Attendees took time from Frontline Solutions’ third annual F&I Conference and Awards Dinner to gather for a panel discussion on the future of the industry, hosted by Experian and chaired by Motor Finance editor Fred Crawley
Fred Crawley: The next few years will see a lot of niche and non-prime lenders trying to expand to fill large market gaps. Can you easily scale-up manual underwriting from a local level to a national level?
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David Enright: If you’re a small company, you can chose only to write locally due to local knowledge, but to do it nationally, it’s got to be more scientific. We’re a small finance company. We manually underwrite and we’re quite pleased with our low arrears. Even so, we put some science behind it. We try to calibrate credit scores to take out the obvious no-hopers, which allow us to develop the remaining deals.
John Harman: There are some applications you wouldn’t want as part of your normal business, scorecard or business profiling. Thenthere’s the middle ground, these are the customers that you really want to look at more closely, these customers are not autoacceptsor auto-declines.There’s always going to be the top part of your business where you want to make quick decisions for dealers, brokers and introducers.We want those automated. There is always going to be a careful blend between regional and nationalunderwriting.
Mark Gow: We’ve seen businesses in the last seven or eight years use technology in different ways to help with these decisions. Itdepends on scale. At DSG we use technology to identify the obvious top and bottom ends of the credit profile. How do you automatethat middle section?
Andy McMorine: There’s a huge part of the market that lenders should be funding, but they’ll miss it because of automation. There’sa large percentage of automated declines we would be willing to pay if the scorecards are set correctly.
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By GlobalDataFraser Brown: Over the past five years, the middle ground has become smaller. What we might see over the next five years is thatmiddle ground getting larger again. That will mean more manual intervention.
Fred Crawley: Is the emphasis on rate of return rather than volume as strong now for lenders as it was a couple of years ago? Are things creeping back toward volume in the middle-to-upper market?
David Padilla: Certainly we’ve seen that in the last year.
Fraser Brown: Certain funding houses were coming round with very poor rates, not looking for volumes, just looking for profit and,suddenly, when the government put in Funding for Lending, all of the banks that were building business for profit, not business forvolume, have come out again. You’ve seen a huge turnaround in the last three months in particular where lenders didn’t want volume, they wanted profit. Now they want volume to meet government targets or they receive significant penalties on the money the government has lent them at a discounted rate. It’s really interesting, as a dealer, to see how aggressively they’re coming back into the market.
Fred Crawley: Looking past the next five years, what are lenders’ priorities going to be, if and when things stabilise?
Andy McMorine: It depends who funds the lender. Have the major UK banks all got the money to throw at it? Secondly, medium term, are their returns sustainable on low-rate business if and when money costs increase?
Fraser Brown: What happens to the banks’ balance sheets? If the banks can get the balance sheets back to where they need to be by 2020, then we’ll be back to a more conservative style of what we’ve had – business as usual. It’s crystal ball stuff. We don’t know where the eurozone’s going. There are so many macro- and microeconomic issues.
Fred Crawley: There’s been speculation where else funding could come from: East Asian banks, pension funds, other exotic sources. Does anything seem more or less possible than it did a couple of years ago?
Fraser Brown: Peer-to-peer lending will grow, perhaps through brokers, which I think has got huge legs. There’ll be brokers looking to tap into the market and translate that into a motor industry solution, but are there brokers doing that at the moment?
David Padilla: Companies like Zopa, basically putting borrowers and lenders together.
Fraser Brown: If I’ve got £20,000 earning low interest in the bank I can put it into a peer-to-peer site with a likely idea of risk and return. If somebody could work with one of these organisations or websites like a broker, and structure some money to come into the motor industry, that’s a really interesting concept.
Lorna Rossi: There’s also guarantor lending which is a growing market. We’ll see huge growth in that in the next few years and there’s a huge market for it. Take a customer who can’t get a decision on finance, but can get a guarantor loan, hook them up with a dealer and get them to pay the dealer directly. It’s a route to market and another way of acquiring business. Like peer-to-peer, it’s looking at alternative solutions where there is appetite.
John Harman: Growth in the industry may come from companies which are looking to take up more business with joint customer and guarantors. Funders may need to look more closely at what companies in the personal loan markets are doing with a lot of guarantor lending. It’s only going to be a matter of time before funders start looking more closely at this. It’s not the strength of the individual who’s coming for a car; it’s the strength of the joint customer or guarantor.
