Lenders must navigate data ownership hurdles for telematics financing

While telematics has become a boon for asset and risk management in equipment finance, lenders must overcome obstacles tied to data ownership and accuracy.  

Telematics, which combines software and hardware to transmit machine data to a central cloud dashboard, is providing deeper insights into utilization, location, maintenance and other performance metrics for lenders, yielding benefits including:

• Higher resale values; 
• Improved remarketing;
• More informed usage-based financing;
• Reduced inspection costs; and
• Reduced liability concerns.  

Read part 1: Telematics supercharging asset, risk management for lenders 

However, the primary challenge when financing telematics-enabled equipment is that lenders don’t own the data, Crest Capital President Mark French told Equipment Finance News.  

“The feed usually belongs to the OEM or the platform, and it often rides on a subscription the borrower can just let lapse,” he said. “A connected machine with live data history is worth more at resale than the same machine with a dark modem, so part of the collateral value sits in something we can’t control and can’t renew.” 

In addition, setting the residual becomes increasingly speculative when more of the value is tied up in the software and support instead of the iron, French said.  

There are two keys to navigating these challenges, French said:  

“Handle data access in the documents instead of assuming you’ll have it and never underwrite a residual that needs the technology to still be current at the end of the term,” he said. 

Verifying accuracy  

Another hurdle is that lenders may be unable to verify that data from third-party telematics providers is accurate, Riley Thompson, vice president and head of direct sales at Mitsubishi HC Capital America, told EFN.  

When lenders underwrite a machine that is dependent on telematics but aren’t confident that the third-party provider understands the credit risk, “that changes whether or not we can even use it,” he said. 

Thus, more lenders are requiring use of their own telematics systems or those of preferred third-party providers for borrowers to qualify for the loans, Thompson said.  

“We’re still all needing a bit of a trust fall as a lender when it comes to anything that’s outside of our control,” he said. “You can’t put as high of an underwriting bias on third-party data that you’re trying to use unless it’s a big enough company that’s bona fide and audited … so that you can actually feel comfortable.” 

Shared risk 

AI-powered telematics is poised to make “real risk sharing” possible among dealers, lenders and OEMs as the technology continues to evolve, Crest Capital’s French said.  

“Right now, the OEM knows the machine best, the dealer knows the local market best and we carry the residual, so it all gets argued out after the fact,” he said.  

However, verified utilization and condition data, a residual guarantee or a remarketing agreement can be “written against something measurable instead of negotiated later,” French said. 

“As long as every OEM’s data sits on its own platform in its own format, lenders keep underwriting to the lowest common denominator, which is no data at all, and whoever gets that standardized is going to pull a lot of volume their way,” he said.  

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