In A Scandal in Bohemia, Sherlock Holmes tells Dr Watson that "It is a capital mistake to theorize before one has data." This could just as easily apply to motor finance as it does to fiction, as companies go out of their way to make sure they have as much data and information about those they lend to in order to reduce the risk as much as possible. But whereas Holmes, famed for his powers of deduction, had to gather all the data himself, today, there are a number of companies with a wide range of data sets and products available to clients to help them analyse all sorts of aspects of a potential deal, from customer affordability to checking potential pricing costs.
Although the oldest of these companies, Equifax, was around at the turn of the century, the sheer scale the data available today is unlike anything seen before, and credit companies such as Equifax, Experian and Call Credit all have a number of products designed for the motor finance industry, to help it tackle a number of issues.
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In the UK, the biggest recent challenge has undoubtedly been the coming of the Financial Conduct Authority (FCA), which placed an emphasis on checking affordability. Gary Brown, head of automotive at Equifax, for example, describes the FCA as the number one priority for lenders thanks to the number of stringent reviews of process which have been conducted in order to adapt the various businesses into FCA compliant ones.
Affordability
As far as the credit agencies are concerned, one of the biggest results of this has been a boom in demand for affordability products. According to Andrew Ballard, principal consultant of Experian’s Automotive Business, there’s been "a lot" of debate and discussion around the topic. He says: "A lot of that discussion is around the desire for consistency, and trying to understand what the regulation requires individual lenders to do, and also what their peers and the wider competition is doing."
Although progress is happening, there’s a general recognition that affordability is providing a challenge to the industry. James Tate-Smith, market development manager at Call Credit, says: "This is relatively new for lenders, and it’s not something that they’ve been used to doing historically. So with tighter and increased regulation, it’s perhaps something they’ve had to pay more attention to or focus on."
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By GlobalDataTrying to get to the heart of the affordability question may be relatively new for the motor finance industry. However, this is not the case in all financial service industries, giving these credit agencies some background techniques they are able to utilize. Tate-Smith says: "There’s a real need to look at products that can go into this area [affordability], and we have a whole suite of products that can be utilised within this marketplace, as we’ve used them in other marketplaces successfully.
"If you look at motor finance, it’s ultimately another area of the provision of finance. We deal with a number of different vertical sectors and clients across those sectors. So we’ve got experience in terms of the affordability arena, and we feel we can bring this to help the industry both comply with regulation and also make sure they are lending responsibly."
This is a struggle Ballard has witnessed while working with the industry, and says he’s seen "more debate and discussion than actual implementation" as they figure out how to apply the rules consistently to various scenarios.
As businesses gets to grips with affordability, Ballard suggests companies work together to develop a baseline in the industry. "What would be ideal would be a best practise concept," he says. "There will always be people whose business models and appetite will allow them to do more or less. But the feeling I got from talking to clients is that you’ve really got to be clear on what you’re prepared to compete on and what you’re not prepared to compete on.
"Competing over customer experience and service, that feels a much more sustainable way to approach the market than trying to do a bit of nip and tuck and trying to strip things back which should be there as best practice."
Each of the agencies Motor Finance spoke to said they either had products relating to affordability, or were bringing out products. For example, Ian Renard, market development manager at Call Credit, speaks of a new product Call Credit is working on, which will be able to do an affordability calculation where there isn’t an income to do that. "Obviously with affordability it’s all about ‘here is all your commitments, can you afford this on your salary?’. So if you don’t have a salary it’s very difficult to do that," he says.
Despite the affordability work, none of the agencies would support the idea that the FCA has resulted in an uptake in business for them. Ballard at Experian, for example, says: "There’s not a direct correlation, but there’s a lot more considered dialogue in purchasing a particular piece of data. So if you think about the ability to take on some data to assess affordability, rather than doing that because they’re trying to assess the risks of bad debt and the risk of not being competitive in their peer group, there’s now another dimension, which is whatever we do, we need to do it consistently in a way that meets the aims and objectives of the FCA.
He adds: "There’s no evidence that the regulation has rolled into more money."
Similarly, Tate-Smith at Call Credit says: "We’ve seen it in the alternative lending sector, specifically with short-term lenders and how they’ve had to adhere to FCA regulation. We wouldn’t see that as a sales opportunity for us, just an opportunity for us to extend our expertise that we’ve gained in other areas over time."