Vince Carter: The problem with the joint-signage was in the dealers. There were some defaults and the guarantor was claiming they
weren’t truly informed about the loan. It was more about social lending, where we might be going back with the population short of credit.
Mark Gow: There are things closer to home for us than peer-to-peer, like JVs with the funders. The appetite is stronger now than I’ve seen it for a long time. Some funders recently made their parameters more flexible. In trying to think what the world will look like in five years’ time, just rewind five years. We couldn’t have predicted the past five years and we cant predict the next five. If I look back six months I’ve probably seen more changes than I’ve seen in the previous two years in terms of appetite.
Marcus Pask: Your business managers are trained to ask the right questions which will speed up the process a little bit. Do you think that running courses will help?
Fraser Brown: That’s what all of my sites have. It’s critical that the salesperson in there is experienced, qualifying the customer properly. What will it look like in 2020? One of the biggest questions is regulation. If we go down the commission disclosure route, big enough dealer groups can go into a joint venture, where commission disclosure becomes irrelevant.
Ian Beardmore: Go back to volume bonus, what it was originally there to do. You can do deals at minimal commissions which look sensible to a customer. That’s a genuine bonus for achieving a volume and the commission is purely commission.
Fraser Brown: It squeezes small dealers, in every part of motor retail, finance or purchase of vehicles. We’re going to see the rise of medium-sized dealer groups. I don’t really know what the future holds for larger dealer groups. It’s harder to control such larger organisations, but I think mediumsized dealer groups are the future of the motor industry in the UK. Then how that links in with the finance companies is going to be interesting.
Des Porter: I’m quite optimistic about the next five or seven years. The thing that’s missing from the market for the last five years is competition. The prime lenders have ratcheted the scorecards up to take the super-prime customers, and the subprime lenders have also tightened underwriting considerably and have been accepting far lower-risk business, largely that which would previously have been accepted by prime or near-prime lenders. This has left 35% of the population now classed as subprime significantly underserved.
Ian Beardmore: Particularly prime lenders. I’ve seen independent market research which shows they are saying to banks there is an opportunity to come into the market.
Roland Schaack: When the retail arms of these banks have got ‘clean’ money to lend, I think you’ll see them coming back in.
Fred Crawley: At the moment, people buying Vauxhalls have got the opportunity to take money from Santander or GMAC. Does that set a precedent?
Fraser Brown: It’s absolutely fantastic. Finance houses link funding of vehicles with retail paper – I don’t like that one little bit. Dealers which aren’t cash-rich have to take funding from a finance house, whether manufacturer-related, stocking new cars linked to retail paper, or used car funding linked to retail paper through an independent. It’s restrictive practice and strangles people’s ability to make money out of retail finance. Having two companies competing over one manufacturer is really positive. If other manufacturers went down that route, for competition and competing for dealers’ business, it’d be fantastic.
Fred Crawley: In isolation, will we see more competition for subvented programmes?
Andy McMorine: It depends if one of the major prime lenders adopts the franchised dealer model which Santander has adopted. Not only do they do finance, they do service plans and GAP. They probably do the warranties as well. They have created a slick model as a manufacturer-independent finance company. Will another independent, bank-led finance company want to challenge that?
Marcus Pask: Santander has thrown down the gauntlet and put the model in place. If we try to emulate what they’re doing, it gives dealers more competition, which is good for dealers.
Fraser Brown: Having been involved in various discussions with Barclays, I’m desperate for Barclays to come into that. It would be fantastic. When are they actually going to put their money where their mouth is?
Roland Schaack: It’s about appetite, systems processes and decisions.
Marcus Pask: We’ve got an appetite to lend. Just watch this space. It’s very imminent.
David Enright: Barclays has been a little ironic. Corporately it withdrew from lending money to finance companies a couple of years ago, but is now pushing forward with lots of funding elsewhere in the market.
Fred Crawley: Des, you mentioned some optimism about the state of competition looking forward – care to elaborate?
Des Porter: Yes, I was pleasantly shocked how much it had come back in the States. I don’t think we’ll follow what’s going on over there. There are more controls in place than I saw in the States 20 years ago, so it’s not gone back to those silly levels, but I do think – going back to this issue of the finance companies controlling us for the past four years – we’re just starting to see a bit more enthusiasm from the finance companies to get our business, which goes back to driving some of these things you’re talking about. Moneybarn is more active in the market andthere are a lot of people who believe the funding is there. It raises another issue of the dealerships and the brokers having access to credit information. We’re working in the dark. If we’re trying to deal with the 35% of the population whoare subprime because of poor credit, largely, if we don’t have access to that, how can we possibly manage the efficiencies of the finance companies? We don’t know if our customer is super-prime to go to Barclays, whether it’s in the middle and going to a Moneyway, Carlyle or Close, or whether it’s going to be funded by the people who look at every single aspect of a customer’s demographics and credit profile. We don’t have that information.
