The subprime market, designed to appeal to customers with lower credit ratings, has long battled stereotypes and misconceptions over its work. The recent Financial Conduct Authority (FCA) review has also recast a spotlight over the entire motor finance arena, with a further focus on consumers who may require extra affordability assessments. Christopher Marchant speaks to leading figures in subprime about what their customers want, transformations in the digital marketplace, and whether any changes need to be made.
The FCA sent mystery shoppers to dealers around the country, and its final report concluded: “We are not satisfied that all lenders we surveyed were complying with FCA rules on assessing creditworthiness, including affordability. Some seemed to focus unduly on credit risk to the lender rather than affordability for the borrower, and there were gaps or anomalies in information provided.”
Go deeper with GlobalData
These findings are cause for concern across motor finance, especially from a body that has the power to enact regulatory change.
Assessing the general difficulties touched on in the report for buyers using subprime finance, James Syron, head of automotive at Experian, notes: “The car-buying journey is not always straightforward for people with lower credit scores. Some dealerships don’t offer the right finance options for them. Others work with brokers to find the correct higher-cost finance packages, but clearly the customer journey can be improved.
“People naturally find finance conversations awkward, and it can be particularly daunting if you worry it will end in rejection.”
However, by the FCA’s own admission the mystery shoppers did not complete the full application process for a motor finance agreement, leaving it unclear as to what issues could be rectified by the end of the chain.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataShamus Hodgson, managing director at Moneybarn is insistent on the need for best practice when assessing customers, saying: “We all welcome much of what the FCA has reported, yet actually I think we operate in an industry that is, despite what people sometimes perceive, very focused on customers, very aware of its regulatory responsibilities and is actually very resilient.”
Analysing the issues of any inconsistencies at the dealer level from a lender perspective, Keith Charlton, director of Advantage Finance, notes: “One of the difficulties that motor finance lenders sometimes have is when dealing with large volumes of applications on a remote basis, they may not be able to interact with the lender on a level where all the information can be provided to make a full detailed ingoing and outgoing assessment.”
In spite of any qualms, there remains general sentiment within the subprime industry to work with and implement FCA considerations. Billing Finance director Oliver Mackaness is of the opinion that the government body’s report into the industry will have a net positive effect. “If those in leadership positions are running their businesses well, they should already be doing what the FCA is requesting,” he notes. “The findings are fitting of a tougher economic time, and there should be a lot more consciousness about whether customers can afford the payments. There also needs to be more clarity on the commissions paid to dealers and brokers.”
Misconceptions
There are a wide range of reasons that customers could enter the subprime sector, from a lack of information on the consumer, missed payments in the past, or even a county court judgment standing against them.
These parameters can lend themselves to notions surrounding factors such as the income levels of subprime customers and susceptibility to higher rates of default.
Assessing these perceptions, Hodgson points out: “Subprime doesn’t mean poor, it doesn’t mean low income, it doesn’t mean that customers do not have a level of disposable income. It represents credit risk alone. People who have well-paid jobs and have a lot of disposable income can still have a historical blip on their credit record.”
Reports from Parkers Car Finance show that car finance costs have increased by as much as 49% since the UK voted to leave the EU, and this is unlikely to change with the nation’s ongoing Brexit negotiations.
As to whether any rise in defaults would disproportionately affect subprime motor customers, Hodgson says: “It is certainly true that there are pockets of the subprime customer base across sectors who are more prone, but I don’t think that’s necessarily true for motor finance.
“All our customers are employed or self-employed, all our customers earn over a certain amount of money, so I’m not sure it necessarily rings true that there is an increased correlation in terms of the better the customer’s ability to survive economic shock, the higher they go up the credit continuum.”
Mackaness also sees his customers as expressing a resilience unmatched by customers outside this area. “Subprime customers are used to challenges, used to juggling their money,” he says. “In many ways they are probably more prepared than people who are rated prime. They are used to being in a trickier environment, so often they can adapt more quickly.”
The notion of unfair subprime practices is a persistent one, often as a result of consumer perceptions derived from outside the motor finance sector. As Charlton notes: “It’s got a negative implication when it comes to the causes of the 2008 financial crisis.
“I don’t think that these historic misconceptions can hold water with what firms such as Advantage Finance are doing nowadays. Subprime finance companies build success based upon delivering a quality product alongside very high standards of service,” he adds.
Syron also believes that information and the possibility of choice can improve the subprime customer experience yet further, saying: “People with subprime finance can assess their options for a loan before going to a dealership, so they are able to have a more informed conversation about how they pay for a vehicle. It is also likely we will soon see car finance options for people on price-comparison websites. Pre-qualification has been good for people in other financial markets, so there’s no reason it can’t happen in car finance.”
