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Insourcing Finance as a Revenue Stream in Manufacturing with Michelle Katics
Episode 613th December 2021 • The Manufacturers' Network • Lisa Ryan
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Lisa Ryan: Hey, it's Lisa Ryan. Welcome to the Manufacturers' Network Podcast. Our guest today is Michelle Katics. Michelle is co-founder and CEO of Bankers Lab who provide lending simulation tools to the financial sector for the last ten years in over 30 countries. Bankers Lab is making these financial simulations available to the manufacturing sector, which can benefit from the world-class solutions used by banks for years. Bankers Lab is working to disrupt finance in the manufacturing sector, reduce the time and friction required to finance manufacturing equipment, and enable more rapid innovation. Michelle, welcome to the show.

Michelle Katics: Thank you for having me, Lisa.

Lisa Ryan: Michelle, please share with us some of your background and what led you to do what you're doing with Bankers Lab.

Michelle Katics: Well, I'm a recovering banker who was solving problems. I was working internationally in banking, we were trying to teach people across our banks' footprint in 57 countries how to optimize their portfolios, which was no easy feat. My background is very much mathematics and economics. It seemed like everything I had done till that point came together. We saw that simulation was a way to solve those problems to help people see things that you can't see from a textbook and to see how the world works through simulation.

Lisa Ryan: So, share with us a bit of that process. When I think simulation, I think video games and I think of flying a plane and trying not to crash it. How does that look like in the banking industry?

Michelle Katics: Well, the concept is the same in a sense. We use the analogy of a flight simulator. We say to people, okay, that's great you can drive the plane, but do you know what to do in a storm? Do you can you do a water landing?

It is pretty comical if you Google how to do a water landing in an airplane. It gives you ten steps, but it's ten steps. Set the flaps to this. Set that attack angle to that, etc. Anybody can read those steps, and you can probably memorize them and repeat them as a trick at the bar or something. There's no way you and I will do a water landing.

There's such a difference between just reading something in a textbook and practicing it. The concept of simulation, which is what they use in most verticals. Most industry verticals these days are something we also do.

In the financial sector, you'd say, gosh, it's been my dream to learn how to manage a multi-billion dollar credit card portfolio. I don't know why you'd have that dream these abilities. No problem, give me two days with you, and we're going to put you into the simulator, and you're going to make all these decisions about the portfolio. What are my credit criteria? What size credit limits should I give people. The thing about simulation in any simulation is that you press the button, and you get to see what will happen in two years. You see it instantly, so your learning loop is seconds long, whereas if you try to learn by doing and your job, you'd have to wait two years. It creates this very rapid learning.

When you have these complex portfolios, with the cause and effect in there, it's just such an easy way for people to wrap their heads around that. They can practice, not just the core concepts, but they can also anticipate what might happen in the future. Clients can come to us and say, well, we think this might happen next year, what should we do? No problem, let's simulate it. So, you know, do the fire drill if you will.

Lisa Ryan: So, what are you seeing or how are you seeing manufacturers using this type of technology?

Michelle Katics: It is a new thing for us, and it's really fun. In manufacturing, if you step back for a minute and look at the industry, you've always had massive manufacturers doing their finance, such as  GE capital. In the past, to do your financing if you're going to sell jet engines or medical equipment or robots or whatever it is, you want to provide that funding for your customers, which many big manufacturers do. In the past, you had to have big on-premises servers and a team of 20 people. Systems manage those loans. These days with things in the cloud, we're seeing that you don't need to be as big as GE anymore to do that.

To some extent, because of the cloud-based software, finance for this part of the economy has always been full of friction. Let's face it. Banks are not the best at providing this kind of financing. They're good at many things, but typically this has been, I would say, a bit of an Achilles heel, so the manufacturers like, wait a minute, let's do this ourselves.

Lisa Ryan: We've all heard things about outsourcing. We outsource all kinds of services and products and everything these days. But what you're talking about is something you refer to as insourcing. What does that look like, and why might some manufacturing companies insource their financing?

Michelle Katics: Let’s take an example of we're selling robot arms. Some small shop comes to us and says we'd love to buy three of these. We have a significant labor shortage. I would tell them that as the manufacturer of that robot, go to the bank, get a working capital loan, and return. I'm outsourcing the finance.

That poor, small business goes to the bank that needs 8500 pieces of paperwork, so, you might not sell that equipment if that small business can't get that loan. Insourcing finance means I've already built the robot arms. I own them. I've made the thing I'm selling.  I will provide the financing myself. I might either lease them, and many manufacturers do this already. Still, I'll give that financing myself, so what we see, for example, is with cloud-based systems, you can set up simple credit criteria. The other thing is that I can increase sales of my robot arms because I've created a financing option. I'm the one-stop-shop. It would help if you bought this thing for me. Canon financial does a great job with print shops and stuff that they're always financing the printers.

