Chris Jones of Blue Motor Finance explains the rationale behind entering the subprime market, and the mitigation of the risks involved through partnership with specialist lenders
One of the best ways to build market share in a competitive environment is to broaden your range of products: The aim is to reach a point where customers can get virtually everything they need from your business, rather than going to a number of providers.
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While competing on price definitely builds market share, it comes with its own price tag – driving down margins and building risks at the back end of the business. Equally, while building direct sales capability to reach more clients is effective, it brings considerable overheads.
Compared with these options, product diversification offers a better proposition for customers, while incurring little risk to the provider, although that’s not to say no risk – more of that in a moment.
In motor finance, where lenders’ direct customers are dealers and brokers, diversification means increasing the range of assets you will finance, building the range of finance products used to finance them, or extending risk appetite to offer introducers solutions for more diverse customer groups.
This aspiration towards the much-fabled one-stop shop is not just good for lenders. With dealers facing an increased regulatory burden, it makes more sense than ever for them to consolidate lender relationships down to those partners with the broadest appetites.
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By GlobalDataHere at Blue, diversification is a big part of our game plan. We are still very much committed to investing in direct sales growth: Having started lending in 2014, we have now lent over £250m in finance through more than 3,000 introducers, while the last year has seen us make a number of high-end sales appointments to widen and deepen our national coverage
But underpinning this is a commitment to increasing the range of products we offer to dealers. Shortly we will be announcing the launch of a new finance product which we feel fills a largely unserviced part of the market: Extended Contract Purchase (ECP) will be a PCP/HP hybrid, offering customers the same lower payment profile of a PCP product, but without the constraints and complexities.
In addition, we have invested heavily in credit-decisioning technology to build a tier-based scoring and pricing system which we are confident gives us the broadest risk appetite in point of sale. Now, after trialling last year, we are extending our product from prime and near-prime into subprime business.
In the subprime area a finance house needs entirely different infrastructure to deliver a sustainable offering, and can overextend itself trying to offer a much more complex product with demanding front-end requirements.
Facing these concerns, we decided the best method was to approach a specialist. And that’s exactly what we did, forming partnerships with several subprime lenders including The Funding Corporation (TFC).
TFC has been lending for over 15 years across multiple markets, and in January 2015 relaunched into the UK subprime market. For us, TFC represented a lender geared perfectly to take on the business we wanted to offer, and for TFC, we offered a wide and growing dealer network, with a robust service proposition at our front end.
We have married this subprime expertise with our systems, and hope we have achieved the best of both worlds, giving dealers a single home – and a single service level – for both prime and subprime business.
