As direct lenders offer lower rate to UK car buyers, some erosion seems inevitable for dealer finance market share. Charles Wheeldon reports.
Enter car finance into Google, and see what comes up in the list of pay-for-placement links highlighted in yellow at the top of the search results list.
Go deeper with GlobalData
The list changes on a daily basis as different companies bid to occupy the highlighted spots, and many are familiar faces from the dealer finance world captive funders promoting special offers through franchised networks, catchily named online finance brokers, car supermarkets and so on.
But one name and one number that have cropped up more frequently in recent weeks are Sainsburys, and the figure 6.8%. Since December last year, Sainsburys Finance has been regularly knocking down its headline consumer loan rate, and has made no secret of its intention to promote this to the car-buying public.
It has not been the only one, either as shown by data gathered this month by Motor Finance, a considerable majority of direct loan providers made moves to lower their rates in December, and have continually cranked them down as the year has gone by. Now, they are beginning to close in to the rates offered by dealer finance providers.
Competitive pressure from direct lenders dropped massively in the wake of the credit crunch, and left an opportunity for point of sale finance providers to make much greater inroads into UK car retail.
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By GlobalDataThe three years since then have seen a boom in point of sale penetration, allowing motor finance providers to take a larger slice of a smaller pie, and thus stay relatively intact in a market that has seen other forms of consumer lending shrink massively.
The party may at last be ending, however, with many finance houses now considering competition from direct lenders to be one of their most significant concerns for the second half of the year.
The situation has been exacerbated by the fact that the growth opportunities which many expected to see in the used car finance market have largely failed to materialise the size of the playing field, it seems, has been decided.
What sort of attitude are the direct lenders taking towards the competitive landscape? Needless to say, responses vary.
Steven Baillie, head of personal loans at Sainsburys Finance, said: "Our latest car-buying index, looking at peoples current car purchase plans between March and September, suggests that 19% of people planning to buy a new or used car over the next six months will look to finance at least part of their purchase with a loan.
"Of the total amount that will be spent, the research suggests around 12% equivalent to £6.2bn will be financed by personal loans. This figure is up by £400m on six months ago.
"We offer a range of loans which we sell online and over the phone. We expect competition to increase during these challenging economic times as people look for the very best way to finance their cars. We are committed to offering our customers competitive rates and offers that will appeal to them."
Nationwide is currently vying with Sainsburys to offer the cheapest personal loan around. Its spokesman Paul Beadle claims Nationwide now offers the lowest personal loan rate on the high street at 6.7% for its own current account holders (the lowest rate it has offered since 2007) and 6.8% for non-customers.
However, it does not have specific designs on the car finance market.
Says Beadle: "You can take out a personal loan with us for whatever reason you like the consolidation of debt, holidays, a whole number of reasons. But with our 6.7/6.8 rate applying to loans between £7,500 and £14,999, we are probably in the range of amounts you would need for a car, but were not specifically targeting car buyers. Its just one of the options you have with us."
The Clydesdale Bank and its subsidiary Yorkshire Bank appear to have a competitive advantage in that they offer dedicated direct-to-consumer hire purchase products, sold alongside personal loans.
A spokesperson said: "We wouldnt sell a personal loan to a customer for a car purchase, but would point them towards our car finance option. On our website, under loans, we have a personal loans section and a car finance section. Customers can borrow £7,500 and upwards, with monthly payments spread over one to five years, and we can arrange payment options to suit different budgets."
When asked if the bank intended to target point of sale competitors the spokesman said bluntly: "Yes, Clydesdale and Yorkshire Banks offer a dedicated car finance package that, unlike a regular person loan, is tailored specifically to purchasing a car."
Also looming large in competition with dealer finance providers is M&S Money, which has offered personal loans direct to customers for more than 20 years.
Its spokesperson said: "We also provide the M&S Car Buying Plan, which helps customers to minimise payments by deferring up to 60% of the loan. We currently have a rate of 6.9% APR representative on loans between £7,500 and £15,000 on both personal loans and the Car Buying Plan."
But the aggressive players are by no means ubiquitous. Take the AA for instance. Spokesman Ian Crowder said it has no immediate plans to compete in the motor finance market.
"Our loans are reasonable value," Crowder said. "Were not the most competitive and neither are we the worst. We organise them through a third party, the Co-op if you apply through our website you get put through to the Co-op. Our focus is on concentrating on our savings and credit card products."
Over then to the Co-operative Bank, whose spokesman said it offers personal loans which can be used for cars and other purposes, but that it doesnt offer a specific car loan package.
The spokesman added: "We have no plans to increase our presence in the car finance market at the current time."
Nevertheless, lenders probably have least to fear from the very biggest beasts in the personal loans jungle. When asked if the worldwide giant HSBC intended to target motor finance, spokesman Mark Hemingway simply said: "No, and weve no plans to engage in increased competition."
Indeed, subsidiary First Direct, the Leeds-based telephone bank, seemed even to be faintly turned off by the idea.
Spokeswoman Rebecca Hirst said: "We offer a personal loan product which can be used to purchase a vehicle. However, we do not offer a specific car loan product. Weve no plans to market or target personal loans especially, but are concentrating on mortgages and savings. Obviously if someone rings up for a personal loan for a car we will provide that for them if we can. But were not seeking that market or trying to show that our loans could be used for that reason."
Its a view echoed by another major banking group, RBS, whose spokeswoman said; "We dont target any specific area of personal lending at all and we have no plans to target motor finance."
So clearly, overall, competition in the market will be hotting up in the third quarter of the year and beyond. However, the good news for the UKs point of sale community would seem to be that the really big boys in the playground dont seem interested in the fight.
The return of the direct lender – how can POS react?
Spencer Halil, director of Alphera Financial Services
According to the FLA, direct lenders are looking to up their game during the second half of 2011 with particular focus on PCP and HP. With increased competition against point of sale finance, how can dealers and brokers continue to nurture and grow POS finance sales and avoid losing out as the competition heats up?
First and foremost, dealers must advertise finance packages effectively, ensuring their offer is competitive and attractive, giving customers the choice of different bundles and buying options. I would advise dealers to work on their unique product offering – customers like to feel they are getting a personalised deal and this is the competitive edge dealers have over direct lenders. Dealers can build direct and personal relationships with their customers in order to offer bespoke finance packages, not to mention the ability to build up buyers’ confidence by dealing directly with them and their individual needs.
This is also the perfect time to make sure that all types of customer interaction are delivered to a high standard. Retention will be critical towards the end of this year, so it’s important that dealers focus on customer retention management, including all contact
over the phone, face-to-face or via email. Part of guaranteeing good customer service is making sure customers are treated in a
compliant and fair fashion. By adopting an integrity-based customer approach, customers are put at the centre of the process, boosting their confidence and trust in dealerships as the place they can rely on to purchase a finance deal.
While concerns that competition will become tougher towards the end of this year are valid, I don’t think any of us expected such a rise of POS in 2011, and I am confident that POS finance can continue to grow for the remainder of this year.
As long as dealers are proactive and have a robust sales process in place, based around individual customer needs, I don’t see why
the successes already seen with POS this year shouldn’t continue. I would advise all dealers to start speaking with their finance providers now to find out what support and advice (beyond competitive deals) they can provide, in order to prepare for competition and to stay ahead of the curve.
