Following Secure Trust Banks flotation on AIM and with a myriad of products set to come, lending director David Nield, national sales manager George Miller and head of lending development Andy McMorine at the banks car and retail finance provider Moneyway talk to Richard Brown
Secure Trust Bank is still based in Solihull, 50 years but little distance from the companys beginnings as a debt manager and private banker to blue-collar workers in the West Midlands, processing factory pay packets into bill payments and spending allowances. The bank still has a budget account, now called OneBill, serving 30,000 people.
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Moneyway, based in the same building, provides motor and retail finance for the bank, ranging from cars to bicycles, to white goods, and even musical instruments in conjunction with Arts Council England.
The bank also has a parent in wealth manager the Arbuthnot Banking Group, which counts Henry Angest, Ruth Lea and Sir Christopher Meyer among its board.
Certainly, there were enough wise heads in the company to spot the price of risk was overheating by 2008 and pull the bank out of lending before the credit crisis took hold.
When the crunch came, the bank was in a relatively strong position and free of a problematic back book. As appetite for lending contracted further and companies left the market, Secure Trust Bank saw its opportunity to once more get ahead of other players. It began lending again and took on a motor finance operation. A "counter-cyclical" strategy, as lending director David Nield calls it.
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By GlobalDataThe bank acquired portfolios from LV and City in 2008/09, giving it "scale on Day One", says Nield. "The nature of the transactions meant it was spinning off very good income."
In the last three years, Moneyway has paid out business for over 2,000 dealer outlets, including transactions with 71% of the AM 100 in the past 12 months. It has grown at a compound annual growth rate of 377% since 2008 and expanded its car loan book over 30% in the second half of 2011, based on financing cars less than 10 years old and under £15,000.
Nield attributes the popularity and focus of the Moneyway proposition, particularly among larger dealer groups, to being one of the only lenders in the near-prime motor sector to invest heavily in a national sales team, headed by George Miller.
"We have nine account managers from Scotland to south Wales to the south coast," Miller explains. "Weve got good coverage as far as postcodes are concerned, and we also have a bespoke broker manager, not a traditional broker model."
In turn, Miller puts success down to the banks history of managing customers, something prime finance companies may miss out on, while not following a subprime model of chasing loan-to-value ratios.
"Theres a lot more helping of the customer through difficult periods, supporting them when things change.
"We want to help them buy another car and repair their credit. We want all our customers to pay, regardless of where our risk sits."
Expanding organic
In each of its three finance businesses, motor, retail and personal lending, Moneyways book has approximately doubled while current accounts at Secure Trust Bank have risen from 96,000 to 139,000.
Such success is the result of mixing organic good business with the inorganic, such as acquisition, according to Nield.
In motor finance, outstandings at the end of 2011 were £63.4m, with £9.9m in income, compared to £31m outstanding at the end of 2010, with £3.4m. "Thats all organic growth," says Nield. "Were not just growing a book were growing our income and our profitability. I suspect the inorganic growth wont mean the motor space."
Indeed, the acquired portfolios in run-off, including those from LV and City, have decreased from an income of £6.1m in 2010 to £4.4m in 2011.
"With any portfolio, it goes into rundown. As they have, our organic growth has gone the other way. We replaced the assets with our own established businesses."
A more recent injection of money by inorganic means was the listing of Secure Trust Bank on the London Stock Exchanges Alternative Investment Market (AIM) in October 2011, which raised £25m in capital investment. As Nield said then, the capital would be to support lending growth.
"Because were a bank, we are able to raise funds by raising deposits," he explains. "This is where most banks would like to get to: lending supported by deposits, as opposed to inter-bank and wholesale funding. All of our lending is supported in that way.
"Were in a pretty prudent position, with an excess of deposits to our lending. Our loan to deposit ratio at the end of the year was 57%. We dont have to worry about how were going to fund our growth."
Core capital for the company, including equity capital and disclosed reserves, measured against risk-weighted assets marks the bank as well-capitalised by Tier 1 standards; while many banks strain to raise their ratios from 6% to 10%, Secure Trust Bank has a 21% Tier 1 ratio.
"Some of our competitors have had to ease off," says Nield. "Theyre recycling their own funding whereas were after good growth. One thing were certainly not chasing is growth-at-any-cost.
"Were built on some sound principles and strong foundations. It cant be overemphasised the strength that having your own money gives you."
And it is Miller, in contact with the finance directors of dealerships, who sees the benefit of such strength in cars being sold: "Were not in a position where we get to a certain point in the month and, because our funds are under strain, were having to hold back or choke any new business opportunity."
