Consumer brokering in the motor finance industry has just undergone an exciting period of growth, but the sector is already adapting to thrive in whatever market environment is coming around next
It is easy to dismiss brokers as the middle men between the dealers and the lenders, but consumer brokers are, in many ways, the glue that holds the motor finance sector together.
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It is a sector that has seen turbulent times, with highs such as the recent boom in car sales, and lows such as the economic downturn from which the industry is still recovering. Motor Finance has been taking a look at the consumer brokerage sector as a whole, asking how it is doing and where it could be going from here.
If you talk to the people in the motor finance industry there is little doubt that it has been an exciting time for consumer brokerage. Richard Hoggart, chief executive officer at DSG Finance, sets the tone with a great deal of enthusiasm for how the industry as a whole has been performing.
“I would be surprised if anyone said the year to the end of March was anything other than spectacular,” he says. “Demand has been high, lenders have been bold, dealers have been dynamic and regulation has ensured we all come together to deliver effective and fair solutions for the customers.”
This vibrant business environment is the result of a steadily growing market, but other brokers in the sector are cautious about whether the current sunny climate is set to continue.
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By GlobalData“The overall motor finance market has seen significant growth over the last few years, benefiting from both increasing new and used car sales and penetration levels of point of sales finance,” explains Lee Streets, chief operations officer at Evolution Funding.
“Lenders and brokers are unlikely to see these twin benefits continue, and wider economic uncertainty could undermine consumer demand for car sales, leaving motor finance players competing for increased share of a contracting overall market. The first quarter of 2017 appeared robust, and new car sales were significantly aided by reforms to VED for cars registered from 1 April. The second quarter is likely to be more challenging, especially for new car registrations.”
CreditPlus spokesperson David Penman credits at least some of the recent boom in car sales to the rush on the new VED rates, and he expects to see slowing volumes in new car sales, especially with pressure from the Bank of England to look at whether affordability is being covered properly on PCP programmes from manufacturer schemes. And of course, there is the ever-looming spectre of Brexit on the horizon.
“Brexit will force pricing changes on new cars going forward. On top of this, the forecast for rising household debt in the UK for the next two years is still on the increase, with worrying trends that many households now have less than £300 in savings,” Penman says.
Hoggart also accepts that times may be about to become more difficult. “The challenge might be a little tougher over the next 12 months though,” he says. “Economic indicators are just starting to suggest that consumer intent is slightly reducing.”
While there may be more difficult times ahead, most brokers agree that the market itself is undergoing a period of diversification. As the needs of the customers become more varied, more and different kinds of lender are emerging to help them.
“In our 27 years of trading we have never seen the range of lenders and products as wide and varied as it is today,” Hoggart says.
“From high-value prestige right down to low-value subprime, every possible credit niche seems to be well represented.
“There is a high degree of aggression with lenders in terms of their appetite and targets, with many very keen to exploit the sweet spot of risk and reward that sits just outside traditional prime,” Hoggart continues.
“We regularly hear of other potential new entrants looking at the sector, so we expect the number of lenders to continue to increase in the short term.”
Streets agrees that the market is healthier than it has been since the credit crunch, but is keen to point out that it is not returning to the loose credit standards that preceded the crisis. He tells Motor Finance: “We have seen an increase in lenders across the whole credit spectrum. Near-prime and non-prime is as competitive, if not more competitive, now than the pre-credit crunch.
“However we are seeing lenders compete on price, commissions, service and technological improvements centred round the customer journey. We are not seeing non-prime lenders seek market share by dropping credit standards or credit scores; if anything we have seen a moderate tightening where they are looking at ways to meet regulatory pressures on evidencing affordability.”
Penman points out that with most companies seeing good liquidity and loan books that are performing well within bad debt and payment profiles, it is a period when lenders should be looking to grow.
However, he adds a note of caution to his analysis: “The biggest concerns are the amount of household debt and lack of household savings – affordability and job security are key here. Don’t be surprised if self-employed individuals with less than two years’ trading see a tightening of credit criteria,” he says.
Rising to new challenges
While the faltering progress of a recovering economy is something that lenders in all industries quite rightly have their eyes on, the consensus seems to be that the big challenge facing the industry now is one of consumer confidence, with many leaders citing transparency and diligence as the qualities that brokers will need in order to thrive in the evolving market.
“An economic slowdown might have some effect on the market, but aside from that the FCA is now looking at motor finance, so we need to ensure that we continue to improve our own practices and processes, and that we respond positively to any FCA guidance that might be forthcoming,” Hoggart says.
“The industry needs to ensure that the sales process is exciting and engaging for the customer, but equally it must be diligent and fair. Ensuring the customer fully understands product options, and the characteristics of the product they do choose, is paramount.
