As customer demographics have undergone an immense paradigm shift, the near-prime market is ripe for re-evaluation.
The impact of the Covid-19 pandemic on the motor finance industry is well documented, but that impact and its longer-term consequences may be seen nowhere more clearly than the boundaries within the industry. The top and the bottom, while shaken, are roughly where they were before, but at the middle, the pandemic’s consequences are far more visible.
This is why the near-prime sector is an interesting place to look to get a feel for how the motor finance sector as a whole has been affected. The prognosis is optimistic.
“It’s been pretty strong. Obviously, a year ago things were relatively quiet, but I think this month we’ll almost double what we wrote in July last year. There’s been a fairly quick recovery,” says Oliver Mackaness, chief executive of Billing Finance. “Some lenders stopped lending during the pandemic, creating opportunities – things filtered down to us; March was our busiest month on record.”
One of the big pieces of news surrounding the near-prime sector has been sub-prime vehicle finance provider Moneybarn broadening its offering to the near-prime market. The firm now offers APRs from 14.9%, depending on personal circumstances, which applicants will be able to instantly accept or decline.
“Our primary reason for entering the sector is that we already have a reasonably large penetration into our traditional core market in the sub-prime space. Near-prime is larger than sub-prime, so without pulling away from our core market we’re looking for areas to grow into,” explains Bill Scotney, commercial director of Moneybarn
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A new customer profile
The near-prime market of today is not the same market that existed in February last year. The customers who make up this market will come from different places and have different expectations.
“We’re seeing a lot of ex-prime customers. We’ve seen unprecedented levels of settlements over the last year, which is interesting,” Mackaness tells us. “People, especially the self-employed, may have used grants or money saved during lockdown to pay off their more expensive bills.”
The fact is, most of the evaluation that allows us to define prime, sub-prime and near-prime is based on years of accumulated data, and over the last year that data has become less of an indicator than it used to be.
“We’ve all relied on score codes and data items based on the customers’ previous years of history, but the data from the last 18 months is from an abnormal period,” says Scotney.
“That new influx of near-prime customers hasn’t come from nowhere, and they still expect an experience as smooth as the one they had as prime customers”
Moneybarn’s attitude to this shift has been a cautious one.
“Because of our sub-prime background, the whole customer affordability issue is key to us. We are being highly prudent in terms of the assessments we’re making, possibly putting ourselves at a slight disadvantage, but we’re comfortable doing that.”
Scotney is the first to point out that near-prime is a highly competitive sector, now more than ever, and it is one that Moneybarn has had to adapt to work within.
“It is a very competitive market with more players than in sub-prime, and the expectations of intermediaries, brokers or dealers, and customers is for a slick, frictionless journey, while in sub-prime there might be requests for extra proofs. It’s a less automated journey,” Scotney explains.
At the same time, there are challenges for financiers in the prime market coming the other way.
“In the prime space, both the lender and customer’s expectation is for a frictionless journey,” Scotney points out. “From a sub-prime space you expect friction, and in near-prime we have to make ourselves comfortable with reducing some of the intervention we have in the customer journey while a prime lender has to make themselves comfortable with taking a greater risk.”
New customer expectations
While the customer base itself has undergone some major changes, so has the way we evaluate and interact with them. Could increased digitisation mean changes in how “near-prime” is defined?
“It hasn’t yet,” Scotney says. But he adds: “There will be a cohort of customers who are near-prime because of thin credit files rather than delinquency, and if you have thin credit files you need to look elsewhere for indicators of the customers’ likely intentions.”
Mackaness tells us this is an area that Billing Finance has been looking into.
“We certainly have been looking at that and we have been looking at alternating our affordability process working with Experian,” he says. “What I think is interesting is when looking at affordability they’re measuring different metrics such as income stability. It’s about context. Experian is starting to use rental data, there are other areas people are looking at. You’ve got to start looking at a wider picture to make your decisions.”
Digital also has a key role to play in streamlining the customer experience to match the expectations of customers used to transactions in the prime marketplace.
“I think the key for us is going back to that digital journey, looking at new technology like open banking where we can use data streams rather than requiring proof from customers,” Scotney explains. “The devil is in the detail in terms of how you view income and categorise expenditure, but it can get you to a far slicker and less interventionist journey for the customer because the key is you want to give a yes to a customer and dealer at the point of sale.”
The point is that while the customer base may change, it is ultimately still made up of the same people. That new influx of near-prime customers hasn’t come from nowhere, and they still expect an experience as smooth as the one they had as prime customers.
“Over time you see populations of people ebb and flow between near-prime, prime and sub-prime. Given we’re coming out of a weird period and there is the potential for higher unemployment and difficulties in the macroeconomy, people who were prime have had a blip or two and slipped into near-prime,” Scotney concludes. “It means the customer base is larger, but the downside is someone who was yesterday prime still has a prime expectation of the service delivery. You need a customer journey that meets their expectations.”