Demystifying Asset Finance, Building Societies, and the Future of Banking Technology

Speaker A: Welcome to Dave and Dom Demystify, a fintech futures podcast helping make sense of the world of fintech and digital finance. Please sit back and listen as the two Ds take a subject and discuss it to make it clearer and easier to understand.

Speaker B: Demystify.

Speaker C: Welcome everybody to the Dave and Dahm Demystify Show. And this week I have Eric Beery from SPS Software.

Speaker B: Welcome, Eric and Amesh. Very happy to be with you.

Speaker C: Great. And for, uh, most of our audience, you'll be expecting David to be here, but he's taking a holiday. So Dave, it's just me and Eric today. And today we're going to demystify a couple of things. One area of banking which I don't really know too much about, which is asset finance. And then an area that I absolutely love and actually genuinely have some concerns about. So I'm hoping Eric is going to help me not only demystify, but allay my concerns for the industry. But let's start Eric with a bit of an introduction on yourself and for the audience who might not know sbs. Tell us a bit about sbs. Yeah.

Speaker B: So SBS is a software company. We are doing some software, software only for the financial services industry. We are born 15 years ago and we are, uh, independent today. Our total revenue is around 400 million.

Speaker C: Wow. Huh.

Speaker B: So which is starting to be significant even if we consider that software company should be above the billion. But let's say we need to start from somewhere in terms of geography. We are French at the beginning. So the first market is France, but the second market is uk and the third market is Africa for us. And we do operate then in the rest of Western Europe and also in North America, even if it's still a small business for us and only in asset finance, by the way.

Speaker C: Okay, cool. And what's your role, Eric?

Speaker B: So I'm the CEO of this company. I was appointed CEO in 2020 just after the COVID There is no link between. But yeah, it was an um, interesting way, like we say here, uh, in London, to step into that job learning very fast based upon that new revolution which was the post Covid situation, even if it's nothing compared to the AI. And yeah, I'm still there. I'm very happy. We are growing, we are back into, let's say normal performance for a software company. So which was one of the biggest challenge I was having at the beginning. And now we are growing at the level of the industry, close to 6% and our, uh, software revenue is going above 10% at the moment. The Strong area. So. Which is a good sign for the future.

Speaker C: Great, great. And so let's dive straight into today's first topic, which is going to be asset finance. Yeah. All I know about this is that I once bought a car and I got a loan from the manufacturer, I thought, but actually there's probably some bank behind it. Uh, that's about it. Tell us a bit more about asset finance. How does it work?

Speaker B: So let's put it simple. Asset finance is a combination of financial engine, like for a loan and an asset engine. So meaning that when you are financing a, uh, car, the value of the car is important the way you are financing it. Because if you are driving a leasing, for example, the value of the car at the end of the leasing, if it's three years, is impacting the amount you may have to finance and is impacting the way you finance the risk. So in the asset finance or in the auto finance, in simplifying, there are two part of the business. The business you see usually. So you go and you want to rent Range Rover. So that part is not our specialty. Our specialty is the second part. I would call it the B2B where um, the dealer you're visiting, he needs to finance his equipment and he needs to finance the stock of vehicle he's proposing to. It's correct in the new car world, but it's even more important in the used car world. So a dealer can decide to go for auction and decide to buy 200 vehicles, but he needs to add the money to make it happen. So that's what we call the world self finance. And the wholesale finance is our specialty. It's where we are a, uh, worldwide leader.

Speaker C: Okay. Okay. And when it comes to assets, is it just cars or.

Speaker B: This could be equipment finance. We are having John Deere, for example, as a tractors and stuff like tractors. Of course it works with tracts, but it works with any other domain where the value of the asset is still in born after three years or five years. We could apply that for phones if we want, but the value is not big enough to drive wholesale financing. For phones, the phone is an asset because after three years there is still a residual value of the phone. So it's more or less the same currency. But our market is with big assets. So we are doing that for planes, we are doing that for the automobile, ships, tractors and many others.

Speaker C: Okay, and does it include things like property or not? Is that separate?

Speaker B: There is a, uh, property transfer when we do this. So meaning that. Let's imagine we have a lender Like Santander or like NatWest. And we have an OEM. So let's take Jiela in the UK. So when a dealer is financing a stock of new vehicle, the property of this vehicle is still owned by glr. The day you're arriving and you take the decision to buy the car, not rent the car to buy the car there is a property transfer from GLR to you.

Speaker C: Okay?

Speaker B: But if you're doing uh, a leasing then there is a property transfer from GLR to the lender NatWest, then NatWest is having the property and is financing the vehicle for you. So these are the two worlds and uh, the complexity of that business is not financing itself because all banks are financing from house to consumer, uh, finance to many others. It's how to take into account the value of the assets at the end of the job.

