The Black Horse brand may not be well known to many consumers looking to buy cars on finance, but the chances are if they are looking at a used car, they will pay for it through Black Horse.
Black Horse is the largest independent finance provider for the prime market in the UK and has a dominant position in the market when it comes to used car sales. The market in used cars is slowly changing though and new competitors like Paragon Car Finance and the captive finance providers themselves are putting pressure on more established finance providers and pushing them into new areas and in some cases potentially down the credit curve.
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One of the areas that would look ripe for deeper exploration is the new vehicle market, currently dominated by the manufacturer’s finance arms. With Black Horse recently becoming the finance provider for Jaguar Land Rover, (JLR) a prestige brand that’s shaking off its ‘old’ man image and taking market share from the German brands like BMW and Mercedes, it would look as though the Lloyds Group subsidiary is ready to explore new areas to escape the pressure.
This adds to their existing relationships with manufacturers Suzuki, Subaru and Mitsubishi, for which they also provide point of sale finance.
Taking on such a big manufacturer, however, doesn’t mean that the business model for the Lloyds Banking Group subsidiary has changed, or so Chris Sutton, managing director of Black Horse says: "Black Horse has been more of a used car finance provider. We have obviously got or had relationships with many manufacturers over the years, but until the most recent arrangement with Jaguar Land Rover I would have said new cars only counted for around about 10% of our new business?"
And while the JLR deal has meant that the share of vehicles that Black Horse will fund in the new car segment is sure to rise "used is the core business for Black Horse", says Sutton.
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By GlobalDataThe main reason for this is not a lack of competitive edge in Black Horse products. The usual range is there. PCP and personal contract hire are just two of their more popular product, and the rates they can offer are as competitive as any other bank-backed company.
Sutton believes the reason not to compete directly in the new car market is more about what drives the captives in comparison to a large independent. "Clearly the captives have a different agenda, sometimes to drive customers into their brand for brand retention purposes. I wouldn’t describe them as loss-leaders but we all know that they are generally fairly heavily discounted offers to keep them in the brand," he says.
Independents, even large ones like Black Horse, are not in the finance business to sell cars but to make returns on their loans. To this end, the course Black Horse has taken "was less about strategy and more about reality. The fact that we were stronger in used, because that was an easier market for us to play in and an easier one to make the required level of return," says Sutton.
By being a significant player in the market Black Horse is able to outperform the market itself with Sutton disclosing that the business had outperformed the market average in the used car finance markets.
That’s not to say that the new car market hasn’t also made the returns that would make the parent group happy. Black Horse outperformed the new car finance market, even before the full effect of the JLR deal has come into being.
The strong market has helped Black Horse maintain the strong lead it has held in the market, ahead of competition from Santander, despite having experienced some tough trading conditions.
Sutton says: "Clearly being part of Lloyds Banking Group, and the financial crisis, we were affected by that and then we had the integration with one of our main competitors at the time, which was the HBOS dealer finance business Capital Bank, so there was quite a lot of integration work," explains Sutton.
But the trials were temporary and Sutton continues: "About 18 months to two years ago we really started to say ‘right we’ve got the integration finished, we want to start growing our business’, so we set about with a growth strategy to grow new business."
The JLR deal was a part of that strategy, but despite it being a prestige car manufacturer its inclusion in the Black Horse client roster doesn’t mark a change in direction for the lender away from volume brands.
"Our core competence is very much around the motor finance market regardless of make, model, prestige or volume, so I think we definitely view ourselves as whole-market players," says Sutton. He believes JLR will certainly help its business volumes in the new car market, but it’s in supplying finance to a wide variety of dealers that the previous success of Black Horse has been based.
"We’ve always had a very good brand with dealers. We’ve been a very well known brand that’s been around in various guises for many, many years and we’ve always had market-leading technology, particularly dealer-facing technologies," says Sutton.
And in having this blend of technology and longevity Black Horse has given the brand almost unique access to the dealer market. "There is definitely a spread from single sites to dealer groups with over 100 sites," explains Sutton.
In addition, within those businesses, "there is no particular target" size of business that Black Horse prefers to deal with, says Sutton. "We’re interested in efficient dealers with good reputations, with solid backing. We do tend to focus on people who have been in the business for a number of years as opposed to brand new potentially riskier situations."
And in comparison to some of the newer entrants to the market, the dealer market is where Black Horse is operating exclusively for now, the direct channels not being an approach they are looking to take in the near future.