David Padilla: There may be a change in legislation. My understanding of the bureaux is they’re tightly controlled in what they can pass on.
Roland Schaack: Reciprocity – where is that? Is it in law? I’m not certain it is.
Fraser Brown: One of the most important things is that the amount of commission you get for writing subprime business is not enough. We fire it all down the line to a broker who works for very little money and, really, for us, is a deal saver.
Des Porter: Why isn’t there any commission in these products?
Lorna Rossi: There’s no competition.
Des Porter: Finance companies are taking it for themselves and biting the hand that feeds them. Commission disclosure will not be a problem in the subprime arena. Customers know what they can afford; if it’s responsible lending based on what that customer is earning that’s fine. None of us wants to put customers into cars they can’t afford. But it’s not price-sensitive; the customer is not worried about commission disclosure. There’s a better way to structure things between the finance companies, the brokers and the dealers. There’s been no competitive pressure to do that. Finance companies don’t have to pay commissions. No one else is.
David Enright: There’s also the pressure of present cost to a subprime. I would be delighted to borrow money as a subprime lender at the rates lent to customers. If people borrow money at 10% they’d be pleased. If we borrow money at 10%, we’ve got to run an operation invariably behind bad debt because all of the good guys have said: "We don’t want you". If we could take 5% off a funder we could give that straight back and make the same money.
Des Porter: It’s difficult because you’re a relatively new business. There are established subprime lenders that have got cheap money
but they’re not sharing it with introducers. Competition will force it, but it’s very slow at the moment.
Fred Crawley: Is this getting to the soft-pull issue (the approval of customers for finance before the sale process)? It’s under discussion because there is enthusiasm to do it over here. Does anyone have a view?
David Enright: If you’re one of the big three, why would you want it? One common search, whether this is full or ‘soft’, would reduce their income massively. Who’s going to fight this corner as they won’t?
Roland Schaack: When pitching the deal to the customer in the first place, if you go to him with 2% or 3% flat, but come back with 15%, the deal is never going to be done. We’re at least getting some indication of the credit score prior to writing and pitching the offer to the customer, and it’s absolutely vital, but it just isn’t going to happen. If you give me a score, I can use that to pitch the rate and the offer to the customer.
David Padilla: We need to be careful we learn from our clients’ declines and the decision signs. If the introducer gets too good at bringing in business you can’t write, you’re not going to learn to adjust your scorecard to see what deals you’ve turned down or performed well in.
Roland Schaack: You’re always going to get a chunk of declines. There are a lot of things we’re going to decline so we can get a good understanding of where to pitch our business.
John Harman: The reason why I think it will change is because customers can log into Experian’s Credit Expert and get their own credit search. So what is stopping them taking their own credit search into a dealership, and saying: "That’s my credit search, please place me to the best lender"? If customers have the right as an individual to see their own credit search, why can’t credit reference agencies give certain information to dealers and brokers to enable them to place the customer with the most appropriate funder.
Andrew Ballard: We are fully aware of the interest being shown in pre-application checks and the use of CAIS data where the lender is a full CAIS member. We are continuing to work with industry bodies and their trade associations’ regulators to assess how best to progress. This is important and much too big a decision to get wrong.
Mark Gow: Why is the issue linked to reciprocity? Why is that more relevant than if you wereinvolved in a joint venture with a funder?
Andrew Ballard: We need to decide and agree how the data can be used in a logical and compliant way. We spoke earlier about automation and the use of credit scores and automated decisions. We will be considering all options including a red, amber or green traffic light type result.
Fraser Brown: The kind of structure that I’ve looked at was the traffic light on indebtedness, on loan-to-value and affordability. Just a single traffic light isn’t helpful. There’s really only three things you need to provide us with: an indication on credit history, indebtedness and affordability.
Andrew Ballard: It also plays to the first question about automation versus manual. If the parameters are quite clear, then it can allow lenders to automate some decisions and spend more time on others where further clarity is needed to reach the correct decision and outcome. Lenders may wish to consider the concept we discussed earlier where a guarantor is required.
