management?
Historians have a way of encapsulating movements in simple phrases
such as the Age of Enlightenment, the Renaissance and the
Restoration. More recently we have had the Age of the Tickbox,
today the Age of Incompetence from which we may just be emerging
into the Age of Risk Management – a spin-off perhaps from the
credit crunch which, hopefully, will be too short to be an historic
era.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
Risk from a motor finance viewpoint might be defined as ‘the
chances of not getting your money back – or not getting the vehicle
back’. Risk management is but one step further, so how about: Risk
management is the field of motor finance that embraces the
organisation taking fullest account of all issues to evaluate,
minimise and monitor any adverse issues regarding the granting and
management of credit for vehicle acquisition. Logical, but
hardly rocket science.
Looking ahead
Surveys and reports from mortgage lenders suggest the housing
market is likely to decline short term. Perhaps more important are
the potentially two million low, fixed rate mortgages due for
renewal over the next year at significantly higher rates.
Despite these downturns, many buyers may seek to continue their
spending habits in other ways – new kitchens, holidays, replacement
cars – for which they may seek to borrow the funds despite their
growth in mortgage commitments.
If we accept the gurus’ consensus that credit is going to get
tighter but at the same time central banks are driving interest
rates down, in classical economic terms a cheaper product could
lead to a bigger demand – but that is before we start to consider
risk. Could we be coming to a time when vehicle finance is limited
by creditworthiness rather than price of the base product – the
vehicle – and funding?
The challenge now for the vehicle finance industry is to protect
profits on what might be a flat vehicle sales scenario. Profit
protection, or even enhancement, might come in part through
reducing the incidence of bad risks while at the same time
accepting that more potentially bad risks may be presented for
financing.
If the credit crunch is going to hit both the business and consumer
market it is quite likely to spread across the whole industry. That
may well mean potential car buyers will shop around for credit,
balancing their aspirations between a portfolio of sources, maybe
making multiple applications between different capital goods –
cars, kitchens or services like holidays. Each industry sector may
offer credit facilities so we may have a new phenomenon of
prospects seeking credit for a number of different goods and
services and filling in applications for credit for more than one
item, creating a falsely inflated market.
Whether the would-be buyers would take all their successful offers
would be a different matter – the availability of credit may be the
critical issue.
Thus, the dealer may, in a roundabout sort of way, have a more
competitive selling situation than historically in that potential
customers are looking for a vehicle-plus-finance package, with the
finance being at least of equal importance to the vehicle.
Pushing the envelope
To protect sales volumes there is a risk the dealer may push
creditworthiness just a little too far and perhaps seek approval
for an over-egged prospect or one seeking multiple credit
opportunities. But that is fraught with strategic risk – and
reputation.
By definition the market must become more professional in judging
shades of grey in terms of clients’ profiles and financial
suitability.
To the dealer, that will mean enhanced credit training, a
maximisation of sources of finance – not just OEM captive finance
but also enhancing links with banks and developing further point of
sale sources. It may also mean saying ‘no’ to some cases.
From the dealer’s viewpoint, any decline in the ability to finance
vehicle acquisitions will need to be replaced by the ability to
maximise the margin on every accepted deal and to ensure the best
possible quality is present in the deals offered for
financing.
To return to our historic simile, the Age of the Tickbox is past;
no longer will ticking the right boxes lead to success. We now have
to be much more astute to get through the Age of Incompetence to
avoid mistakes based on past practices and move into the Age of
Risk Management when every request is judged and carefully
considered prior to a decision.
Professor Peter N Cooke, KPMG Professor of Automotive
Industries Management, Buckingham University
