Due to its global nature, the automotive industry has not been immune from the challenges posed be the COVID-19 outbreak. Auto finance firms, in particular, are feeling the effects of widespread economic slowdown and the financial challenges faced by their customer base.
But challenge breeds opportunity, and this can also be a time for rapid innovation and change. In tackling immediate issues, such as liquidity and changing customer needs, car financing firms can position themselves to prepare for changes to their business model and build stronger relationships with both their customers and retailer partners.
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Becoming customer focused: communication and personalisation
Many firms have already developed a clear communications strategy so that they can continue to engage with existing customers consistently and offer appropriate support if necessary. This has involved being proactive with the most vulnerable, and enabling customers in financial difficulty to get the support they need through online support tools. In many cases, this has been accompanied by a degree of resource switching or upskilling to support customer frontline contact. For prime and captive lenders, this has often proven more challenging than for other lenders who are more accustomed to debt management. Whilst processes are generally robust and well entrenched, the volumes are unprecedented.
Now that markets are beginning to return, we’ve seen lenders consider ways of stimulating demand, often in conjunction with manufacturer, retailer or supplier partners. Until markets open fully there is likely to be a focus on those contracts that ended during lockdown, and how best to renew or extend those. In this context, a personalised renewal approach is vital. Firms looking to generate personalised renewal quotes should now be considering using other sources of available data such as telematics, credit risk and customer value (where applicable).
Managing residual values
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By GlobalDataBeyond operational impacts, a key focus area will be residual value (RV) management. Whilst some European markets are seeing a ‘bounce back’ effect caused by the latent demand built up during lockdown, this is likely to ease quickly and lead to RVs remaining lower than 2020 levels for at least the next two years. The avoidance of public transport due to health concerns may sustain demand in some markets, but once that subsides the pressure will be on retailers to hold firm on pricing so as not to adversely affect the used car market.
As economies shrink and disposable income reduces, there is potential for a ‘squeezed middle’ effect; luxury brands continue to perform strongly but traditional premium brand customers seek to move into more volume brands which are not only traditionally cheaper to finance but are also less expensive to run and maintain. Lenders with a balanced portfolio are likely to see limited impact from this, however those that are overexposed in the premium sector may see significant margin erosion.
Ultimately a drop in RVs is likely to drive up prices across the sector, potentially requiring an increase in OEM support or subvention or an associated decrease in commissions to keep prices at previous levels. With no option to purchase the vehicle, the pure leasing sector may be most impacted due to having to bear the RV and balance sheet risk. This will have a substantial influence on the B2B sector and the future financing of electric vehicles, where leasing has proven popular due to customer concerns around battery life.
A strong analytics based residual value management framework, including appropriate consideration of vehicle options and profitability, will be critical to position for future success. This is likely to involve an increased use of technology and AI to power decision making.
Managing change through technology and flexibility
In the long term, all of the industry will need to respond to predicted market and behavioural changes. These were on the horizon before the pandemic, but the speed of change has accelerated and stakeholders who can capitalise on this will be able to capture demand in a market under pressure.
For example, customers are likely to demand greater flexibility in their products and will use remote digital channels to purchase. As demand for flexible transport matures and increases we are likely to see lower initial purchase and rental margins being offset by an increase in revenue from value added services and secondary income. As a result, the motor finance provider will increasingly become a central part of the mobility “ecosystem” rather than simple provider of funds, further cementing their place in the value chain.
Despite facing a challenging period, it is likely that those auto finance providers who use this time to build strong customer relationships and embrace the necessary changes through increased use of technology and flexibility, will come out well positioned for the foreseeable future. Motor finance is, and will remain, key to the automotive sector and mobility as a whole.
Nathan Thompson, automotive finance lead, Deloitte
