How traditional motor finance needs to change in order to remain attractive to an evolving customer base in a market where technology is changing the playing field was a key theme to come from the Motor Finance Europe 2016 Conference.
The closing session of the day, chaired by Ulrich Bergman, partner at KPMG AG WPG, involved several industry leaders discussing the need for a customer centric approach to the changes, and some of the potential hazards which will need to be navigated.
The panel speakers were:
– Dr. Peter Renkel, managing director, AKA
– Richard Jones, managing director, Black Horse Finance
– Mike Dennett, chief executive officer, Segment Financial Services UK, BMW Group
– Peter Minter, managing director, Moneybarn
– Karl Werner, head of sales & marketing, Motonovo Finance
Ulrich Bergman: What are the key challenges to captive finance companies from your perspective?
Dr Peter Renkel: We have an IT challenge because we are working with legacy systems and we have to marry new technology with old technology. In some instances our technology is 10-20 years old, so that is definitely a challenge from a technical point of view.
Then you have the challenge from the regulatory front. Our hands are full with assignments and projects, and those are legal requirements that we have to do. Digitalization is something you have to do as well, but you can make a management decision – it’s your own decision, not an external one, and you’re not forced to do it.
In our traditional business model we work very closely with the dealers in the physical trade. In the old model, the customer comes to the dealership, talks about a vehicle, about a financing offer, and only when the dealer submits a credit application to the bank, does the bank get notice of the customer for the first time.
That is changing in the digital world, where the customer wants a credit offer before they visit a dealership. This means we have to be getting in contact with the customer beforehand. As a result, we have to be thinking about becoming a retailer. We are pretty much experts in the wholesale business, but not so much in the retail business because we don’t have direct customer contact before the deal is closed. And that is a completely different mindset which we have to adjust to.
Should the dealers now be afraid of you as a captive finance company attracting clients or customers? Mike [Dennett], what is your view?
Mike Dennett: I don’t think so, at the end of the day the customer will choose. But within motor finance at the moment we don’t offer a lot of choice in terms of that channel to business. And I think those choices will rapidly change
Should the dealer be concerned? No I don’t think so. They’re pretty adaptive and they will change. What we’re offering now through our online retail platform is actually augmenting the dealer process, not replacing it. The customer ultimately will choose to go through the retailer to see the car, to feel the car. Buying a car is still emotional for many people, but not for everybody, so I think you need to offer choice.
When discussing residual value movements what do you think: crashing through the roof? Getting lower? Have we seen the perfect world already, and will it probably decrease?
Richard Jones: I’m a pessimist for a number of reasons. One is credit: credit conditions will likely go one way in the next five years. The other is the amount of private equity (PE) backed companies that are coming in to motor finance, because they see what you’ve got. There is a lot of PE backed money coming to disrupt the market, and digital is enabling it, which will put pressure on margins. Even if point of sale finance remains dominant, margins will be put under pressure. I think that’s also a reason to be pessimistic.
Despite all of that, this is still a highly attractive market for any captive or independent to be in. The returns will probably normalize, and they probably should because if a market makes super normal returns for a very long period of time, the risk is that it’s making that at the expense of the consumer. That’s not a healthy market.
So I’d be fine if we saw a market where growth stabilized, where returns normalized a bit, and where there was more competition, particularly between captives and non-captives. I say that as both a captive and an independent company because I think this creates healthy competition in the market, and ultimately the consumers win. If we don’t create that market, the consumers will create it for us, supported with lots of money coming in, and disruptive kinds of technologies.
Peter [Minter], what’s your take?
Peter Minter: I tend to agree with that, I think we have a choice. We also actually have quite an uphill struggle as existing motor finance companies because of the regulatory world that we are facing. It is going to be quite difficult over the course of the next couple of years to make any headway outside of what we have to do for the purposes of complying with regulation.
At the same time, the regulator is putting in place initiatives to try and help new entrants into the market. The FCA has got their regulatory sandbox, they’ve got their innovation hub, and they’ve got all sorts of ways for new companies to start up, test out whether it will work from a compliance point of view, with all sorts of help. And I think that is going to make it quite difficult for us as a group, going forward.
There will be people snapping around at us, and we will want to change. There’s no doubt about that, we will want to move forward in all sorts of ways. But I just think it’s going to be quite difficult. So the course of the next year or so, could be slightly uncomfortable for some of us.
Renkel: I think in Germany we can see that the market is still very attractive. We have quite a number of new entrants in the market like Targobank, or Bank11, or on the manufacturers side, Telsa Leasing, which was just established last year. So there is a lot of movement in the market. And even with the regulation and the requirements coming from Brussels, companies find it very attractive to enter the market, and take business away from the non-captives.
