In an increasingly competitive market, Jonathan Minter speaks to independent lenders about how to stand out in a growing market, the differences between independents and captives, and the future.
The independent motor finance market is a diverse space, with bank subsidiaries lending side by side with family-owned businesses, and a range of sizes, products, market segment targets, and general business philosophies all present and practised by a variety of companies.
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And with new, or returning, entrants entering the market seemingly on a monthly basis questions have been raised over how to differentiate your company from the competition. Shamus Hodgson, director of sales and operations at subprime lender Moneybarn, says making your company stand out starts with the basics: service to customers, brokers and dealers. He says: "Operating in the non-standard sector can sometimes be more challenging than the mainstream market for a number of reasons and providing the best service possible to all involved is of paramount importance. We recognised this when we introduced our automated underwriting model in 2010 and it is still just as true today."
Providing service over time builds relationships, and for Billing Finance’s director Oliver Mackaness and sales manager Gary Hill, these relationships become vital in setting you apart from the competition. Hill says: "The key is that the brokers we deal with we’ve dealt with for at least as long as I’ve been here, which is about seven years. So they’ve bought into what we do, and they’ve got a clear understanding of the sort of business we will write, what we look for, and how we’re underwriting."
As such he says: "Brokers very much know what a Billing deal is, and they will have a preference with the funders they use. So from our point of view it’s about making sure they know what they’re doing, knowing what we’re going to write, and giving the best service and turnaround we can."
With the ongoing authorisation process, there had been debate in the industry over a possible fallout of brokers choosing either to leave the industry or join forces to consolidate into larger or ‘super’ brokers. However those Motor Finance spoke to say they have not seen a lot of evidence of this, and even if this were to happen, it wouldn’t necessarily impact on these broker relationships.
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By GlobalDataJames Broadhead, managing director of Close Motor Finance, for example, says he doesn’t see a massive issue. He says: "Brokers are getting bigger but I think we’re going back to the way we were. If you look back 10 years there were quite a lot of brokers who were writing their business. The credit crunch came and a lot of them lost their lines and stopped trading. Now the market is opening up a bit for them."
According to John Simpson, managing director of Secure Trust Bank’s motor finance division, Moneyway, a creation of super brokers wouldn’t have a huge impact on funders. He says: "We’d still look to have a strong significant relationship with all the brokers operating in the market. But I’m not expecting to see a significant reduction in the number of brokers.
It’s similar for Hodgson at Moneybarn who says, while his first reaction would be that he wouldn’t want to see a consolidation of brokers "if it were to happen, I’m not sure it would affect things for us that much from a relationship perspective".
Like Billing Finance, Moneybarn works with select brokers ranging from large to small sizes, and he says the company would seek to maintain relationships with any consolidated brokers if it were to happen.
One potential side effect could be a greater integration at an operational level, says Hodgson: "Technology is becoming increasingly important in customer acquisition and underwriting. Using it to improve customer experiences and removing risk from that part of the operation would potentially become more tenable with fewer, larger brokers."
Beyond securing relationships with brokers there are a number of ways that an independent can look to make itself stand out. Broadhead, for example, talks about Close’s branch network as an unusual route to market for the company, and he talks about the benefits of having local people in place to deal with customers.
Because of this, Broadhead claims Close is able to understand its customers better, to the point where it doesn’t credit score. He says: "Even though we’ve got all these branches, and use a credit score for MI, we don’t use a credit score for underwriting."
As a result, all of Close’s underwriting is manual, which allows it to fund people it might not otherwise accept. Broadhead says that the way underwriting is handled at Close, the funder is able to take into account each customer’s individual circumstances rather than just using a pure credit scoring exercise. As such he claims Close is able to meet the needs of more customers while still adhering to the principle of responsible lending.
For Moneyway, the key to standing out is in the breadth of people it is willing to lend to, and Simpson says the funder is willing to lend across the majority of the credit curve, down to what he describes as ‘the very subprime’, where Moneyway is concerned about possible implications on responsible lending.
Simpson says: "When you look at consumers they’ll fit a specific point on the risk curve. So if you ask how we differentiate ourselves, one of the things we would say is we are looking to evolve our products into having a product that fits most points on the risk curve. Most independent lenders lend around a specific niche, but we’re looking to be broader in terms of what we’re doing."
Speed was also a repeated theme among funders, with each company keen to emphasise how quickly they are able to offer a decision to brokers and dealers. For example, Mackaness speaks about how Billing has recently introduced a new Experian tool, Authenticate, which has removed some of the paperwork from the process of applying for finance: "All we require is proof of income, which sets us apart from other companies. Brokers know that if we accept the deal and want to pay out, all we require is a wage slip and we’ll pay out," he says.
As the route to market for the vast majority of these funders is introducer-based – either via a broker or a dealer, the general consensus is that the brand of the lender is of relatively low importance in the initial stages.
Hodgson at Moneybarn, for example, says: "Most of our business comes to us via brokers and dealers, and therefore our brand is not the one that the customers initially engages with. Having said that, we know that once a customer has been proposed to us, our brand is important."
"We recognised this when we rebranded from Duncton in 2011 and purposefully created a brand that resonated with consumers. Customers need to feel comfortable and confident that they are dealing with a lender that understands their situation, is a responsible lender and is a reputable and solid company."
Similarly at Billing, Hill notes that brokers and dealers acquire the customers looking for business. However, once a consumer is being financed by Billing, Mackaness admits that the brand becomes important, as Billing looks to acquire repeat business and hold on to customers. "For our current customers it is important. We want people to think Billing is a family business which is sensible in decision-making and the way it handles complaints," he says.
