As new lenders enter the market, Jonathan Minter finds out what brokers are looking for when developing new lender relationships, and how the FCA is shaping the market
2015 was a record year for the motor industry in a number of respects. New car registrations grew year-on-year for a record number of consecutive months, resulting in a record number of new car sales. From this growing base, finance penetration broke through 80%, another record high. The used car market also saw growth for the year, with used car finance posting growth month after month, according to the Finance & Leasing Association.
Go deeper with GlobalData
One of the notable aspects of this growth has been the emergence of a number of new lenders, and the re-emergence of some who stepped away from the market during the economic crisis. For brokers, this has meant a chance to review their lender panels, and look at possibly replacing some of their existing lender partners, or filling in potential gaps in the panel.
However, those entering the market expecting brokers to accommodate them into ever-expanding lender panels would be in for a surprise. According to Mark Gow, director at DSG Finance, despite the increased market size, the challenge of distribution hasn’t changed.
Commenting on the new lenders who’ve approached DSG, Gow says the broker has spoken to several lenders, and has done business with some, and chosen not to do business with others.
The key question any new lender looking to go to market via a broker has to ask itself is to look at the dealer community and ask: ‘How can I do this better or enhance the product in some way so the dealer and their consumer is better off in some way’.
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 GlobalData"If the new entrant can’t do that, they’re going to have a problem," says Gow.
Louise Haines, head of partnerships at Creditplus, says Creditplus has also extended its lending panel. Similarly to Gow, though, Haines says it’s important a lender presents a proposition that helps it stand out from lenders which already have existing relationships with the broker.
"For me, I’d need to see a space in our panel to take that lender on," Haines says. "There’s no point us having 50 lenders all with the same underwriting criteria, as that would be wasting everyone’s time. So we’re always looking for lenders that are unique, and have good APRs."
Haines says that, as an example, a new prime lender with really strict underwriting criteria would probably not do enough business with the broker in order for it to be on the panel, as most of that business could be placed with one of Creditplus’s existing lenders.
According to Gow, the main tactic most lenders have used in order to try and secure a place on as many broker lending panels as possible has been to compete on price. In terms of true product innovation coming out of new players, he says he’s actually seen very little. Instead: "It unfortunately all comes down to that commercial, transactional piece about commission or rates."
In some cases, Gow says, this doesn’t work due to the nature of the relationship between a lender and a broker. While the situation will differ from broker to broker, in many cases, brokers won’t add a lender for the sake of it. He says they need to be able to offer something fundamentally different or offer a better product then what is currently on the broker’s panel.
While new lenders has been one theme brokers have had to react to over the past 12 to 24 months, another has been lenders increasingly lending deeper into the risk curve, as they seek to lend more money.
Explaining the economics of this, Haines says it’s due to increased liquidity in the market. She says: "What you typically see is the loan books performing better. And because lender loan books are performing well, it means lenders can accrue more business by writing more business.
"So, for example, Barclays’ loan book might be performing well, with people making their monthly payments. So they might then say ‘we’ll reduce our risk score to this amount, to accrue more business’." She adds that this has mostly happened in the prime space.
Haines doesn’t see undue risk in this, and says that if loan books are performing well, there’s no reason why they can’t expand their risk and underwriting criteria in order to accrue more business.
However Simon Greiner, managing director of Red Potato, which brokers finance for its sister company Premium Plan, says there are potential risks for lenders doing this.
He says: "I’ve seen a number of cycles along these lines – when the money becomes more easily available, it’s easier to lend and people come under pressure to lend because they’ve taken on big targets. Sadly, two or three years later, the chickens come home to roost, and those lenders start to struggle."
Greiner says Premium Plan hasn’t started lending further down the risk curve, and he’s found that in cases where customers have had to go to other brokers, due to Premium Plan not offering them finance, these customers are getting finance at an ever-increasing risk to the lender.
While the lenders are potentially leaving themselves exposed in these cases, Greiner says that in instances where broker commissions are backdatable, the broker also stands to suffer if the high-risk, high-growth strategy should falter.
He says: "There’s a risk that, as lenders take more risk, the brokers don’t provision for commissions to be returned. I’ve spoken to brokers who are making this provision in view of how risky some of the loans are, and I know some brokers who aren’t."
While this is a potential future risk for the industry, in many respects brokers that have survived the initial push towards heavier regulation are faced with a number of opportunities. Aside from the aforementioned statistics in terms of car sales and finance growth, a number of smaller brokers left the market rather than attempt to reform their business to make them FCA-compliant and go through the application process.
According to Haines, a number did leave, which she sees as a good thing because: "It took out the smaller one-man band businesses that weren’t playing ball, or were operating in a way that wasn’t ethical."
