Fred Crawley reports how stock funding – not a
glamorous product, but a vital one – is working out for some major
players.
Go deeper with GlobalData
Stock funding, a long-established, but often overlooked,
feature of the dealer finance landscape, is becoming a popular tool
of choice for non-captive lenders – and even for bank subsidiaries
with no presence in retail motor finance.
While captive funders still
dominate stocking for new vehicles, the much larger used car market
is seeing the manufacturer position eroded by brand-independent
lenders such as Santander Consumer Finance, RBS asset finance
subsidiary Lombard, Close Motor Finance and BMW multimake finance
venture Alphera.
While this is partially down
to competitive pricing on the part of the independents, another
contributing factor is the desire of increasingly multi-franchised
retailers to choose where they place retail finance business
without compromising their stock funding rates.
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By GlobalDataFor these dealers,
independent-sourced stocking offers ‘no strings attached’ funding,
without the expectation from a manufacturer of a certain quantity
of retail paper each month.
In turn, the ability to
provide this freedom gives independent funders a cast iron way to
develop relationships with dealers, and inevitably see more POS
business passed their way as a result.
But even beyond the retail
motor finance sphere, stock funding is increasingly considered a
profitable offering in its own right. Lombard Asset Finance,
Britain’s largest provider of asset finance to businesses, has
grown its stock funding offering since 2005, despite having no
retail motor finance arm.
Meanwhile, other banks are
known to be actively weighing up entrance into the sector in
Lombard’s footsteps. Research into the UK stock funding market is
currently being conducted by one global consultancy firm on
behalf of a significant international investor.
Stock funding in the
independent sector is nothing new, however. Asset finance giant
Lloyds Bowmaker, for example, was a major provider in its heyday.
What has changed is the level of improvements to efficiency and
risk management offered by stock funding software, allowing
independent providers to stay competitive on price while still
drawing profit from the product.
After all, if a lender is not
to base stock funding rates on the amount of retail business they
receive, the alternative is to offer a risk-based rate. Needless to
say, the more precisely this risk can be monitored, the better the
eventual margin will be.
James Powell, sales director
of stock funding systems specialist Sword Apak, says: “We feel the
biggest challenge for bank-owned entities looking to enter the used
car stock funding market is ensuring the right level of risk
monitoring – something Sword Apak has endeavoured to offer with its
wholesale finance system.
“We do
validation up front in addition to a finance company’s risk checks
– every vehicle funded through a facility is automatically checked
against a credit agency, and the system decides whether to fund it
or not.
“In addition, we feed the
stocking system into the audit process, so from a risk perspective
we provide everything necessary to do full reporting at the back
end too.”
But despite these
improvements to process, the independents are not in a position to
take over the stock funding market fully.
Spencer Halil, director of
Alphera, BMW’s multimake finance arm, says stock funding programmes
for new and demonstration cars will remain dominated by captive
finance companies, due to their integration with consignment
processes – something an independent funder cannot break
into.
Another issue is the period
of subsidised stock funding usually offered by manufacturers to
dealers, which independents cannot sensibly compete
with.
The only opportunities for
independent providers in new stock funding, says Halil, are the
very few situations where a manufacturer does not provide wholesale
funding, and so there are no consignment issues for an independent
to negotiate.
However, used car stock
funding remains the main opportunity for independents, because
whenever captive lenders are involved, the independents tend to be
less competitive on price. Many captives maintain used car stocking
facilities with dealers by bundling them in with extremely generous
new car stocking offers, because dealers are happy to pay a little
more for used stocking in order to retain unbeatable deals on new
stock.
But, as well as often being
able to offer better rates on used stock funding, Halil says,
independents can complement manufacturer facilities in other
ways.
“Many dealers tend to arrange
their used car stocking finance with their main independent retail
funder, since it gives them more freedom in terms of placing retail
deals,” he says.