Hire purchase
Standard practice in the subprime sector is to offer hire purchase (HP) arrangements to customers, a motor finance type elsewhere in decline. Since 2016, across credit ratings, hire purchase has been the third-most-popular form of finance for consumers, behind personal contract hire (PCH) and the dominant personal contract purchase (PCP).
As to why HP is popular in the subprime sector, Charlton says: “Advantage Finance is something of a one-trick pony, providing finance to customers on simple straightforward hire-purchase terms with an average advance of around £6,500 over typically a four-to-five-year term.
“There is no real appetite to move away from that, as the typical customer hire purchase is a straightforward and legally proven product with easy-to-understand terms and provides end-of-contract certainty for the customer.”
Explaining the relative disadvantages of PCP, Hodgson adds: “This product is not really appropriate for the subprime customer. From a subprime perspective on a PCP deal, you are often asking for a relatively large deposit, and for subprime customers that’s not always affordable. We need to bear that in mind.”
As well as the financial angles of PCP, another key reason subprime customers may not favour the option is due to the types of vehicles typically sought out through this arrangement. “We serve functional rather than aspirational customers,” Hodgson explains. “Our customers need vehicles to live their lives, they need vehicles to take their kids to school, to get to work. These are not customers who are buying statement vehicles or desiring the next Mercedes.
“Our typical vehicle fluctuates between a Vauxhall Astra 1.6 diesel or a Ford Fiesta 1.4 petrol. These are functional, good-quality, relatively recent, relatively low-mileage vehicles,” he adds.
Digital Disruption
As with all areas of motor finance, subprime has undergone a sea change in response to increasing consumer familiarity with the online world, and every provider of finance has had to adapt to the times.
Highlighting areas in which Billing Finance has incorporated digitisation into the sales process, Mackaness says: “Customer don’t really like speaking on the phone, so Billing is introducing interactive voice-response payments, and we are about to launch a customer self-service portal. The majority of our agreements are also finalised with e-signatures; it is something our customers expect.”
While Hodgson welcomes digitisation, he also recognises the need for a human touch in subprime. “As with many things in life, it is a balance,” he notes. “The opportunities that digitisation offers a company like Moneybarn are fantastic, but one needs to use them judiciously.
“It is not a desirable process to remove the human experience from the subprime motor finance agreement. Customers need and deserve support and the ability to ask for information, including the opportunity to ask questions and to be reassured. That’s quite difficult to do in a fully digitised process.”
The move to a digital arena has not gone unnoticed by Charlton either, who says: “There’s definitely been a shift over several years where customers themselves, especially those who think a finance approval may not be a foregone conclusion, tend to make inquiries about finance offers before even going to look for a vehicle. It is no secret that this type of service has been available via the internet for a significant period of time.
“The demand is met by a range of motor finance brokers and dealers who provide excellent access to all parts of the market. That has reinforced the importance of positioning ourselves so we can provide equal access to our services for both digitally and traditionally sourced customers. The digital sphere has allowed us to perfect our credit service and improve the efficiency of our offering with regards to our processes.”
Experian research estimates that there are 5.8 million adults in the UK that can be classified as having a subprime credit rating. Syron notes: “Many in this sector may have a low credit score because there is little or no information available on them – they are known as credit ‘invisibles’.
“For this group in particular, Open Banking is going to be a huge development. It will give them the chance to easily share their bank account information with a range of lenders in the hunt for the best deal. Open Banking technology is secure, and the data can be categorised so lenders can assess a prospective car buyer’s disposable income.”
Within Open Banking, a dynamic development in the financial world has been peer-to-peer (P2P) lending, through which private individuals can invest in projects. On whether this model can disrupt motor finance, Hodgson says: “I see a P2P company being no different to Moneybarn, a captive or any other independent finance provider. It is just a different way of accessing your money. It’s not a disruption, so much as potential competition.”
Concluding his overall views on subprime, Hodgson says: “The subprime market can be quite a tough place to operate as a lender, but I think it is a necessary segment of the market. Subprime is helping people who in many cases have been disenfranchised by the mainstream but absolutely deserve to be supported in buying good-quality vehicles to help them live their lives. Subprime is often maligned, but it’s an essential part of this wider market that we call car finance.”
With subprime and motor finance as a whole facing up to what could be transformative change, the need for industry best practice has been more pressing than ever. This is, of course, a sector that provides an essential service for the motor retail sector, coupled with a more frequent desire for vehicle ownership than often found in prime.
Subprime financiers can no longer be seen as the detractors from an otherwise stable regime, but figureheads who have the confidence and business reputation to face any FCA conclusions head on.
