Consumer finance house Southern Finance has found a real
niche in the market. Fred Crawley reports.
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The
term ‘niche business’ gets used a lot in the motor finance
industry, but few companies fit the description so well as Southern
Finance.
The consumer finance house turned
heads in March last year, when it came under the wing of Raphaels
Bank, the lender which it formerly sat beside in the portfolio of
businesses making up the Lenlyn Group.
The group is well known for
exploiting niches – within the vast field of ATM provision, for
example, Raphaels has become known for leading the market in the
provision of multi-currency ATMs at airports.
In motor finance, the group seems
equally as idiosyncratic. While on the surface Southern might look
like a standard hire purchase lender for the independent dealer
sector, it has some eye-catching quirks.
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By GlobalDataFor example, in the field of
wheelchair-adapted vehicle finance, which is largely dominated by
contract hire company Motability, Southern has set itself up as the
company to go to for a hire purchase alternative.
Equally, Southern has made a big
name for itself in the world of mobility scooters, where a
strategic alliance with a distributor has seen it build a book size
of £5m, encompassing around 5,000 scooters.
Big changes
But it is not just in its choice of
target markets that Southern does its own thing. The first thing
that happened when Raphaels absorbed the Southern brand was a
complete reconstruction of the company’s funding model and sales
method along highly original lines.
Before, it had been reliant on
wholesale funding from a syndicate of banks including RBS,
Barclays, Bank of Ireland and Alliance & Leicester, a situation
that was endangered when Barclays changed its mind about wholesale
lending to the consumer finance sector.
Now, Raphaels’ Southern Finance
book is funded by retail bonds raised directly by Raphaels from its
banking customer base. This one-of-a-kind model has given Southern
greater independence, even if it has not allowed for an immediate
increase in volumes lent.
With the liquidity position thus
secured, says Raphaels CEO and former Southern managing director
Miles Roberts, the next function of the business to be reviewed was
its route to market.
“Quite simply, we reduced the size
of the sales force to zero” Roberts explains.
“We’re almost unique in having no
field sales force, and it has paid off very well. Rather than
having a field force of reps going out to independent dealers, now
we maintain strategic relations with retailers and write a similar
level of business.”
Losing its sales force reduced
Southern’s overheads considerably, but has not dented existing
relationships with dealers. According to Roberts, dealer
satisfaction with service levels has actually improved since the
change.
“At the end of the day, the dealers
aren’t being tied up having coffee with finance reps – and that
means they have more time to sell cars,” Roberts adds.
The question bears asking, however
– how does Roberts expect his business to find new dealer
customers?
The niche markets that Southern has
engaged in have brought in new customers, Roberts says. In areas
such as hire purchase for wheelchair-adapted vehicles, for example,
dealers will get in contact to fund one vehicle, before later
become regular customers for standard deals
Brokers, too, have been of growing
importance to Southern since it lost its sales force, with most of
the nationwide introducers being dealt with on a monthly basis.
“It gives us a national presence,
which is an advantage when there are so many gaps in the market”
Roberts says.
The grey
demographic
Yet beyond these sweeping changes,
some things at Southern have not changed. Primarily, the lender’s
approach to underwriting and its risk appetite. Roberts explains
that this is another area where the company fits into a specific
niche:
“We manually underwrite all of our
business, so we’re looking to pick up what’s declined by normal
scoring, but where customers are not a big credit risk,” Roberts
adds. “For example, customers who have no credit history due to
having recently arrived in the country. Equally, if a customer has
a satisfied CCJ with a good explanation, they are not a bad risk.
We call it the grey demographic.”
Roberts says these are risks that
independent lenders in the prime bracket would be happy to take,
but which they don’t necessarily have the resource to sift out from
the number of applications that don’t make it past their
scorecards.
As such, Southern’s ideal customer
has a prime profile, but requires a little more attention to detail
to underwrite due to some non-standard characteristic or other.
Roberts sees great prospects in
this demographic, since it will stay wide so long as the car market
remains undersupplied with finance, and prime lenders are able to
keep selecting only the most easily assessed low risks from the
applications available.
“We treat all our customers as good
people to whom bad things have happened. Subprime is just not our
thing,” Roberts concludes.
Profit
increase
While it seems that Southern’s
culture has not changed vastly since it was incorporated in 1957,
inclusion in the wider structure of Raphaels Bank has certainly had
a dramatic effect on its bottom line.
After all the changes to Southern’s
funding method and sales model, its owner can look forward to a
much greater return – by the end of its first year of trading
post-acquisition, Roberts expects the division’s profitability to
have increased by more than 100%.
As the growth of Raphaels’ deposit-taking base grows to allow
greater exploration into the consumer finance sphere, the results
coming from its new subsidiary will hopefully encourage extra
investment in years to come.