Speaker C: Great. And so I mean to me it doesn't sound like this is an area of banking that's impacted so much by some of the new technologies now is that right? I mean is the asset finance world going to change dramatically through uh, agentic AI or tokenization or something?

Speaker B: That's a good question. I'm going to give you two examples.

Speaker C: Okay.

Speaker B: One is this requires a lot of automation because a dealer, if you decide to purchase 10 cars and not only five one in auction, it doesn't want to wait for one day to receive the money. The whole automation and the whole pre scoring stuff. So all of this is, is requiring more and more AI and airtip because you cannot expect to ah, have someone from the bank waiting a Saturday morning the call from the dealer to approve an amount.

Speaker C: Right?

Speaker B: M so all of this I'm going to take you, give you another example. The risk is the major part of the what is paid to the lender. So if you are a dealer, you are having 100 vehicle on your stock and you are keeping that during one month. The biggest part of the money you're going to spend for the bank or for the lender is not to finance the vehicle, it's the risk to lose the vehicle. All the auditing is very critical to secure that the car for example is still there with the dealer and the only way to do it is to audit. So option one, you send someone doing a physical audit but you cannot send someone every day. The second is what we call the digital audit. So meaning that using the NFC chip and then using AI to check that there is no fraud and then the dealer can run himself the audit every day and if he's taking pictures for example, we Develop machine learning to secure that we are uh, able to drive fraud detection. So then the new technology is making a difference in that space and of course this is making a difference. So the new technology is even impacting the asset finance business.

Speaker C: Cool. And I guess this might be a little bit left field but I just came back from Money 2020 and there were two streams. One was like agentic AI and then the other one was talking about tokenization and apart from tokenization of money which I get. But they were also talking about tokenization of assets.

Speaker B: Yeah.

Speaker C: Does that apply to asset finance?

Speaker B: This could apply because we can consider that a lender with an OEM is driving a uh, multiple contract multi countries and then they can decide that they are not going to follow the asset itself but they're going to drive tokenization, to drive the finance the financing across the different countries and to avoid cross border payment, to avoid many complexity. So this is something we can investigate. This is something Birmingham um, at the moment. And this is going to apply, we think mainly on fleet management. So if you're deploying a fleet across multiple countries, tokenization can bring a lot of simplification.

Speaker C: Brilliant, brilliant. I'm going to switch over a little bit to building societies now, but thank you for that, kind of get this space a little bit at least. But I also appreciate that the technology is broadly applicable. But you know, it just sounded like this was like a very uh, well established way of banking and probably not right for disruption. But I'm glad you clarified that for me. So the other part of your business kind of deals with building society. The thing that kind of keeps me up at night I guess is, you know, I look at what the big banks are doing and how much they're spending on um, technology. How does a building society, you know, how do they stay up with the technology? I mean you've got things like agentic AI, you've got downstream things like quantum computing, we've got things like CBDCs and other tokenized money, et cetera. Like that's quite a lot for a small building site to handle. How do they do it?

Speaker B: It's really a challenge. Let's start from the beginning.

Speaker C: It's a challenge for big banks as well. But they got a lot of money to throw at it.

Speaker B: Yes. Sometimes even having a lot of money is not changing their business. But you're right, there are maybe too many small building societies in the market. So I think it's the starting point. And today we are having 20 of them clients from very small one up to top five. And we see a common pattern. The first question is what are uh, their strengths for the future? Their strengths are based upon a deep local knowledge of the market and the client, starting from the mortgages and moving to how, uh, to equip largely their members to make the building society. I would not say first bank, but maybe first bank execo something like this. And this is something very important. So the first question we are asking ourselves to them is what's the right size for them? And the right size meaning the number of assets finance. So we consider today that the market above 1 billion is um, they can survive video. They have to find new ways to share investment. Because you're right, spending a lot of money in AI, spending a lot of money in new technology. It has to be generating something differentiating themselves into a very competitive market. So for this one below, I would say 1.5 billion. They are looking with us by the way, in how they should be putting together some investment in their technology because this is not differentiating them where they may have to reduce their total cost of ownership on the technology. So serving a mortgage is not differentiating compared to the competition. Having uh, an AI analysis or on what's the profitability for them on this market and analyzing behavior of their members is something they can share. The way they decide based upon this data is something they may ask to decide alone, but the technology behind is something they can share. So more and more we are in discussion where they consider that they should be having only one kitchen, but many restaurants. If I'm um, trying to do an analogy. So the kitchen is serving alone, proposing settings with the different, I would say assets covered and this can be seen in the future, there are no reason not to cover this. So for them, if they are able to reconsider that they are sharing the same kitchen that will work for the future, then the way they go to markets is the way they leverage their branches because it's very easy to consider that they can reduce the number of branches but large part of their client base. And not only the oldest people of their client base, they are expecting to have local, uh, advisory services and they are making a difference there. So adding the AI, helping the sales in the branch to understand better their client base, but keeping that local way and leveraging a common kitchen with the uh, five other building societies operating in other geographies is a model which should be helping them not only to survive but to take a lot more opportunities to deliver more value and more business within their markets. So it's a trend we are looking at the moment, the one not following that trend will be on the menu of the restaurants and then it will be acquired by others for sure.

