We are in the midst of a generational shift in consumer buying behaviour. Asset ownership is losing the appeal and dominance it enjoyed for decades, as consumers turn increasingly towards ‘usership’ models – hiring goods for a set period without the intention of ever owning the product. Chris Lemmon writes.

Netflix and Spotify have blazed the trail in the new-age subscription society – but consumers are now expecting similar usership services in other areas of their lives.

The motor industry and car ownership is no different, with emerging behaviours effecting change across the market.

“We have all been on a journey for the last 30 years, where people are moving away from models that are about owning assets, towards using assets,” explains Adrian Dally, head of motor finance at the Finance and Leading Association (FLA).

“All the models available when purchasing a vehicle are on a spectrum: from outright ownership on day one to personal contract hire (PCH) at the other end of the spectrum, where you never own it.”

The notion of car ownership is changing. In the past, owning a car provided consumers with a sense of pride; however, as Perrys Leasing director David Johnson acknowledges: “it is no longer embarrassing to admit that you are paying for a car on a monthly payment – it has become the accepted norm.”

James Comrie, director of wholesale finance at Close Brothers Asset Finance, agrees that the car is losing the role of status symbol that it once enjoyed. Purchasing a car, he says, is becoming less emotive and more transactional, in the same way that happened with the mobile phone.

Comrie reveals that before launching its specialist PCH funding venture, Close Brothers conducted a review of the market in collaboration with Lancaster University. The results of the study confirmed the changing tides in the industry. “The younger generation is more concerned with usership than ownership, and instead want digital platforms to underpin their car requirements,” Comrie explains.

Coupled with the depreciating importance of customer car ownership, Andy Alderson of Autorama UK points out that owning a car does not make financial sense any more. “Whilst everyone wants a new car, most people understand that a vehicle is a depreciating asset – you lose money on it.”

In the meantime, the motor finance industry has been working hard to improve the various offerings of alternatives to car ownership.

Alderson continues: “PCH today is a better product than it was a decade ago. Leasing a vehicle used to be a hard sell, lacking flexibility on mileage and wear-and-tear agreements for example, but this is not true today. Add that to the fact that just as PCH’s offering has improved, consumers are learning that PCP is not the great deal they thought it was.”

The availability and visibility of personal leasing has increased as a result of the changing consumer preferences, Paul Harrison of Leasing.com observes. With consumers now increasingly comfortable with not owning their cars, there has been a push in the market to promote a variety of leasing options. More captive lenders have introduced personal leasing into their product line-ups, and manufacturer advertising campaigns often lead with a leasing offer,” Harrison notes.

“Consumers are hearing more about leasing, and they are now able to access more information about it online and in showrooms. In the business market, a relatively punitive CO2-based tax regime for company cars has turned some business users to the personal leasing market.”

Greater Simplicity

A PCH agreement also offers a level of clarity that may not be available with other leasing products. “PCH is more transparent,” says Johnson. “It is a simple payment, and there is no deviation. What you see is what you get in terms of payments – it’s the same for everybody.”

In contrast, PCP has been criticised for its complexity, with customers often entering into agreements without fully understanding the terms of the contract. “Motorists have been taken for a ride by a sector that has misled them into owning cars that they would be much better off leasing,” says Alderson.

A recent Autorama survey found that 56% of drivers on a PCP contract were so put off by the inflated balloon payment at the end of the contract that they would either return the car or set up a new PCP deal as a replacement.

“They are effectively leasing even if they stick with PCP,” Alderson states. “Our own research found that customers who lease a vehicle are actually saving an average of £4,424 when compared to PCP.

“If we want to win back the trust of the customer, we need to be transparent and point them towards a financial package that is in their interest: PCH,” he asserts.

Consumer Protection

Despite its apparent flaws, PCP offers a level of consumer protection that is currently not available on PCH agreements.

Dally explains that PCP is a fully regulated product, which PCH is not. Effectively a derivation of hire purchase, consumers benefit from voluntary termination rights when signing up to PCP agreements.

“The consumer knows that half-way through the agreement, in a distress situation, they can exit the PCP or HP deal with clear statutory rights. You cannot do that with PCH.”

This disparity could potentially be rectified in the coming months, with the Financial Conduct Authority currently reviewing the Consumer Credit Act – where the rules and regulations of each leasing agreement are laid out. The levelling of the playing field in the leasing regulatory space could further boost uptake of PCH, with consumers more assured of protection.

Figures from the FLA show that PCH agreements on new cars in the UK have increased by more than 350% in the last five years. During that period, PCH increased its market share from 4.3% in 2014 to 11.4% in 2018 – overtaking HP as the second-most-popular finance method in 2017.

PCH still lags far behind PCP in the market, which accounts for almost 80% of all new finance agreements.