“PCP is growing month on month, so the industry needs to ensure that the customer understands properly and doesn’t just see the cheaper instalment,” Hoggart adds.
One company that is particularly aware of these challenges is Zuto, a newer kind of broker that operates more in the online environment than through working with dealerships.
“Consumer trust in the industry at large remains the key challenge,” says Zuto chief executive officer James Wilkinson.
“To improve this, a business will need to provide greater transparency across every part of its operating model. We are working extensively with our lenders and partners to ensure we put the customer at the heart of everything we do.”
Streets goes beyond that to point out that the uncertainty in the car finance market is not a temporary trend that companies can weather: It is a permanent fixture to which brokers will need to remain constantly adaptable in order to succeed.
He says the biggest challenge in the sector right now is learning to adapt to a market that is operating with high degrees of uncertainty. “Uncertainty is everywhere – regulatory, economic, political and technological,” he says.
Streets argues that the industry needs to respond by “creating a culture and organisation that embraces change, is capable of innovation in both product design and customer journey, and can deploy technology rapidly using an agile methodology.”
Tools for a new age
Penman also agrees that technology is going to be both a valuable tool and a new challenge for brokers.
“We have the technology and integrated systems to deliver a loan-comparison to loan-completion service within a matter of minutes,” he says. “They already are, with a growing number of both motor finance operations and IT companies bringing technology from other sectors into motor finance,” Penman says.
Hoggart is particularly proud of DSG Finance’s progress here. “We are the only broker with a multi-lender e-sign solution operating through a single in-house platform,” he explains. “Our Click Docs system is now live with eight major lenders.”
Streets notes that the rate of technological development is still rising, and will have a drastic effect on how brokers do business.
“It is being driven by a desire to find competitive advantage or differentiation, and a need to innovate faced with uncertainty over traditional business models and distribution channels,” he says, and Penman agrees.
One demand from the market that is becoming commonplace is the expectation that brokers will be able to identify a person’s creditworthiness and find them the right loan within an incredibly short timeframe. This leaves brokers struggling to serve multiple masters at once.
“With over two-thirds of all car loans now covered by direct lenders using brokering channels, it’s volume versus speed of response versus the ability to cover risk,” Penman says.
A Wave of Innovation
Penman also points out that the new technology that will automate the process of confirming an individual’s identity for risk assessment and online fraud-reduction purposes is one of the most valuable technological innovations the sector is seeing today.
This technology will also have the ability to access, with customers’ permission, their account details to confirm that a loan is affordable. He also expects more innovative ways of looking at click-and-buy journeys for car purchase.
However, it is important to remember that innovation does not always necessarily mean new technology. Even as more and more of the business moves into an online space, it is vital that, as Wilkinson says, the customer experience is put at the centre of every new development.
“Point-of-sale finance needs to evolve,” Streets says. “Consumers will increasingly seek to transact car finance in the same way they do other loans and credit products – in the online space.
“Innovations that support dealers’ migration of the point-of-sale finance offering online are critical, as is technology that removes friction from the process and automates challenges like affordability.”
Hoggart is sceptical of the idea that any of the latest developments are revolutionary, but adds that this is not necessarily a cause for pessimism.
“To be honest I don’t think there is anything groundbreakingly new,” he says. “However, there is constant improvement in professionalism, product delivery and fulfilment evident all around.”
One improvement that DSG Finance is putting into place is adding value to its brand through the launch of its own lender. “We have recently launched our own lender, Unity Facilities, which has now taken its place as a wholly independent lender on the DSG broker panel. This ensures that our group of companies has a diversified income stream and allows us the agility we demand to react quickly to market opportunity or changes,” Hoggart explains.
For Creditplus, adding value and offering a wider array of services has always been a key component of its business strategy. As Penman points out: “We have always been solution sellers offering more than just motor finance – so offering key-to-key or door-to-door solutions is part of what we do.”
Streets believes brokers across the market are looking for ways to increase their value and diversify their offerings – and, like DSG, many are doing so by moving into the lending sector themselves. “Some are doing this through technology, others by looking to create their own lending,” he says.
“Evolution has been a lender since 2007 and has a technology team capable of 700-plus hours of coding per month. In addition we have invested in complementary solutions such as our flexi-lease mobility business, Evogo.
“Evogo is synergistic to the brokerage as it purchases all its vehicles from supporting dealers of the brokerage,” Streets explains.
Across all the companies Motor Finance speaks to, the one constant seems to be change – whether it is in expanding their offering or finding new ways to deliver their existing offering.
Brokers are still the bridge between the dealers and the lenders, but as the market grows and devlops, their role is growing and changing with it. Only the most adaptable, flexible and innovative companies are going to be able to lead in that environment. <