Speaker C: Right, right. And obviously you know it's almost like these cohort programmers that we keep talking about in it that maintaining the old systems. But what happens when I guess you know this older generation, they pass on? What about the younger generation? What are the building societies doing there?

Speaker B: I think the first role is to protect the access to property. So this is the main role. And of course when they deliver savings, uh, it's not only settings for the balance sheet of the bank, it's also doing settings to attract the younger generation. And if they provide only traditional savings a large part of the new generation, we'd be looking at something different. So the first driver is property. And even for younger generation property is still key for the future and maybe more difficult than the vast by the way for this younger generation. So the way they may have to attract that younger generation, they need to bring the same capability than a big bank and still keeping their strength which is we know the local markets. If they are able to bring that together, that works. And back to my common kitchen. Adding payment capability for building society 10 years ago was not really interesting but today anyone in the human generation can get access to a neobank revolute others and they will have all payment capabilities, they will have all savings capabilities very soon, all mortgage capabilities. Right. We still don't know it's a big story. But let's say looking in five years this will be very difficult not to consider that level it or others will not be able to provide this. So how can building societies in the next two, three, five years make a difference that they will be able to bring same kind of capabilities and payments or accepting crypto or doing some other stuff but keeping their differentiator factor they're having today which is knowing this market and really supporting this new uh generation in accessing to the purpose. So if they start to forget what's their real first trends of the market, they are there. If they do not accept that part of that technology is not going to help them to differentiate. But first to give access to a large panel of services or products to their clients, partnering with uh, other institutions, this will be also difficult. So it's that combination which is making a difference. And one of the buildings hedge CEO told me last time, why do you stay engaged within that that business? Because there will be consolidation and you will not be growing your business. And I think exactly the Opposite, there will be few players working with the building societies but the one able to drive this initiative, sharing that capabilities and giving them I would not say one stop shop, but a bigger access to all of these different assets, we make a difference into that market. And it's one of our key challenge, slash objective, let's call it like this. So I think there is still a big opportunity for them if they do not forget who they are. And that's really important.

Speaker C: Cool. And so you clearly see a future for uh, building societies. How different? Or will building societies continue to be almost like small banks? Or do you think they'll differentiate even more in the future?

Speaker B: I think they cannot stay small.

Speaker C: Right.

Speaker B: That's so either a single kitchen, um, with a, in a bigger group with different brands or that ability to partner with many, many other uh, players within the ecosystem and still be the one serving that objective or that expectation from their client base, from their members. There are only two ways.

Speaker C: Okay. And I guess from a tech perspective, so now this is like moving back to sps.

Speaker B: Yes.

Speaker C: From a technology perspective, what do you think is the most could have the most impact to kind of building societies and even asset finance? Is it like AI or generative AI, Agentic AI? Is it tokenization of money? Is it quantum computing? Which of those do you think will have the biggest impact?

Speaker B: Definitely, I think it's Genai and not agent AI, right? Yeah. Because the gen AI should be able to accelerate a lot of decisions. This will be allowing them to augment dramatically their capabilities. But the building society tradition, why I'm not talking about nationwide or uh, eventually they will never be in a situation to develop agentic capabilities. It's not their business. So their business is to make sure that they will deliver to their members enough capabilities to make them access to their goal. And the main goal at the end of the day is access to property, right?

Speaker C: Yes.

Speaker B: So if we are looking at this, we need to make sure that the salespeople in the branch in the building society will have a direct fast access to the many capabilities. So of course reporting agents is going to make a difference. It's Genai augmented copilot for the sales in front of the member is going to make a difference because this is going to be fast and accurate to support the members. It's generative AI delivering AgentIQ tool give more capabilities to the member. I'm not convinced that this is going to make a difference because this is not the core business of the building society. And even if we see a gentic growing super fast around payments but the payment is less than 1% of the revenue of the building such today even for the one delivering payments which is not the case for all of them. Today the building society is generating 50% of revenue on the mortgages, 50% of the the revenue on savings. So how do they augment capabilities to drive more revenue on savings and on mortgages? Even if it's in allowing more payment capability to their member but they will never generate because they will never be at scale. So even agency grant savings when we are looking at where they are earning money agentiq will never not make a huge difference the next three to five years. So maybe tomorrow driving increased ecosystem for the members based upon agentic capabilities I'm um, convinced. But 80% of that agentic capabilities will be coming from partners and building societies will need to be in an orchestrator role for these agency capabilities and this will still be genai. So for me, but again it's only me and maybe sbs. So we think that the gen is going to make a difference for them because this augment their strengths to the market.