But the other upshot is that it creates a customer stickiness that we noticed. For example, Canon Financial provides the financing for the local print shop to buy a massive printer to print posters and stuff like that for the community. Still, it's sticky because once the leasing arrangement ends, Canon Financial is right in there saying, hey, we see that this equipment was depreciated. Do you want to upgrade to the next model?

It provides this natural touchpoint with the customers to keep expanding your sales to them, renewing it, and providing them the next generation of equipment. If they went to the bank, bought it, and went away, you have to start with them to sell more.

Lisa Ryan: So, in the case of that robot arm, though they are financing it to own it, they're not financing it to lease it like you would with a printer for Canon.

Michelle Katics: We see a trend that we would call equipment as a service. I say software as a service, meaning you don't own the software. If you have ever used Office 365, that's the service because you don't own it. You're just renting it for nine bucks a month. I don't want to cough up the 250 bucks upfront. I'll pay nine dollars a month, thank you very much.

Equipment as a service is the same concept. Creating flexible and short-term leasing options is what we're seeing. Successful manufacturers who do this provide all those options. So do you want to purchase to own? Will we give you this working capital loan for this equipment, or do you want a long-term lease? If it's a crane, I only need to lease it for a month, so that's more like equipment as a service. In that type of sector, they'd have these leasing arrangements, but at the end of the day, good lending is centered around good product design.

Each manufacturer needs to kind of know whether you're building cranes; that might be kind of more short-term use. You might have particular financing options versus somebody selling robot arms where these factories say, no, we want to buy it to own it, thank you very much. We will use this thing until we run it into the ground. For each type of manufacturer, there are different product types for financing that are most suitable.

For agriculture, for example, John Deere has provided financing suited to their industry. The other reason manufacturers are better suited to do this is you go to a bank and say we need an agricultural loan, so the guys going to pay he can pay us zero. So while he's planting his crops, and he'll pay you a bullet loan when he does his harvest, John Deere understands agriculture, so they're good at providing that product structure, whereas the bank might be like, what? You’re not going to pay me anything for four months? It's that type of those product features that the manufacturers already understand those customers in a way that the banks don't.

Lisa Ryan: So, as far as from a personnel standpoint, though, is that something that manufacturers would have to take on a whole new department and a whole new learning curve, or is this something that Bankers Lab that you set it up and you do that work for them.

Michelle Katics: We see people setting this up in different ways. For example, the more prominent companies would have a couple of people say under the CFO who would manage this. Some people pull in a consultant to set up the initial credit criteria. We come in with the simulation exercise, just so as an organization, then we say to sort of, for example, to the manufacturer. What are your goals with this financing? Are you trying to increase sales? Are you trying to make sure that you get product renewals? Are you more interested in short-term cash, or are you trying to maximize it over the long term when you set up the criteria?

Our partner, Turnkey Lender, has software where it's super easy to do the drop-down boxes, and somebody can set up the software for you. You're up and running, and you can bring in a consultant. We can find the people. Then the idea is to automate it as much as possible and have people within the manufacturer set up financing. Before, we had to hire a whole department of people to sit and push the 83 pages of paper for the loan applications. This process is as automated as possible, and you have somebody who understands the strategy. Then you can manage that.

Lisa Ryan: Okay, so what are some of the typical hurdles when manufacturers are insourcing finance?

Michelle Katics: Well, these days, with the cloud-based software, I think, sometimes it might just be perceptions. If you say to somebody, oh plug into this loan origination and management system, they assume it's going to be some giant IT project. These perceptions are starting to get shattered. I'll give you a great example with Canva. Canva is software that you might use online to create what a graphic designer would have done in the past. The free account is so powerful, right? But the point is with cloud-based software, there's a perception that it would be difficult. It's a lot easier. One thing is just the perceptions are a hurdle.

The second thing that is true for any lender is to understand lending. That's where we come in. If that's the sticking point, no problem. We'll put you in the flight simulator and teach you enough to be dangerous. You have a sound system with lots of reasonable checks and balances, and you have somebody good set it up according to your strategy, but I think that knowledge gap is what we're trying to make sure is not a sticking point.

Lisa Ryan: I just had an experience, and I think about financing and like you said, the 84 pages of paperwork, I took my car in four tires the other day, and of course, they found a lot more with my car, so it ended up being a lot more expensive than I thought. Instead of paying them my credit card at the end, I went to their lender and got pre-approved, and I never gave the tire to replace my credit card. They did 90 days same as cash, it was the easiest thing on the planet, I did an electronic signature.

It's so easy how these types of services are making our lives, especially when now, mind you. I signed and probably said electronic sign and 84-page document that I have no idea what's in it; hopefully, they're not taking my first child, which would be difficult since I don't have one except my cats. So it wasn't an easy option versus what you were talking about. That small manufacturer is going to a bank—having to justify and do all of the paperwork they need to decide whether or not you're going to get the loan.