Mike [Dennett], you’ve worked in six countries. What are your thoughts on this?
Dennett: Every market is different, and for different reasons. And a lot of it comes down to people and culture. People behave differently, and culture is something that drives that behaviour.
The other thing that’s different is the product line-up. So the product line-up in the UK is different to Belgium, it’s different to Germany, and so on. Why is that? It’s predominantly driven through fiscal behaviours and changes. And you can see that driving the behaviour and the product line-up as well.
At the end of the day, what’s really important is to look to the customer and see what they want, what interests them, and then we need to adapt. And I think that’s where we stand in the UK at the moment, not driven by fiscal change, but by behavioural change.
In terms of change, Karl [Werner], why do you think that the captives have been so slow with digitalization in the past?
Karl Werner: I think that would be unfair to say. I think we’ve all been slow. I think the captives have done some awesome stuff in the digital space. If you just take the technology challenge of putting together a car builder, create your own vehicle, spec it, etc. I think that as an experience is amazing.
The block in progress is not about the investment to make some changes. I don’t think there is any lack of investment or will to write checks in the industry. I don’t think there is any disagreement that the strategy is wrong.
I think it’s a little bit around, how we can do this in a way that everyone signs off on. It’s those four signatures that you need to make that change really work: the customer, the dealer, the manufacturer, and the lender.
We’re also a little guilty of saying, we know we need to be at number 10, we were at 1, now we’re at 3. The customer still sees you as 7 short. I know its progress, and the will and the technology is there to fulfill customer requirement right now. But doing it where everyone is happy with the way you’ve done it, I think that’s the million-dollar question.
What has been my highlight of today is I’ve left thinking it’s amazing there are so many people in the industry thinking along similar lines. But let’s not have this be the agenda next year or two years’ down. I don’t want to be the industry that talks about what to wear to a party where everybody has already left. The time is now to get to grips and make some of these changes.
We’ve seen a lot of surveys today, and they have been quite consistent. The key message is that probably in the near future, more people will order cars online. So Peter [Renkel], do you think that in the future, maybe in five years or 10 years from now, the physical process will totally be substituted by the Internet?
Renkel: I think there will be an evolution, not a revolution. It will take some time. Whether it will go away entirely at the end, I doubt it at the moment because people like to shop, and sit in and test drive a vehicle. This will be less people than today, definitely: younger people are into the Internet and doing things electronically or digitally, but I cannot imagine that dealerships will disappear completely from the face of the earth.
Jones: Just to reflect on what Karl said on digitalization: at the end of the day, motor finance is a secondary product. It’s not a product in itself, it’s a facilitation to get a customer in a vehicle. The more the digitalization of getting a customer into the vehicle accelerates, the more that the facilitation that gets them there has to keep pace.
So to an extent motor finance digitalization has to stay in step with the digitalization of the consumer car buying experience. And so, are we behind? I don’t think we are in motor finance because that journey hasn’t accelerated. But it will, as you say.
Digitalization allows us to take the horrible bits out of the finance-buying journey. So it could actually cement motor finance even further, if we get it right. But we must not forget that we’re only here to facilitate getting a customer in a car.
Dennett: The other thing to bear in mind is that we can’t treat all customers the same, they have different needs. Some will want the traditional pattern, they’ll still want to go into the dealership and see and feel, before they start the process. Others won’t even want to see the car, they’re happy to have it delivered directly. So we need to be able to offer to the whole customer spectrum all of the options available. And I think we’ll see a shift in which proportion goes in which direction.
Just to support what Richard said, we support, enable, and facilitate the sale of a vehicle and getting the customer into a vehicle. The other part of what we do of course is then provide the service that makes them happy with that vehicle, and the financing for that vehicle, for the life of the ownership. And I think that’s a really important aspect about what we do, and there is a digital part of that as well, that we need to make sure we’re on stream with.
Client centricity is important, you cannot do anything without the client. What are the measures to get to know the client better, to know the customer behaviour better?
Renkel: We have to work better with the data that we already have about the customer. Big data is a big word, but we don’t really know what to do with the data, I think. We collect the data, we store the data, but we don’t really interrogate it or use it to find out when the customer is in the market again for a new vehicle. When they think about buying a new vehicle, or financing a new vehicle, we need to be there with them, with the right offer, just in time. And that doesn’t happen.
Minter: I think the other thing about big data is it allows us to look for trends. And I don’t think we’re really good yet at seeing the trends in data.