Customer feedback
The importance of keeping customers happy once they’ve been attained is also emphasised by Simpson, who says that Moneyway measures both introducer and customer satisfaction via a specific tool, which is able to track all the feedback customers give when interacting with the company.
He adds: "At this point in time our distribution channels are via motor introducers rather than via consumers. So our brand awareness needs to be developed around the introducers, rather than direct to consumers."
The bulk of the new car market is dominated by captives for a number of reasons. The key difference, according to Simpson, is that: "The captives are looking to support sales of their product through specific product promotions like deposit allowances
and PCP agreements, which are geared towards supporting the registrations of the products."
Whereas a captive finance provider’s offerings can be designed to attract customers to the captive’s respective manufacturer, as opposed to just making a profit, this is not the case for independent lenders. As a result independent lenders do the bulk of their business in the used car market. For example, Broadhead says: "Our market is the independent used car market. That is where the bulk of our business is done. We do business in the franchised arena and with LCVs and motorcycles, but the used car market is where we are best known.
However, as a rapidly expanding market, the used car space currently offers independent lenders plenty of space to grow. In its August figures, the Finance & Leasing Association (FLA) revealed the number of used cars bought on finance through dealerships for the 12 months to the end of August was 1,016,415, up 18% on the annual period preceding it. The value of advances grew at an even faster rate, up 25% to £10.156bn. Both of these figures were higher than the comparative figures for new cars, which grew 14% and 20% respectively.
This is not to say that independents don’t have advantages over captives. Mackaness, for example, points out: "We’re not under any specific target, while I’d guess captives have specific numbers, so we can do any type of deal or any type of motorbike, and we can spread ourselves out. We’re not restricted by any particular chains or garages."
Moneybarn’s Hodgson adds that independence from a manufacturer allows it to focus on its core proposition without external distractions. "It also allows us to be relatively flexible around how the business is managed and make both strategic and tactical decisions without being encumbered by higher-level company objectives."
Hill agrees that added flexibility is a key difference between captives and independence: "We can react to things and make our own decisions. If we want to change something it is basically a discussion between myself and Oliver, so a decision can be made pretty quickly." As a result of this, Hill notes that there’s less bureaucracy and red tape.
Simpson echoes Hodgson and Hill in talking about the added flexibility of not being tied to a brand. "There’s no restriction to the introducer market that we can operate in, and as we have no vehicle manufacturer to support, we have greater flexibility. It also gives us a wider market penetration – we have the flexibility to operate anywhere on the credit scale, whereas captives are not in a position to do that."
As such, both captives and independents are reasonably able to coexist and grow in harmony, in their respective markets, and have been doing so successfully in recent years, as the car market expands rapidly, and credit has remained cheap.
However problems may be caused if or when rates begin to increase or car sales become static, according to Broadhead. He says: "Everybody has had very good margins recently. But actually, as rates rise, and more competition comes into the market, there will be pressure on margins again, which is something we’ve not had for a while."
Because of this, he says, as long as both the new and used markets keep growing, things will remain okay. However he warns: "If new entrants are coming in and there isn’t the growth in the numbers, then that will start causing established companies problems."
As ever, the Financial Conduct Authority is a factor that should be born in mind as the industry develops. However, in general the consensus is that the main bulk of the FCA’s impact will be industry-wide.
Hodgson, for example, says that the main effects of the FCA regulations are going to be felt across the entire motor finance market, as opposed to being specifically reserved for the independent market, because, as he says: "We’re already seeing the FCA’s effect on areas such as affordability, broker commission and forbearance, but I think these are equally impactful to all areas of the motor finance market."
Any differences tend to lie where the scales of operation differ between independents and captives. At Billing, for example Mackaness points out: "Because a Billing Finance deal is typically a £4,000 to £6,000 deal, our range of products is very small. So it’s easier for us to cope with regulation because we don’t have seven or eight different products to deal with compared to lending, for example, between £2,000 and £30,000.
Compliance officer
While on the one hand compliance costs for Billing may be lighter, the company has also had to employ a compliance officer for the first time. Mackaness adds: "We’re doing internal audits now; we have a load of different policies. It makes sense as we get bigger."
Broadhead describes the possible consequences as "interesting".
Close specifically does most of its deals through its sales force and motor dealers, as opposed to through brokerages, which is more the norm, and he worries that FCA requirements could cause smaller dealers simply to stop offering finance rather than take on the required paperwork.
Close is not unique when he says the company has worked extremely hard working with dealers in order to convince them that getting fully FCA authorised and compliant will require work, but would be ultimately worth it for the dealers. These efforts are starting to pay off, and he says: "The last two or three months has seen a sea change of companies trying to get them to understand it. And it is getting somewhere, and will do. But we know it takes time."
As a result, Broadhead says: "Deep down there will be a small percentage that won’t [become authorised]. Is that good for the customer? I’m not convinced it is." To access the customers of these dealers specifically, Close will have to alter its approach route to market.
These cases show that, while the FCA may not have a unique impact on the independent space, due to the varied nature of the marketplace, there are scenarios where the regulation could make a greater or a lesser difference – such as in needing to hire additional staff or working with smaller brokers and dealers to help them with compliance.
Overall those Motor Finance spoke to are generally optimistic about the future. Though there is an acknowledgement that, at some point the rate of used car sales will have to level off, and that interest rates are unlikely to stay at their current, historic, low levels, companies are all looking to expand.
Moneybarn, for example, was bought by Provident Financial Group in August, which at the time said it felt the non-standard car finance space had significant room to grow. Meanwhile Billing, fresh from securing a three-year revolving finance deal with RBS is planning on increasing its lending from £1.3m to 1.4m a month to £2m a month within three years. So while there are still certain caveats to consider, the industry seems generally optimistic about the future.
