The car subscription market – which bundles a leasing/hire type agreement with additional services and flexibility – has not quite taken off in the UK, which may be explained by persistent unanswered questions over a) price/profitability, b) product definition and c) risk. This article is by Simon Harris, consulting director at finance consultancy Finativ, and originally appeared on the Finativ website.
The concept of car subscription has been a recurring topic in online and offline discussions by industry insiders.
However, despite the product being available for over four years, subscription models have yet to generate significant business volumes in the UK market.
Nevertheless, the topic continues to be a recurring subject of discussion with scepticism focused on three areas: price/profitability, product definition and risk.
Original equipment manufacturers (OEMs) have predictably struggled to overcome the conflict between first-year depreciation on new vehicles and an attractive customer proposition on, what is by nature, a relatively short contract term. Other important factors are also at play here, such as scale and logistics costs.
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Is it rental or lease? In terms of what a customer might expect from a ‘subscription’ in any other walk of life (Netflix, gym membership, publications, etc.), with transparent, predictable and equitable cancellation and termination conditions, one might think it should be a rental agreement.
However, UK consumer regulation is not helpful in apparently limiting a “regulated hire agreement” to 90 days.
The Personal Contract Hire (PCH) agreement used by most providers in the UK, brings with it the potential for punitive early termination calculations for someone who, in their mind, is quite reasonably looking to exit a subscription after, for example, 18 months of a 3-year term. Of course, these conditions are a matter of choice for the provider, but there is not much transparency and consistency for consumers, and the Consumer Credit Act (CCA) does little to help.
The third area is, at least in part, related to the point above and (use of a PCH contract notwithstanding) many established financial institutions are wary of getting involved in what they see more as a utilisation risk scenario, rather than the credit risk they know so well.
The fact that a subscription is sometimes referred to as a ‘long-term rental’ makes the connection even stronger. Certainly, the more favourable the termination conditions are to the customer, the greater the utilisation risk for the provider.
Helpful in taking some of the heat out of the debate are two gradually solidifying working assumptions.
The first is that instead of hyping-up subscription as the product of the future and hailing the death of Personal Contract Purchase (PCP), most people are happy to have a conversation about how subscription becomes an integral part of the finance product portfolio, though debate continues as to how big a part and when.
The second, which is perhaps not comfortable reading for an OEM focused on new car volumes, is that in the automotive space, subscription lends itself more readily to used cars, where the lower continued depreciation supports more attractive pricing for the customer.
So, if a more measured approach is taken, what opportunities does subscription present?
The first might come as a surprise, but with an emphasis on used cars, it can be profitable.
Yes, control of suppliers, logistics and servicing costs are critically important, but the revenue-generating potential of a used car can be profitably extended, without resorting to its automatic disposal at end-of-term.
Admittedly the waters have been muddied more recently by the volatility in used car values, but arguably that’s all the more reason to plan for a longer lifecycle and extended revenues.
Profitability aside, and with an eye on the future, such a strategy can also help a finance or leasing business to demonstrate its sustainability credentials, by sweating the asset for longer, something that will become more viable as battery electric vehicles (BEVs) grow as a share of the book.
If the first opportunity is a surprise, then successfully taking on the challenge can lead to the second – growth.
Remarketing a vehicle gives away to someone else its future profit-generating potential. Having a flexible, cost-effective subscription proposition will bring new customers to the provider’s brand, as well as provide a handy customer retention tool. Some might see that extended reach as straying into lower-prime territory, but the amounts involved are not so onerous to a typical consumer, and the process of identity verification, to protect against fraud, is probably more important than a detailed credit check.
The third opportunity is not unique to the subscription model but is a common feature of innovative products in general, and that is data.
With insurance, maintenance and other services featured as core to the subscription proposition, there is a chance to learn far more about customer and driver behaviour, as well as provide more frequent, legitimate reasons to contact them. And obtaining increased intelligence about the asset itself.
This data can feed future pricing models as well as create the possibility of more tailored pricing for the consumer, which, together with the ‘peace-of-mind’ element of an all-inclusive package, makes subscription an altogether more ‘sticky’ product for the provider.
A role to play
While car subscription is unlikely to be the product of the future, it is definitely a product with growing potential and a valid place in any motor finance portfolio.