Used Car Market

Historically, leasing has very much been a product for the new car market. However, despite continued low market share, the PCH market in the used car sector has grown from £7m in 2015 to £110m in 2018. Such growth has not gone unnoticed in the industry, as changing consumer preferences continue to effect change in the products on offer to them.

Harrison believes there is huge potential in the used car leasing sector because of the size of the UK market, but it offers a variety of different challenges to new car leasing. “Do finance companies want eight-to-ten-year-old vehicles on their balance sheet? Probably not. Striking the right balance between risk and vehicle profile is required.

“Offering a secondary lease agreement on a two-to-three-year-old used car that’s been well maintained under a previous agreement is more appealing for lessors and consumers. It took PCP a while to establish itself in the used car market, and the same will be true of PCH, but a number of leasing companies have recently launched initiatives.”

Comrie has recognised this growing trend in the market, stating that it can be a win-win situation for both contract hire companies and customers. “Sixty percent of the contract hire companies we fund PCH for now fund used assets on PCH, and they are starting to market this heavily. This is a big benefit for both the consumer and the company since the consumer may not always want – or afford – a new PCH vehicle or indeed find a potentially large deposit.”

As Comrie points out, contract hire companies usually have a large number of ex-fleet vehicles that have been owned from new – providing the perfect stock for the used PCH market.

“We see this as a future growth accelerator, as consumers are becoming less and less motivated about paying large initial rentals on cars they will never own,” he notes. “Up until this point, the market has developed products that focus on a headline monthly rental rather than an overall usership package the driver may want.”

Finding the right balance in the used car PCH market will be the key to its success. Dally acknowledges the greater risks associated with used cars, due to uncertainty around used cars getting the correct valuations. “The older the car that is being leased, the higher the price risk is. The higher the price risk, the higher the price.” This, adds Dally, could result in the cost for consumers becoming uncompetitive when compared with PCP or HP.

Increasingly accurate data and car-valuation technology is helping to remedy this, which could be helping to increase confidence among used car finance providers.

“The car-valuation agencies have got many more data points, and each year car valuations have become marginally less risky,” explains Dally. “As a result, PCP has become viable on a wider range of cars, which is why PCP has grown in the used car market. We are beginning to see movement on PCH as well. Data improvements are absolutely key to making those things viable.”

An additional hurdle for providers to overcome in the used PCH market is the difference in VAT restrictions to the new car market. Johnson explains that because of how the VAT is structured, customers could find themselves in a situation where the monthly price of a used car can be similar or even higher to a new car. As a result, Johnson says: “We will see more growth in the used car market than what we have seen in the past, but it will be very limited because of the way VAT is structured.”

Digitisation

Societal shifts in the motor industry do not appear to stop in the asset ownership versus usership space, with younger generations increasingly turning their attention to digital channels when shopping for deals on new cars. Providers of leasing products are now investing heavily in online offerings to keep up with this demand.

Harrison believes the FCA would want to ensure the fair treatment of consumers and provide them with adequate information when choosing a product suitable to their needs – which could be more easily available and regulated online.

“PCP remains the dominant product in the consumer new car finance market, but its market share is reducing as consumer demand evolves and new funding methods emerge,” he observes.

“The industry is planning for continued growth in the personal leasing by updating their digital propositions and by supporting their dealer and broker networks with improved offers and training.”

The benefits of a more web-based system, according to Comrie, start with greater transparency and the effective maintenance of compliance in a more efficient system.
“We have seen our contract hire customers develop online PCH platforms that give their customers exactly what they want and with ease,” he explains.

“Our contract hire customers allow their end users to select cars with their desired mileage via an easy-to-use web portal.” Customers are able to watch walk-around videos of potential cars, while documents can be sent and received via the web portal, signed by e-signature.

As a result of changing consumer preferences, Close Brothers is investing heavily in supporting partners to enhance their digital offerings. “It can create a USP, especially given how millennials are increasingly viewing a car purchase in the same way they would a mobile phone purchase. In essence, it’s becoming more transactional.”

Societal Shifts

The motor finance industry finds itself in the midst of change, as changing consumer behaviours have triggered a cycle of innovation across the industry.

As the younger generations grow older and form an increasingly large proportion of the car buying and leasing market, different trends such as the growth of PCH and digitisation are beginning to emerge. Companies, in turn, react to the changing consumer preferences and enhance their offerings to suit those needs, further feeding the growth of such trends.

According to the FLA’s figures, PCH’s explosive growth has plateaued slightly, growing by just 4% between 2017 and 2018. The latest figures suggest that the supposed shift towards usership models remains a long way off – and is not guaranteed.

As new PCH products reach the market in the coming months and regulation potentially levels the playing field between different product offerings, we could see demand for PCH skyrocket again. Until then, predicting the future is anyone’s guess.