the bank earns additional clients!
I would also like to dive into this technical part very briefly. Yesterday and today, other speakers talked about how companies can leverage their own data, but now I’ll talk about how you can share data beyond company borders and how you can develop new business intelligence with critical information generated from your customers and even suppliers. As exciting as this sounds, cross-company data sharing welcomes quite a few challenges such as trust, security, and other malicious activity, to name a few.
Let’s say the machine buyer or machine user would say:
Ok, I want to take advantage of this whole system and lies about the number of units they produced so that they don’t pay as much.
Or on the other hand, the bank could say:
Let’s be unfair and force the manufacturer to pay us more by saying that they reached their maximum production limit and produced more than what they actually did for the given period.
Because of all these two malicious scenarios, Linxfour wants to eliminate as much “trust” between both parties by implementing a secure and reliable data source to prevent these uncomfortable situations. Our data source enables trust-less information sharing through a safe hub that allows parties to share data securely and tamper-free across company borders.
How has Linxfour solved this problem? Well, for starters, we completely encrypt the entire process, end-to-end. As the service provider, we have zero access to the data, making it possible for all that data to be sent from one company to another, down to the PLC of the company, ERP systems, or in the cloud. Imagine this entire encryption process occurring at a similar process to that of WhatsApp, and how they facilitate end-to-end encryption with each conversation. If you send a message to your colleague, then you could read this message, which is also encrypted end-to-end since each mobile phone has an encryption code. One could only see this data if and only if they looked directly into this encrypted code. Additionally, we have the proper IT infrastructure to cross-check this data and harvest it on the blockchain to eliminate any malicious activity.
In other words, if we encounter a situation where both parties don’t agree on the produced output, then we need to look at the actual sensor report to see the correct answer. Thanks to our two-factor verification process enabled by blockchain, we have a “trustless” source to verify and resolve any conflict or uncertainty between either party.
I would now like to go over my last two slides to see what the advantages of pay-per-use and usage-based financing are?
For starters, OEM can enter the pay per use business quite quickly without transforming their business, as you can see in the second point. If you’ve thought about adopting pay-per-use services, then you probably found yourself asking:
Where do I begin? Who finances this entire process? Do I now have to transform my processes internally? How do I change my invoicing system to issue monthly payment reminders? Do I have to change the direction of my sales strategy and implement a different commission structure?
For the last question, yes, employees no longer strive to sell machines for as much money as possible; instead, they have to sell a higher quantity of machinery to scale operations. As far as the other four questions go, Linxfour prevents you from evening worrying about these questions as you don’t need to bother completing flipping your current business around.
Unlike other solution providers, with Linxfour, OEMs can test the pay-per-use demand in their market without having to invest a fortune to see if their customers even require such service. If your current customer segment does not need such flexible services, you can take it one step further and explore your competitor’s market to see if their customers do.
Most importantly, pay-per-use financing is a unique selling point to differentiate yourself in the marketplace.
OEMs have sold more machinery since this service model has so many advantages for their customers, such as making the highly desirable transition from investment costs to operating costs, also known as CAPEX to OPEX. This switch has both balance sheet and tax advantages and optimizes your cash flow since you only pay back at the same per-unit rate you produce.
With traditional financing, if a manufacturer has a planned production downtime, they’re still obligated to repay the full amount, but with funding usage-based, payments are minimized to production output. I have a lower initial investment, and the most important thing is that I have very transparent financing costs. I know exactly every single piece that I produce. For example, if my mineral water bottle’s financing costs are five cents, I know that one cent is now a service share.
I would like to thank you for holding out for so long.
I hope I was able to give you a little insight into how your business can overcome this hurdle of "pay-per-use" for machine manufacturers, how you can immediately jump on this trend and test its viability rather quickly, risk-free, and inexpensively in your business.
I think we have developed a neat solution together with Erste Group that will continue to help many OEMs and manufacturers alike.
I would be happy to get some feedback from you on what you think about it. Below are the contact details of my colleagues, and I am still here if you'd like to chat.
Thank you very much!
Linxfour is a European leasing company, based in Austria, providing Pay-per-Use financing solutions to manufacturing companies. Using proprietary IIoT (Industrial Internet of Things) technology and AI-driven risk management, we are unique in underwriting true utilisation risk. Operating across different countries and industries, we are committed to helping businesses finance equipment with our unparalleled solution.
Linxfour: Transforming Equipment Finance