The German motor finance industry is changing: The rise of new lenders, changing mobility preferences and financial regulation are all set to influence the industry in the coming year. Banken der Automobilwirshaft’s (BDA) Peter Renkel, speaks to Saad Ahmed about the coming challenges

“I think we are still optimistic in terms of the volumes which are going to be sold. We had a very strong January already, which was 12.5% above last year’s January volumes; last year was already a record year,” Peter Renkel, managing director of the BDA, Germany’s motor finance industry body, tells Motor Finance.

Servicing one of the largest car markets in Europe, the German motor finance industry has had to undergo significant changes recently. The arrival of new lenders on the scene, the changing nature of ownership, and mutating mobility preferences are all adding complexity.

Record volumes in 2016 and in January this year may show that the industry is, so far, managing to adapt. Though, as Renkel explains, further developments may come in 2017 that could leave a profound effect on the shape of motor finance in Germany and beyond.

Motor Finance spoke to Renkel to assess the structure of the German motor finance market, emerging trends, and whether there could be bumps ahead.

Structure and size

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An in most motor finance markets, in Germany the industry is divided between captives and independents, and Renkel says there is a clear distinction between the two.

“New car business is dominated by the captive banks. I would say around two-thirds of the volume is financed by the captive banks, and one-third by non-captive banks.”

The used car market, however, is more equal in its division between captive and independent lenders. Describing the market as “still quite attractive”, Renkel says new players have been enticed to offer motor finance in Germany. ING, Commerzfinance, and Tagel Bank are among the providers that have joined the German motor finance market in the last few years, focusing mainly on the used car market.

However, because Germany does not have a system whereby each bank registers customer financing in a central register, it is difficult to assess the full size of the industry.

Renkel explains that the BDA uses its own figures, which it derives from data from its members and from market research data, to show the full size of the overall market and to calculate market shares. “It is as near as you can get to the truth,” he says.

Motor finance penetration in Germany is comparable to that of the UK, with approximately 80-85% of cars purchased through finance, according to data from the BDA. This is an increase from 2016, when the Automotive finance 2016 report published by the then-AKA stated that 46% of cars were purchased with motor finance from its members, and 29% elsewhere, for a total penetration of 75%, while cash buyers made up 25%.

As PCP continues to make inroads in the UK, a similar package in Germany is gaining ground among private customers. ‘Three-way option financing’ refers to the options available once a contract term ends.

“You continue to stay in the car, you return the car, or you refinance the balance,” Renkel explains. “Because there is an estimated future value of the vehicle, the customer can choose, after a contract term of 24 or 36 months, what to do.”

Car leasing is more popular among corporate customers in Germany. While there is little to no difference in cost between leasing and PCP, Renkel explains that advantageous tax arrangements make it more appealing than PCP.

“You don’t need to put the data on your balance sheet as a company if you lease the vehicle,” Renkel says. “It’s not an item on your balance sheet, and that helps with taxes.”

As the tax benefits are only realised by corporations, individuals tend not choose leasing over PCP. “Leasing and three-way option financing are pretty much the same as far as the monthly instalments are concerned,” he says. “The difference comes from tax deductibility, and that only applies to business customers.”

Online offering

“It’s pretty apparent that customers tend to get a lot of information out of the internet, but they also want to do and complete transactions on the internet, like a car purchase or pre-approved credit,” Renkel says. “Then when they come to the dealership they are well informed, they have a pre-approved credit certificate in their hand, and they have a better negotiation position.”

The digital offering for motor in Germany is growing slowly but surely. “I would say it’s still early days,” Renkel tells Motor Finance, adding that online motor finance is more developed in the used car arena.

According to Renkel, the purchasing preferences of German and UK car buyers are very different. “From my experience in the UK, people tend to buy cars from stock – more than in Germany,” Renkel says.

German consumer preference for specification adds significant time between ordering and delivery. “Germans tend to specify the vehicles to their own customisation. The order is paced with the factory, and it takes two months until the vehicle is built,” Renkel says. “It takes quite a while until the time the vehicle hits the ground.”

Even when the vehicle is delivered, it is sent to a dealership, and the consumer must complete the purchase in person, based on the starter information they provided online.As used cars are already in existence, this issue does not arise, and transactions can be completed within 24 hours, including the finance or lease options.

“Used vehicles are sold through internet portals, and most of the time a financing or leasing offer is attached. The customer can then choose the vehicle and the respective financing or leasing [offer], and go,” Renkel explains.
He suggests a way to speed up the process, one that has been piloted by Mercedes in Germany: “Order and finance pre-built units. Mercedes is offering this here in Germany,” he says.

“It has a website with a selection of pre-built Mercedes-Benz vehicles, with a finance and leasing offer attached.”

By removing the option to extensively customise vehicles, the time gap can be significantly reduced, making it more comparable to the process for used vehicles.

For the purposes of expediency, Renkel suggests that German car buyers may have to lower their demands. “If you want to make it quicker, then a customer has to accept certain compromises. So he might not get 100% of his desired vehicle,” he explains.

“We have to work with pre-approved credit, and once the vehicle is delivered we just pay [that] out.” However, according to Renkel, this is in its early stages and “is not settled yet”.

Challenges, changes, opportunities

“The biggest challenge is banking regulation,” Renkel says. “A lot of energy and resources are concentrated [on] regulation that is coming out of Brussels, but also local legislation.”

Renkel adds that securitisation legislation coming from Brussels could pose a significant challenge the to way the motor finance industry operates and funds itself.

The European Commission first launched a consultation on legislative proposals for financial services in late 2015. As part of the proposals, the EC sought “transparent, simple and standardised securitisation”, attaching a variety of requirements such as requiring loan originators to maintain exposure by retaining a minimum stake of 5% or 10% in the underlying asset. The proposals were discussed at the European Parliament by the Committee on Economic and Monetary in December 2016.

“If all these plans materialise, it would make it more difficult in terms of funding our business – more expensive,” Renkel notes. “It would have a negative impact on our profitability if we are not able to pass on the additional costs to the end consumer.”

Renkel explains that the BDA is monitoring the situation as it develops, and although it has engaged in lobbying, there is little it can do.

“There’s a big weight coming towards us. It’s one of the main challenges that we have to face, and we still don’t see an end to it,” he says. “It’s ongoing.”

Shifting customer behaviour also presents a challenge for the German motor finance industry. The German car industry must meet changing expectations, and, in response, extra services are beginning to be included.

Renkel says that, on average, each motor finance package comes with two additional services, such as insurance or maintenance. However, he adds that consumers now look for more than these “traditional mobility items”; what Renkel describes as “worry-free motoring” is beginning to make significant headway in the German motor finance space.

This is in keeping with a general trend in the car industry, where shifts towards usership models are becoming deeper. Rather than simply having a car for a set period, users also want add-ons – additional services that complement, and simplify, the experience. Renkel believes these trends will only deepen and widen in scope through 2017 and subsequent years.

“I also think that the mobility services, the digital mobility service items, will gain more popularity. There will be new items which become more relevant,” he says.

Parking and fuel are both areas which could be bundled into a motor finance deal as part of a package. Renkel specifies that the services may be amalgamated into a monthly instalment with a finance deal, consolidating them. In this way, such services would form part of the full cost of car use, without the need for surprise bills.

“This is then summed up in a monthly instalment, together with the finance instalment. This one monthly payment plan, including everything, has gained more and more popularity over the last [few] years,” Renkel explains.

“Everything is included; you don’t have to worry about extra payments.”