CONSOLIDATION
Question to Graham
Llewellyn-Berry/James Snow: Target does all the loan processing for
Picture Finance, Blue Motor Finance, and Park Asset Finance; its
customer proposition means that if you want to start a finance
house, all you need is the funding and the route to market, as
Target can provide an overflow capacity. Is this becoming a more
attractive option in the current climate as financiers become more
risk-averse?
Go deeper with GlobalData
Graham
Llewellyn-Berry: Yes, it is. Taking a step back, it is
clear that back-end processes have become the poor relation, with
less investment. For an outsourcer, however, the core business is
the back-end operation, which means that we absolutely have to be
efficient.
One of the things we’ve found is that because
we have a history of producing investment reports, banks are
getting comfortable with that – which can enhance a new start-up’s
chance of securing funding. If you are a start-up, you can go to
market more quickly, and with much less risk – and without high
investment cost in systems and processes. And if you don’t hit the
volumes you were expecting, there is less risk because it is a
variable cost.
James Snow: In the
current cycle we’re in, consolidation is happening. I hope the
cycle does repair itself sooner rather than later.
As new companies enter the market with
whatever differentiation they go to market on, their choice around
setting up will be for launching their new business on more of a
variable cost basis than in the past, aiming for more web-based
systems, and a pay-as-you-go approach – rather than incurring heavy
capital spend up front.
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 GlobalDataThis model will allow companies to access the
latest in technology, and have a payment structure and cost geared
more to the success of their business.
We’re looking at ways in which we can provide
companies help and access to the latest systems and infrastructure
for them to successfully set up in the market.
But as soon as a company hits critical mass,
it naturally wants to look at other ways of financing its systems,
as paying per use begins to look less cost-effective. We can offer
a risk and reward approach for our clients, along with fixed costs
for large volumes of transactions.
Question to Tarun Mistry:
Tarun, what has the impact of consolidation been on the motor
finance market and in your opinion how will it affect the industry
in the future?
Tarun Mistry: If
you look back at some of the acquisitions and consolidations that
have happened in motor finance, generally they occurred for
strategic reasons, or because a player couldn’t get to a scale that
generated the necessary returns for its shareholders in any other
way. By acquisition, trade players have been able to obtain
economies of scale and improve their financial results.
More recently consolidation has been driven by
lack of liquidity and by some form of distress.
Until very recently the industry has been
driven by volume which has resulted in the ‘control’ over pricing
and margins being effectively passed to brokers, introducers and
users of finance, since they all had a large choice of finance
options.
This has effectively eroded margins.
Therefore, as consolidation, combined with the impact of the credit
crunch and a lack of liquidity, has occurred, there has been an
overall reduction in the availability of funding options.
I consider this to be good for the remaining
players in the industry since it means that pricing structures now
reflect more accurately the risks that motor finance companies are
taking on board.
Due to the lack of active funders in the
market I think this will force brokers and introducers of motor
finance to build strategic relationships with their chosen finance
companies. This will move the current relationship between these
parties from one based upon a transactional nature to one of
resembling more of a ‘partnership’-type structure. I consider this
to be good news for this industry.
Another point is that consolidation
and lack of liquidity have brought about a situation where there is
now a space in the market for niche players. We are seeing some
domestic and foreign entities looking at this element of the market
and strategically thinking if it represents a business opportunity
for them. These new entrants don’t have the baggage of a historic
portfolio, which makes entry into the market potentially
easier.
Bruce Wood: What
sort of models do these interested parties have, and will they
offer any new products?
We have traditionally seen small players, who
are fast on their feet and offer terrific service and higher
margins, gradually become bigger and bigger, until they are not
fast on their feet any more, but have by way of compensation a
bigger portfolio, cheaper funding and lower margins. Is there any
differentiation other than service for a new player coming into the
market?
Tarun Mistry: I
think there is differentiation – for example if you look at it from
a credit appetite perspective, niche players will come into certain
areas not currently being serviced. One could say that there is at
present a gap in the near-prime finance sector. We might find some
players coming into that market, where they see margin potential
compared to the credit risk that they would take on.
At the start of the credit crunch, there were
predictions that the vacuum for funding could be taken up by
overseas sovereign funds coming in, but it seems that they are
looking at bigger opportunities. There are some Middle Eastern
banks that have shown some interest in the motor finance market
that we’ve been talking to, but it’s minimal.
Peter de
Rousset-Hall: Much of the consolidation we have seen in
motor finance was driven by the parents – by the manufacturers and
by the banks. They didn’t set up new relationships just to get into
motor finance.
Chris Sutton: The
past six months of my life have been spent putting two businesses
[Black Horse and Bank of Scotland Dealer Finance] together. It has
consolidated into a significantly smaller mass – one plus one
doesn’t equal two, it equals one and a bit.
David Betteley: If
you are a 7 percent to 8 percent market player like Toyota
Financial Services is, consolidation has been quite helpful: it has
brought a lot of sense back to the market. All our competitors are
rebuilding their balance sheets. Our cost of funds has come down
and that’s what’s driven the margin repair.