Michelle Katics: Here's my question about the manufacturing sector.  The financial industry has done an excellent job at the point of sale. We've created many frictionless financial products for the consumers. But at the end of the day, the financial sector is failing the manufacturing industry because it's our engine of growth.

For example, when we talked to manufacturers in northeast Ohio, you guys have all these crippling Labor shortages. You realize you can source other products, but if you have supply chain issues, you need capital. We need to fix this in the manufacturing sector to have the frictionless process you have as a consumer. Because it's the engine of growth of the economy, we're having supply chain issues if we can get that capital expenditure sorted out and made easier for everybody. It just seems as it'll help both at the broad economic level and help those companies grow faster.

Lisa Ryan: So what are some of the companies that you've worked with that are doing this?

Michelle Katics: So a great example, I'd like to call our partner, Turnkey Lender, who provides the actual production software for this activity. Turnkey lender, if you go to their website and their blogs, they have some excellent case studies about Siemens that they're working with, so you can read those. Case studies are online about the work that they have done with them which is very interesting for the manufacturers. We can always give you those links for the show notes if you like because those are highly relevant. We're also seeing things like the example of a solar panel manufacturer saying, oh wait, I can increase my sales if I provide the financing.

Here's another excellent example where lending is contextualized in the manufacturer knows more than the bank meaning. A solar panel manufacturer might evaluate that financing, not just based on the borrower's ability to repay. It's more about what's the site plan. Is there enough sun? Is the thing going to pay for itself? Is the installer high quality? The manufacturer will see that whole set of elements outside of just the borrower, whereas if you go to the bank for that solar panel, that the bank will just be looking at the borrower.

Lisa Ryan: Is this program work primarily for selling parts already on the shelf? You mentioned robot arms - if they already manufacturer the robot arms. But what about things like custom orders and customer equipment? Would that also work the same? Or how would that work?

Michelle Katics: From a finance perspective, it works, the same. But another area to call out based on that question of what other products does this work for some of that the other thing that it works well for is what we call factoring. So invoice financing works great for that. If you're having supply chain issues, often you get your lending the short-term money while the goods are in transit—that is gap financing. For any manufacturing company, especially right now, a supply chain issues. If I were a CFO, I'd step back and say what's causing friction in my system right now and how can I use throw some financing to unlock it? My suppliers are struggling because the transit times or longer, and they need were financing for that transit time. Maybe I’ll provide that. Oh, and I made extra interest income along the way. So I would look at the whole system and say, okay, what is my sticking point? Is it a Labor shortage? Can I throw some tech at it? Where's the friction in the system, and let's see if we can use some financial options some financial engineering to smooth out those bumps.

Lisa Ryan: When you brought up an interesting point with interest, too, that becomes an additional source of revenue for the company - instead of that manufacturer paying the bank. Are you seeing that many of these companies are offering interest rates similar to the bank? Are they the same as the bank? Do they give them a little bit of a break on the interest rate to make it more attractive to them? Or do they make it perhaps higher for the convenience of being a one-stop-shop?

Michelle Katics: I'm going a little bit finance geek out on you. So the short answer is that any manufacturer should be in a position to charge a lower rate, whether or not they decide to do that, for the following reasons so let's say you have a piece of equipment that costs $100,000. And we go to the Bank to borrow the money, and we're going to the bank needs to have the hundred thousand dollars. They need the cash to give me for the loan, and then I pay interest on hundred thousand dollars. Let's say it's 10%. If I'm the manufacturer, I have the equipment, and maybe let's imagine it cost us $50,000 to produce the equipment. I've already done my cash outlay right, so I lend the money to my buyer for $100,000. The cool thing is, I collect interest on $100,000, but I only needed the 50, whereas the Bank needed 100. It seems to say so my so based on that simple example. So my interest margin is my profit margin is double the bay if that makes sense because I'm charging interest to my client, not just on the goods I produced, but I'm charging them the interest in my profit margin.

I'm in a position I have all this flexibility. I have another revenue stream, but then that's a little short-sighted. Yes, I have another revenue stream, but the ample opportunity is that customer stickiness, the customer relationship. Your customer will be very loyal and keep coming back to you, rather than a different manufacturer for that type of thing. If they just filled out a one-page thing and upped my contract, I got the new generation of equipment two years later. Why would I switch right from the print shop? Why would I rip out all my Canon stuff and buy from somebody else when I just thought one page for new get my latest equipment called good.

Lisa Ryan: Right, well, and you're also differentiating yourself from all of your competitors because they are going the traditional route. It makes it a lot more challenging to get the financing you need so as a differentiating factor, so not only for long-term retention of customers, like in the cannon example. But also for attracting new business because you make it kind of a done for you one-stop-shop type of thing.

Michelle Katics: Exactly. Let's say our print shop chose between two big printer companies, absolutely. I would even tolerate a...