Funding the gap
Since 2008, those business opportunities have been in the near-prime gap, an area of increasing demand which many companies are keen to fill but which Moneyway has found through a combination of being ahead of the lending curve and backed by the deposits of Secure Trust Bank.
"The subprime players pretty much left the marketplace," says Nield of the post-2008 car finance industry. "Most supply disappeared almost overnight."
"The key players, in terms of volume, left the market place and left the dealers and brokers somewhat adrift in where to place that kind of business," agrees Miller.
"At the prime end, players started to tighten their credit policy and restricted the volumes they would lend," Nield adds.
"Effectively, as prime tightened up and near-prime and subprime fell away, there was a gap in the middle and thats where we positioned our proposition."
All three say the near-prime gap is not unobtainable but caution against lending without the right business model. "Its a very specialist skill," continues Nield. "Our scorecards are significantly different to those youd expect to have as a prime player. The underwriting, the scorecards and the collections processes need to be appropriate to the sector."
Andy McMorine, head of lending development goes further, believing competitors inappropriate lending models benefit Moneyway. "The way the two major independents transact is more towards segmenting their more profitable dealers against losses, moving into manufacturer markets which creates more of a market for us to play in. When they tighten up loans-to-value and scorecards on near-prime, thats creating a market for us to play in."
Nield, however, says such a situation has brought with it a significant challenge to near-prime growth for the company.
"When significant players exit a market, to some degree, the market fails to exist Weve spent the last three years re-establishing the market, re-establishing the confidence in players in that marketplace and the credibility."
The most-practical conversation
In simple terms, according to Nield, a slump in the market means car dealers can lose the skills to sell finance, prompting Moneyway to take an approach which is not "all about driving F&I profit".
Nield says todays dealers strive to sell a car and structure a deal, only to be frustrated by a string of declines from prime finance companies. Alternatively, Moneyways proposition is based on finding appropriate rate-risk acceptance, and doing so in a process made as easy as possible for the dealer.
"We have four bands or tiers that our lending falls into," Nield explains. "Everything goes through our prime scorecard first. If it fails prime, it goes into our near-prime card, then one of three tiers: platinum, gold and purple. Those are risk-based.
"Everythings done online; our decision-making is pretty much instant. Within seconds we come back with an answer: accepted, declined or referred."
"If the dealers already captured the information, well take an XML link from their platform. We have over 60 XMLs live now.
"If the dealers not used us before, the documentation guides them through the sign-up process. Our pay-out process is very slick. We have all of the documents and proofs that we require; we pay the money away the same day."
For Miller, a man who has "been on that side of the fence", the frustration for dealers is in not knowing why, or by how far, a proposal has missed its target. Putting a proposal into one of the four brackets gives the dealer, and therefore Moneyway, the opportunity to keep a deal alive, albeit restructured by deposit, term, or even car, "as opposed to a straight yes or no from the prime".
"Our acceptance will probably be on different terms," adds Nield. "Certainly on a different rate. So the dealer needs to reconstruct the sale to suit the customers needs.
"The customers that finance with us need to buy a car; they need to find finance to do that and to find a dealer who can satisfy that need. Dealers who dont have our type of facility to satisfy those needs are, effectively, feeding dealers who do."
The system also includes a built-in deal-making screen for those dealers keying a proposal, rather than sending it by XML. The screen allows dealers to either accept a transaction and print the document or continue to modify a proposal with alternative monthly payments, deposit, term or price of car.
In effect, Moneyway is prompting dealers to ask the questions that need to be put to customers at point of sale. "The customer is still there, cup of coffee, still looking round the car, the details have been taken and processed." If theres a rejection from prime lenders, Millers team are placed to help the dealer explain the alternatives.
Although Nield agrees the team are giving dealers the most practical of possible conversations at point of sale, "the reticence to present these propositions is mainly with the dealer.
"The customer has an absolute need, knows they would have difficulty obtaining credit, and are expecting the dealer to have this conversation with them. Unfortunately, dealers arent confident now to have those conversations. Weve been working with dealers to overcome that."
Miller even suggests letting the customer find the car they want elsewhere.
"The dealers real success in this," he explains, "is they have a regular follow-up tool to touch-base with the customer and ask how they got on. We see, time and time again, businesses capture those customers a second time. The reality has been the customer couldnt find that particular car and price.
"We can still help. Weve still got the approval on the system. Moneyway are still happy to do the loan.
"The nine account managers; thats the critical difference between us and our competitors. And the difference is if the dealer comes on board and understands the value the account managers can bring.
As McMorine adds: "We have to work every single deal. If the dealer partners with Moneyway they can see tangible growth in retail sales, finance penetration, add-ons and income per retail sales immediately."
