The market has to grow strongly for all the finance companies, new and old, to realise their aspirations. Without market growth, the sector could all too quickly return to its pre-credit crunch position of unsustainable margins, player consolidation and market exits.
The headlines of market growth in the sector over the past year should allay fears. However, the reality is that much of the growth is associated with new car finance. With new car finance penetration in the 70% range, there’s little space for further expansion in the new car market with the market already performing at record levels. In any case captive players dominate the
segment.
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Look at the used car finance market and there’s certainly been some volume growth, but it hasn’t matched the new car sector. After a period of what seemed like terminal decline, this was important for dealers and motor finance.
The outlook
Through the economic downturn as the unsecured loan market retrenched, dealer finance prospered. New car finance was used to stimulate car sales and used car finance margins were able to return to viable and indeed attractive levels.
Today, unsecured lenders have become more ambitious once again. On 1 December the Bank of England announced that UK consumer credit had hit an eight-year high, UK consumers increased their borrowing at the fastest rate since the financial crisis. Lending to consumers rose by a faster-than-expected 6.4%, its most rapid annual pace since July 2006.
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By GlobalDataIncreased competition from unsecured lending and motor finance companies seeking growth may mean that margins may have peaked.
Just as the market gets super ambitious, the Financial Conduct Authority has stepped in and could be the game-changer the industry needs.
To fulfil the ambitions of a growing motor finance supply chain, the market needs to grow. Central to this, in our view, is the industry’s capacity to take a greater share of the used car financing market.
For all of the commentary about unsecured lenders reining in their lending activity over recent years, they have remained a major force. Dealer finance needs to deliver a more compelling proposition to consumers, or perhaps more accurately, deliver the compelling proposition more effectively.
FCA compliance could be this opportunity
FCA regulation and its call for promotional activity to be clear, fair and not misleading, along with greater transparency, means the dealer market must develop a new approach to finance.
The focus from dealers needs to be based upon increasing finance penetration, earning ‘a little from a lot’.
Unquestionably, the dealer finance offer should be online and supported by information to fulfill the data-hungry online consumer audience. For too long, dealer finance has hidden its light under a bushel, its time to change that.
Secured dealer finance is fast and convenient, online or in the showroom. Overall, it offers higher acceptance levels than unsecured loans; personal contract purchases can help enhance affordability and interest rates can be very competitive (and this is an area where increased transparency can help). What’s not to like? Certainly, the consumer media often cites the risk of repossession, but repo figures are very low and secured finance offers significantly wider levels of consumer protection. I say again, what’s not to like?
For us, FCA regulation is the perfect platform for positive long-term change. Dealers need to get finance online in a fresh open way, informing and engaging prospective customers. Supporting tools already exist to help customers to shape their ideal finance package in a high-integrity fashion.
If all of the dealer finance providers want to grow, they have to inspire their dealers to help make it happen.
It’s about making the dealer (online and/or in the showroom) the natural place for motor finance, notably for those people who to date have chosen to use other financing options.
The alternative with more market players seeking rapid growth in a slowly growing market is margin erosion. n
