What’s up next?
In the future, the ideal scenario would be to set up an agreement between a bank, the user and the owner of the asset. Based on agreed pricing conditions and rules on how the asset is used, wear and tear and service obligations, the bank could automate cash flows and provide instant payment or upon request from the owner. Depending on the agreement between the user and the owner, payment frequency could be configured to be anything from one second to the original invoice period of 30 days.
The traditional trade dilemma where the owner prefers to get paid immediately and the user prefers to pay as late as possible will still be present in this setup, but with real time data available, financing and forecasting would be easier and more transparent. Instant payments would also have a great value for the owner of the asset, meaning that if the user is willing to pay in real time, using the asset could be cheaper.
When the owner has the possibility to claim instant payment, companies can start optimising balance sheets and mitigate risk. A great part of a company’s value creation lies within working capital management and how outstanding receivables, inventory and payables are handled.
A great part of a company’s value creation lies within working capital management and how outstanding receivables, inventory and payables are handled.
Today, payment terms between buyer and seller are usually somewhere between 30-120 days, based on the operating industry, goods and relationship. The possibilities to automate cash flows and payments can help decrease the amount of outstanding receivables significantly. When the infrastructure between banks and the trading parts are more developed, working capital can be improved through financing as well as claiming payments.
The move from financing the cost of the asset to the use of the asset, and the move from financing 30-120 days to financing the wear and tear, provides banks with deep insight into expected use and the financial situation of companies. A bank would instantly know if a company is not able to make a payment and whether there is a risk of default that can be detected before it happens.
One concept that may be interesting to look at is what is known as the ‘car as a service’ model. This relates to using connected cars with IoT data capabilities to understand how the car is being used and by how much, so that drivers can be charged based on real usage of the car rather than an estimate, which is usually the case with traditional leasing models.
In the future, a consumer should be able to buy a new car by creating a contract that states “I would like to operate the car and here are the conditions that I will fulfil” with most of the actual payment being based on the actual usage and depreciation of the asset, in this case the car. The change to the traditional leasing model is first of all simplifying the value chain in terms of distribution, but also simplifying the value chain in terms of maintenance. The car manufacturer could theoretically, in the very same way as Rolls Royce managed for airplane engines, take over the maintenance and ownership of the car as the best possible entity to make sure the most lifetime value is derived from it.
The consumer can also be charged not only based on the kilometres that they have driven, but also on other sustainable principles such as safe and economical driving. The safer and more environmentally friendly they drive, the less they pay, for example. This would not only be a benefit for the overall value of the car but also from a broader perspective, especially if the car manufacturer is interested in promoting safe driving, this is a very concrete way they could actually make that happen.
A bank would instantly know if a company is not able to make a payment and whether there is a risk of default that can be detected before it happens.
The benefits of Pay-Per-Use models are first that the acquisition costs are lowered. So far, the business model is mostly used in Cloud and Software-as-a-Service companies, as this industry often experiences high costs and upfront payments. The business model also engages customers for a longer period of time, as the affordability and flexibility is increased. Customers can actively choose not to use the asset, which bring some sort of cost-effectiveness to the user. As the business model is connected to real time data, Pay-Per-Use provides a deep insight into market demand and needs.
The challenges connected to the pay-per-use business models are unpredicted revenues. In the beginning, it can be difficult to forecast how the users will consume the assets and what the income will be. With time, forecasting will become easier with the data available for the previous behaviour from customers. Another risk is that the assets will not be used. The COVID-19 pandemic has affected Rolls Royce as very few of their engines are being used with global air traffic grounded. Furthermore, many offices are not using their coffee machines and printers, as many are working from home, which are other examples of assets under a pay-per-use model.
The Fourth Industrial revolution is coming and as seen before it is all about the ability to adapt. With future infrastructures between banks, owners and users we see great potential to optimise asset life time spans, customer relationships, working capital and value creation.
If you would like to hear more, you can write to Mathias at mathias.rasmussen [at] nordea.dk.