For example, there is this move towards millennials being the majority of the buyers of cars. That’s fine and good, and we understand it. But there are trends out there in information that’s available that we’re not really mining at the moment. We tend to look at it as a snapshot and say that’s how it is today, but there is actually quite a lot of change happening that we could get to if we really chose to look for it. It’s a growing field too; it’s one of the infant areas for this industry.
I think also that there are digital sellers and marketers in other markets who’ve already made the journey. They have made the journey to click and collect, or entirely online, and we haven’t got there. There is a lot we can learn by looking at them to see where we can get to pretty quickly.
Jones: Retailers are consolidating, and many of the big retailer groups are multi-franchise. The way they think about customers is ‘well if we work with the customer through their life, we can support a customer within a brand, we can support a customer moving between brands, we can support them through life stages, etc’. What would be interesting is if a retailer thought about data in that way.
Then you think about what stops a retailer getting there, and developing a more customer-centric model? The relationship between manufacturers and franchise holders, and finance companies and franchise holders today, those relationships and those contracts, and what is dictated in them, will not support the new world. This is because its dominated by sales, by penetration of FNI, and by retaining as much of that with that particular business.
If we forgot about the model today and we designed a world that was customer-centric, and we put the retailer at the heart of that, it would look at work very differently. Nobody owns the customer.
What are the key points for captives in order to survive in the future? What are the key points for a captive leader to think about now?
Jones: There is something at the heart of the model about a partnership, about working with retailers, manufacturers, and customers, over the long term, and building a commercial model that supports that. I think that’s essential. The second is, do you use the data that you have on the customer to help the customer because, if you use it in any other way, it won’t help you in the long term. And the third is probably being very clear who your customers are. You can do a lot more by segmenting and getting really close to the customers that you want to be your customers, and then being very kind to the customers that you don’t. If a customer is saying, actually I’m not going to stay brand loyal, I’m going to move, then don’t fight it, help the customer get into the next brand that they might want to go to. So long term partnerships, be clear whom you want to serve, and use what you know about the customer to the benefit of the customer.
Renkel: I think you need to be more customer friendly, more customer-centric. We definitely see the customer as the most important piece in the process, but we have other things, which are also important, and I think we have to focus on the customer even more. And you can see from companies coming from Silicon Valley that they do it in a different way. We need seamless processes behind it, as it is still too complicated to do business with us, with too many processes, and too much interaction.
Minter: We’ve heard a lot about usage of a vehicle as opposed to ownership. So I think the thing that will come out of that over time is cost of use. This is the whole package, not just the cost of the car, but the whole piece, everything, including servicing and repairs, insurance and all the various add on products that you might put with it.
I think that’s the thing that people are going to have to focus on. I had experience quite a few years ago with Commercial Union, which doesn’t exist anymore. They put together a package that was a total cost of ownership package. One rental covering insurance, vehicle ownership, maintenance, road tax, everything. All you had to do was put petrol in. They had a huge launch and sold two units on it because everyone was making a little bit of profit all the way through.
Dennett: At the risk of repeating a few of the comments, I think putting your customer at the center. Our systems, legacy systems, are mainly built on asset finance and not customer finance.
We have a lot of data already, we need to turn it into information, and then use analytics to drive some useful marketing towards the customer that is relevant. It needs to be simple and transparent, and we need to be accessible. So I think everything really is centered around the customer and meeting their needs, rather than selling them what we have.
What about the regulatory authorities?
Jones: They want the same thing. The FCA fundamentally wants good customer outcomes, transparency, and to know that you’re trying to protect customer interests. It’s when we get that wrong, when we lose sight of the customer, that you get big problems.
The thing with principle-based regulation is it basically puts the onus on you to figure out what the right thing to do is. Then of course the regulator gets to decide at some point in the future whether you were on the right side of the line or not. That does bring more uncertainty.
Dennett: I think regulation is the new norm. It brings a burden, but we can’t shy away from it, I think we have to embrace it and move forward.
Renkel: It is important that there is a level playing field for participants in the market. We are sometimes concerned that is not always the case, especially with new entrants or fintechs, which don’t need a banking license. They are treated in a different way, they can do things that we can’t do, and I hope that this goes away at some point in time.
Minter: At this moment we’re at a particular point in time, which is unique and not likely to survive for very long. The FCA is going through the authorization process for consumer credit. While they learn, there are some issues, but I think go forward two or three years, they will have learnt, we will have learnt, and I think the scene will be a lot better than it is now.
Werner: Just to be a marketer for one second. The seven P’s of marketing, the regulator is only interested in two: product and price. So we can certainly get moving on the other five. I appreciate what shows up on the screen as to why it’s that per month is a regulatory and a dealer question. That is no excuse not to push on with the accessibility, the placements, and so on.