This being said, Sutton does perceive a sea change coming in the way the dealer market works, which may affect the way Black Horse deals with the market in the more distant future.
"Consumer behaviour is changing and it will continue to change, whether it’s people buying cars direct over the internet or whether it’s people doing more research before they go into showrooms," explains Sutton, but there is no need for panic in the dealer finance community he believes, the changes will not happen overnight.
"While the purchase of online vehicles will increase, it will be a very slow burn and the dealer still remains central to the market and is certainly central to our strategy.
And I still think that for the next few years the dealer model is still going to be very, very important, the most important bit. But you can’t ignore changing consumer behaviour."
Where more immediate pressure will come from on Black Horse is the rise of new entrants to the market, Sutton believes, many of which have done so encouraged by the historically low impairment rates and favourable lending conditions.
Paragon Car Finance and Hitachi are two companies Sutton identifies as being among the newer contenders, but he points out that Santander, Barclays and MotoNovo remain threats.
Direct lenders, Sutton believes, may not be the threat some others estimate, partly he feels due to their record in the downturn and their historically smaller size.
Their return, however, especially the internet-based lenders, is something he has taken note of.
But whoever the competition may be Sutton feels the market is already big enough for them, and with strong growth in the finance sector, the room for more competitors is there, while still not troubling the position of Black Horse at the top of the UK motor finance industry. For one thing Sutton thinks it has an edge that sets it apart from the competition. Sutton returns to the theme of technology when describing that edge.
Some of that technology has been so successful it has led to the dealer-facing platforms of the captives and some brokers mimicking various features that have made Black Horse a success.
The success of the platform can be measured in the statistics surrounding the amount of deals that flow through it. As Sutton explains: "Almost all of our point of sale finance is dealt with online, approximately 99.5% or thereabouts, as you will always get dealer downtime and sometimes there are systems issues, but the vast majority is online. Two-in-three of all proposals are fulfilled completely electronically. So the customer, even in the dealership, signs an electronic signature pad and has done for a number of years. The funds are automatically transferred into the dealers account that day."
This technology is also one step towards helping with another aspect that’s troubling the industry, the new Financial Conduct Authority regulatory regime which began in April.
One area in particular has caught Sutton’s attention. "The key things that we’ve been looking at for quite a while and we’re now starting to see movements in the markets are around things like affordability," he says, "there is a much bigger onus on the credit intermediary and the finance provider to make an affordability assessment, as opposed to what I would just say is a credit-worthiness assessment."
Sutton believes that the media attention that affordability tests have been given for mortgages do raise questions, but the problem is overstated when it comes to the motor finance industry: "A car purchase isn’t in the same league, but it’s always quoted as probably the second most significant financial transaction that an individual makes.
"I read something yesterday about you’ll be asked if your husband is a member of the golf club and how many times you eat steak every week. We don’t need to get to that but, we as an organisation, we do need to do a more detailed assessment of whether a customer can afford to take out the commitment, and for the length of that commitment, and we strongly believe that, as a minimum, dealers and providers will have to ask for some form of income details," continues Sutton.
The task of doing this is not that of the dealers believes Sutton. To him he sees the role of the finance company as essential in providing the dealers with the tools required to handle this extra diligence. "There has to be a partnership approach and that’s part of why we have quite a big sales force on the ground with dealers and very, very good face-to-face relationships with them backed up by good systems.
"Now what we are not going to do is, or we’re not planning to do at the moment, is insist that customers bring in payslips, P60s and all those sorts of things."
Sutton believes that the regulation of the business will take up time for the whole industry until clarity is reached on what the FCA is really looking for in the motor finance industry.
In the meantime the Black Horse business will continue to do what it has done so successfully, deal with customers fairly through the dealer networks.
As Sutton says: "The Black Horse brand is of course very strong, we’ve been in business for well over 50 years, so we’ve been around a long time and we’re not going anywhere. I think we have got significant scale and we are comfortably the biggest independent advisor focused on customer service and in particular helping our business customers as well."
We will support the used car market’s financing needs through a variety of products, including PCP and PCH, but most of all, we will continue to support the dealers themselves in their efforts to sell more cars by using the data and skills they have acquired over the years.
"We believe that we can enhance how we help dealers use the data that we have got on the business to enable them to go back and obtain repeat business."
All of which, along with the deal to finance the growing JLR brand, means that Black Horse will only go from strength to strength. n