His colleague, Martin Leonard, head of sales – lending, at Call Credit agrees, saying: "We try to look at the process of the lender or brokerage. We try and look at the process that the end-customer will go through, and the process that the dealerships or the car seller has to go through. That has changed a little bit with the FCA regulation coming in. So we tend to spend a lot of time with our clients in terms of talking through the process and looking at how we can adopt our products to fit in there.
Increased awareness
Affordability has been one of the core areas that credit companies have seen growth in, however they have also seen growth in areas such as pre-qualification checks, which allow customers to see if they are likely to be able to secure possible finance without damaging their credit score. According to Brown at Equifax, there are a few reasons for this. The first he says is: "I think there’s been a general industry change over the last few years to ensure they’re helping consumers manage their consumer credit profiles in an efficient manner, and then treating customers fairly in line with regulations." So again, it partly comes down to the change in regulation.
However, a second reason he suggests is increased consumer awareness of the importance of credit history over the past few years. Brown notes the country has just come through a major period of economic turbulence, often referred to as the ‘credit crunch’, and that lenders are now expanding their product offering. As the range of products available increases, the way consumers goes about financing their vehicles purchase, likely the second-largest purchase they’ll make after a house, becomes increasingly important. Brown says: "The industry has been performing really well. Lenders have diversified, and in line with that consumer appetite is there for these products, which they’re securing at very competitive rates," he says.
A third reason Brown suggests is general macroeconomic factors, as people have found themselves with less capital at a time of historically low interest rates.
Similarly Call Credit identifies broker screening as a trend it has seen emerge recently. Asia Anwar, business development manager at Call Credit, says this too is a result of the changes to the regulation, but that it’s also an attempt to increase efficiencies.
Anwar is essentially talking about a soft search, which enables brokers and finance companies with various different products on offer to screen a customer’s credit file, look at it, and decide from what they see where that individual would sit in terms of whether they’re able to offer them credit or what type of product they’re able to offer.
According to Anwar: "It speeds up the process and means more people are going to get accepted. There are certain rules around it, in terms of principles, and we have to ensure they are doing everything correctly from a compliance perspective. But if they’re running one search, they only have to pay for one search as well, so it saves them money."
Customer journey
Both the broker screening and the pre-screening are part of a general push to make the purchase journey as simple as possible, which is something all three companies agree is key. At Experian, Ballard describes something approaching the ideal customer’s journey: "In a number of dealer groups you can make online bookings for test drives and servicing. So if you imagine the journey might be that you see the offer on a website, and it looks appropriate and attractive. You can then, without detriment to your credit score, validate your likelihood of being accepted in to test drive a vehicle, scan that with your mobile phone or tablet, get that through a secure process, so when you turn up to a dealership, if the deal and car both feel right, you’re a good way into the process of generating a finance application."
In other words the idea is to create an experience where people entering a car dealership will already have a reasonable idea of what type of car and finance they will be able to apply for, and will not need to leave the premises before the finance agreement has been signed.
As Call Credit’s Anwar says: "From a customer experience point of view, dealerships are going to be reluctant to have someone walk out when they’ve come in to buy a car and potentially take on finance. The last thing they want is to turn around and say ‘you’re going to have to go and get a bank statement’.
"People, especially consumers, want a decision straight away; they don’t want to be waiting a day or two."
As an example of this, Call Credit points to its MOGObankconnect product, which allows customers to inform the finance company about their past three months of bank statements electronically, meaning the customer is required to bring one less piece of paperwork to the dealership.
Brown says the kind of products Equifax has seen become more popular in recent months tend to be orientated around ‘know your customer’ analytics; in other words the type of products which enable lenders to make sure they have the correct sales process at point of sale, and are capturing the correct information about the consumer as quickly as possible. These include things like the Equifax identity verifier, and its fraud detector.
As the range of products these companies offer expands, and the quantity of data they have available increases, Ballard notes they need to remain results driven. He says: "It’s fine to consider throwing the kitchen sink at something, but you’ve got to consider the cost of the data in the first place, the ability to manipulate it, and also consider if it’s going to be delivering an actionable outcome."
What these actionable outcomes are can be varied, depending on the situation, and can help companies to make sure they are only lending to who they should lend to, potentially reducing rates and bad debts and so on. But this is only one side of the coin. As Brown concludes, companies still need to make sure they remain customer-centric, remain in line with the new regulations and have stringent, efficient point of sale processes if they are to succeed.