This will have presented an opportunity to the surviving brokers, who have looked to fill the void left behind.
As a result of the FCA, dealers have also begun to streamline their funder relationship, Gow says, and this is an area brokers should be looking to take advantage of.
"Historically a lot of dealer groups had a strategy of having a relationship with four, five or six finance companies. They’d have the manufacturer which they’d deal with, and then relationships with independent finance providers, maybe some prime and some subprime, and maybe also some brokers.
"But we’ve seen with the regulation that we’re now accountable for what we do with customer data and proposals. Everyone is now sensitive to keeping searches down to a minimum. As a result it’s in the interest of the dealer to minimise the number of funder relationships they have."
At the same time as regulation is incentivising dealers to cut down on the number of lender relationships, finance is becoming increasingly important.
As a result, Gow says dealers are left with the option of either managing a number of different funder relationships or focusing on a relationship with fewer funders, and using a broker. As such, Gow says, the appeal of the broker has been enhanced for many dealers.
With fewer brokers, and more dealers looking to streamline their funding options, standing out is as important today as it has ever been, in the face of increasingly voracious broker competition.
Compliance again presents a way for brokers to stand out in this respect. Gow, for example, says: "Compliance has to be right at the forefront of a broker proposition. When a dealer says to a broker: ‘what initiatives have you got in place?’ the brokers shouldn’t have to think about it. So for us, when we present to dealers, compliance is point one."
Creditplus has seen a similar opportunity in combining technology with helping dealers cope with the FCA. Haines says: "Some dealers left the market when FCA permissions came in. A lot of independent dealers didn’t go over to full permissions, for a number of reasons. This allowed our sister company Dealerplus to reach out to them, and take that responsibility for them through the Dealerplus platform. This gives them access to our lending products."
Technology
Beyond regulation, however, technology has become an increasingly important part of the broker world. For Zuto, making sure its technology remains top of the line is a vital part of its business.
As such, in 2015 the company brought in Josh Goodspeed as chief technology officer from Amazon. According to James Wilkinson, chief executive officer at Zuto, Goodspeed now governs the technical development of Zuto’s end-to-end user experience.
During 2015, Wilkinson says the company did a huge amount behind the scenes to update and improve systems, and as a result is twice as efficient in reporting, underwriting and utilising data.
Wilkinson is clear about Zuto’s aim. He says: "A recent survey by Accenture revealed that 75% of consumers would consider making their entire car purchase online – including financing, price negotiation, paperwork and delivery – which represent a massive opportunity."
The challenge for brokers, he continues, is: "How they harness this opportunity when faced with an increasingly sophisticated customer."
With Zuto looking to tempt customers away from going direct to the dealer, and dealers looking to streamline their finance offering through the use of larger brokers, this could present a challenge to small, single lender brokers, many of whom have had to put a disproportionate amount of their resources into applying for full FCA authorisation.
However Greiner says there are still opportunities out there for such brokers. He notes that while larger dealer groups will want to use a ‘super broker’ with access to a wide variety of lenders and slick computer operations as a result of regulation, niche markets will remain.
Looking at smaller one or two-site dealerships, Greiner says this still presents a viable market for smaller brokers. He says: "My experience is with small, family-run businesses with one or two sites, they don’t write enough business for the larger brokers to service the relationship.
"We think there’s still a market there for a mid to subprime market. There are a lot of dealers there without full-time business managers. They normally have one or two salespeople who don’t have the time or the inclination to process subprime applications. They want to plug somebody’s name into a computer and get the car out of the door."
As such, despite more limited resources than larger brokers, even smaller brokers are increasingly investing in technology.
Red Potato is currently investing in automating as much of its systems as possible, although it is choosing to keep the income and expenditure affordability calculator manual as a differentiator between itself and some of the competition.
Future direction
Automation is the direction a number of brokers are going to go in, and Haines also says full automation is an area a lot of brokers will be looking at. She says: "People apply online because they don’t always want that human element. They just want to do everything online for peace of mind, and for it to be as convenient as possible." Currently Creditplus is in the "brainstorming" stage of looking at how to fully automate the customer journey, Haines adds.
With dealers looking for lending solutions which are easy to use and provide rapid responses, it seems likely that technologies which enable customers to conduct as much of their business as possible online or remotely will continue to grow. Both Gow and Haines highlight this, and they expect to see more lenders offering e-signatures.
At the same time, brokers working with dealers will have to keep one eye firmly fixed on regulation in the future.
On this topic, Gow says: "If you go back two or three years, conversations with dealers were about package, rates, commissions – that is what they were interested in. Now it’s very much compliance.
"How you can help a dealer operate compliantly is absolutely critical."