Fred Crawley: What would commission disclosure mean for the huge amount of growth in manufacturer finance?
David Enright: We welcome commission disclosure because it’s transparent. Sales are getting boosted at the moment at Ford, VW, Peugeot and Citroen because there is a lot of interest-free credit going out. Where’s the transparency going to come through from that? Where’s that going to be disclosed?
Fraser Brown: We’ve done, for a number of years, five years’ 0% finance across our used cars and we do it with no deposit for the month of January and it’s our busiest time of the year, consistently. The level of subsidy we put into that is huge. We all know 0% doesn’t exist, how would you disclose that to a customer?
David Padilla: If you look at the subsidy now and think that’s a lot of money, look at the underlying funds in the Bank of England base rate. It’s never really been lower, and that subsidy has probably never been lower. If you start having interest rates increasing, which you will in the next five years, what’s going to happen to the subsidies then?
Fred Crawley: Do people feel subvention is going to carry on as a big thing? Penetration can’t go up much further, surely?
David Padilla: It depends on the value of the car. The window prices tend to stay high when you have manufacturer subvention. You’re explaining a problem further down the road when it comes to customers’ expectation of 0% and of the value of their car. They’re not getting either of those in three, four, five years’ time.
Fraser Brown: The customer thinks they have a great deal with five years’ 0%; the truth is you’ve lumbered that customer with £1,500 of additional charges for the credit somewhere in the deal that they’re never going to get back as a credit rebate if they settle early.
Fred Crawley: When do you think manufacturer enthusiasm for subvention is going to die down?
David Padilla: When the cost of funds go up.
Fraser Brown: Specific manufacturers have a target of how much money dealers should make. Some manufacturers want dealers to make about 1% return on turnover. That will affect how they run everything to do with dealers: whether they subsidise the finance, whether they put money on the bonnet. You’ll find certain manufacturers at the moment have dealers haemorrhaging and will put in registration bonuses on the bonnet of the cars. Other manufacturers, who are increasing the volume with fixed overheads within the dealerships, are actually reducing the margins within the cars and loading the incentive into finance because the dealers are making too much money.
David Padilla: Probably explains why corporate banks have not been the most enthusiastic when it comes to the motor trade. The return is tiny against other industries.
Fraser Brown: With the powerful brands, the differential between the top- and bottom-performing dealers, on return on turnover, is rather small. Yet, your lesser brands, with less control over dealers, the difference is between the top-performing dealers, plus 5% return on turnover, and your worst performing dealers, minus 2% return on turnover.
Andy McMorine: The big question for the manufacturers, from dealers, should be: is that customer buying the car they want or are they buying 0%? If 0% wasn’t there, they’d probably still buy that car at 4.9% or 9.9% because they want the car.
Ian Beardmore: It’s better off saying "at a rate" rather than saying "0%" because people understand you don’t get something for nothing. You’re better off selling at 2.9%.
Des Porter: 0% is what gets the customer through the door.
Fred Crawley: And which way are customers going?
Lorna Rossi: You’ve got to adapt your sales process depending on what type of customer you’re talking to – is it your car customer or your finance customer? Understand that early on and put the right sales process in place to adapt to that customer.
Fraser Brown: It’s polarising. We’re seeing those who have researched heavily and who fully understand what they are buying. They’re generally more educated, more able to get finance, and looking with greater awareness. Then you have the other end of the spectrum – the customers who are not that bothered about brand – they just want a car and don’t really know that much about finance. Obviously, they’re easier customers to do business with.
Lorna Rossi: But not necessarily, because they’ve usually got a tighter budget or deposit, or more restrictions, need more proofs or
need to tick more boxes. So they can be more difficult to deal with.
Mark Gow: We’re full-circle back to the technology. As a broker, that is our obligation to the market. The businesses that will survive in the future are those that can use technology with people like Fraser’s organisation and say: "That’s the technology the broker would use, you’re at the front with the customer, we’re providing you with the technology and the resource to do it, you put the deal together, based on the parameters that we’ve set". They’ve got the offering positioned correctly in the States. You have to start off a lot earlier in the process. Everything that we’re currently doing post-sale needs to be brought further forward. Part of that involves legislation, part will involve technology, another part is going to be funders with product and appetite. Put it all together and that’s what’s required, but one thing on its own isn’t going to solve it, it’s combining the three areas together.