Speaker C: Yeah, no, I strangely I agree in that, you know if we look at the time frames then from 23 to 26 it's three years. Yeah, right. At first it was what the hell is this? Okay, now we're going to try this out now. Now we're doing it. That's year three. Yeah, right. And if you can do those three things in three years, you're moving fairly quickly anyway. But that literally just brings us up to this point and we haven't fully rolled it out and fully exploited it yet. We want another layer on top because I was explaining to somebody the other day that you can't just do agentic. The baseline has to be generative and AI because without those two it's basically a dumb agent which was robotic process automation. So without the intelligence you've just got RPA which is, you know, faster automation. So I totally agree with that. The one area that I wonder though, and mainly again because I came back from the conference and I've been doing a lot of research into this space, is about money. Right. And certainly, um, when I worked for a bank in the late 80s, we had our own telecoms departments because this was pre the Internet. Yeah, right. And so you had to have the lines coming into the branches connecting back to a mainframe and then we could do some stuff. Right. So it's easy to take for granted now that uh, everyone's been used to the Internet 20 years that we've got this communications network. Right. But money's never traveled across the Internet per se. We've given instructions and then behind the scenes we're back on the old telecoms network. So but with tokenization that, that looks to change all of that kind of stuff. I mean the promise is that, you know, we'll get real time settlement done for pennies anywhere across the world. I mean that surely must have a massive impact. How do you feel about socialization? Is it going to happen soon? It might not happen. What are the risks? I mean what's your.

Speaker B: I think this will happen. This will take time. Time and you were saying for pennies and I think that's the critical driver. If you want to make it for pennies, you need to make it at scale. If you're looking at building society, they will never be at scale for that. So they will be consuming this and the market will be shifting and they will be just part of that ecosystem consuming that tokenization. But there will never be a playoff for tokenization. And even the biggest one nationwide, Coventry, these players, I think even at their level, this will be quite limited in terms of scale. So I think there will be big players driving that tokenization and there will be member player in that ecosystem consuming part of it and then leveraging their value based upon that technology. But I don't see them being able to be at uh, scale enough to deliver that value for pennies. So that's the way we see today. Unfortunately this will be close to trading very few players delivering at scape. But as you were saying, it's companies that means that the value will not be in that side.

Speaker C: Yeah, yeah. Uh, it's a very astute observation. Yeah, I like it. So my final question is because I write a lot about core banking and I hope you've been enjoying my new series about the Franken core. But where do you see the core banking space going? Because quite frankly I've seen, I've been there with the mainframes. I was a COBOL developer myself. Then I saw the client server. Uh, then it was the Internet, then it was cloud native.

Speaker B: Yeah.

Speaker C: Now it's AI native. You know, it's just like it seems like every few years the core banking space needs to be rewritten for some new technology. I mean where do you see all this stuff going?

Speaker B: Maybe I'm going to surprise you because I started in Cobol in early 90s, right.

Speaker C: Oh wow. We're very valuable.

Speaker B: I'm um, convinced. And then you know, if you apply yay on us, I Mean there's a lot of value. But anyway, the core banking will still be the fortress tomorrow because the deterministic outcome from the core banking will still remain critical in 10 years. Because even in 10 years, even if you're looking at your crypto account and your traditional account at 7:12, uh, in the morning, you will be expecting a deterministic answer. If you are asking yourself or to your bank, what's the balance on your account, right? So you will never accept an answer such like, oh, you're close to £10,000 on your account, right? You would be expecting Your balance is 9,547 dots, something like that. Deterministic output is what I call. And the industry is starting to say the same, it's the outcome of the fortress. So whatever the technology which will be behind, if you are not able to certify that deterministic answer, you cannot consider that you are Quebec. So from that starting point, a large part could be delivered with Agentic tomorrow for sure. But the explainability behind that AgentIQ capability will be very critical. So I can take a bet that uh, there will still be some COBOL programs behind but manipulated, maybe using API by OR and CP servers by Agentic, but the co program behind to deliver that deterministic answer will still be the fortress. So our expertise maybe will be reduced to this in the core banking in 10 years, but it's still necessary? I think so, yeah.

Speaker C: Okay, fantastic. Well, I mean, that was a really interesting conversation and thank you so much for joining. Just sharing your views.

Speaker B: I enjoy a lot.

Speaker C: Thank you.

Speaker A: Thank you for tuning in to Dave and Dimystify. Um, we hope you enjoyed the show. Don't forget to like and subscribe and tune in next time as we take another topic and demystify it.