Captive funders tend to be
very concerned with linking rates to the amount of retail business
they can expect in return, as a way of ensuring they are not
funding the retailing of other brands.
Halil says independents quite often link the rate charged
for unit stocking to the retail volume the dealer
writes.
He adds “Some dealers like
it, but others find it constraining – we offer both approaches,
either linking rates to retail volume or basing them on the
dealer’s risk profile.”
Despite the competitive
advantage of offering dealers freedom on retail deals, the onus is
still on independents to be as competitive as possible on price,
which puts pressure on margins. Still, Halil is adamant that this
does not decrease the value of a stock funding offering for an
independent.
“The used car stocking
product is a great tool – yes, it is a revenue stream, but that is
secondary. Its biggest asset is that it demonstrates the value
brought to a dealership. It is another way of supporting the
finance company-dealer relationship, and another way of loyalising
and interlinking business and systems.”
He points out that Alphera
provides stocking facilities to some dealers as a backup to captive
facilities during times of peak sales, even when they are unlikely
to be used for much of the year.
“If it is not used, there is
very little overhead cost to us – but if they use the facility in
March or September, we serve a real valuable purpose and get a bit
of margin too. The system is there anyway, so if it is not used, it
is not a significant cost.”
Solidifying dealer
relationships
Alphera, like other
independent funders, sees used car stock funding as a platform for
solidifying dealer relationships. It will even go so far as to
offer wholesale to dealers which give it no retail business,
running its own team to promote the wholesale product, with
utilisation targets independent of the retail side of the
business.
“We want to cement our
relationships through product variation, and wholesale is a big
part of that picture,” Halil concludes.
“It is a big target product
for us, and we will be growing our offering at a significant rate
over the next two years.”
Lombard Asset Finance has
taken this principle of retail-independent stock funding to another
level, developing a growing portfolio of stock funding without
having
any capability to accept retail motor finance business.
Lombard head of unit stocking
Keith Hayward says: “We only do stock funding – we don’t link it to
retail paper and we can’t see the logic of that from the dealers’
side.
“They are such different
types of funding, we find it hard to believe that providers can be
the best at both services. That begs the question, can dealers
really get the best service and deal overall by using the same
provider for retail and stock funding?”
Lombard’s motor stock funding
offering sits alongside similar products in other asset classes –
the lender is particularly involved in the caravan and motorhome
market and is “evaluating” opportunities in other
sectors.
In the motor market, however,
Lombard’s stock funding presence began when it set up a facility
for dealer giant Pendragon, which banked with parent RBS and
expressed a need for such a facility. Lombard has now grown to
include 9 of the top 10 dealer groups as customers, and has a total
portfolio of 80 customers distributed among the top 200 multi-brand
dealer groups.
While one might presume that
Lombard might be using stock funding, like Alphera, in order to
develop dealer relationships (in this case introducing them to the
RBS banking group), it is steadfastly neutral on its stock funding
customers’ banking behaviour, considering the product profitable in
its own right.
Hayward explains: “Lombard is
a business that happens to be owned by a bank, not a bank
‘product’. We therefore look at this as a specialised market, not a
cross-sell ‘opportunity’.
“Whether a prospective
customer is NatWest or RBS banked is not a criterion one way or the
other. We will work with businesses based on their own strengths.
Stock funding is a specialised market, and the product is more than
an add-on to other funding or services that banks may
provide.”
Certainly, businesses are
seeing the value in either the price of Lombard’s product or its
no-strings-attached nature. Lombard has continued to grow its
customer base annually and has become one of the largest providers
in the market since its entry in 2005.
Looking ahead at the
development of the market, Sword Apak can see the opportunity for
more bank-owned players to enter the picture, drawing on the
precedent of the American industry where stand-alone stock
offerings have been the norm for a long time.
Powell says: “We are of course delighted by the emergence
of non-retail players entering the UK market and expect this trend
to continue as more finance providers see the commercial
opportunities of operating stock funding as a profit centre in
itself.”
