Consumer innovation and leveraging credit rating sees captive exceed competitors’ penetration rate and grow portfolio, report Mike Cobb and Richard Brown.

Toyota’s captive finance partner Toyota Financial Services (TFS) has used its ability to offer cheap credit to build a dominant position in the US auto finance market according to statistics from Auto Finance News.

TFS wrote more than 48,000 new contracts in July across five surveyed states – New York, Michigan, Texas, California and Virginia – according to data collected.

The figures also showed domestic competitors Ally Financial, which holds the former General Motors portfolio, and Ford Motor Credit fell behind the lending arm of the Japanese manufacturer by as much as 16,000 contracts.

Toyota’s US finance arm has aided Toyota’s dominance of the US car market over the past four years and funded 45.6% of its US retail car sales through the first six months of 2013.

According to figures from rating agency Moody’s, Ford Motor Credit lagged behind TFS in its captive penetration, only achieving 40% over the same period.

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By GlobalData

Marcie Belles, editor of Auto Finance News, said: "Toyota Financial Services has been steadily growing in the US. Its loan and lease portfolio hit $67bn (£41.7bn) last year, making TFS the largest captive – and the second-largest financier overall – in the country.

"Toyota Financial thrives on innovation, aiming to improve technology and facilitate communication and collaboration. For instance, TFS actively uses its Twitter feed as a customer service tool, reaching out to consumers who have complaints or questions."

This ability to penetrate came at a good time for TFS as research from Experian Automotive showed the increasing importance of captive finance in the US. According to its figures, captive finance grew by 3.4% year-on-year to the end of March 2013. By comparison, bank lenders lost 1.7% of market share over the same period.

Part of Toyota’s gain lay in its ability to leverage its Aa3 credit rating from Moody’s to obtain cheap money without resorting to securitisation or bond issues.

Ford, however, suffered for its avoidance of a bail out in 2009 and its retention of existing debt. This has led to a lower credit rating and more use of income in paying off its existing debt.

Toyota Motor’s results have also shown it maintained a higher capital reserve for the first quarter of 2013 at $37bn compared to Ford’s stated $26bn. This access to cheaper credit and a higher capital reserve has been effective in delivering finance to younger and more risky customers than other US lenders can take on, according to Moody’s, aiding its penetration of the US car market.

Mike Wells, group vice-president, sales, product and marketing at TFS, attributed the company’s success to "the close partnership" developed with Toyota, Lexus and Scion dealers and the sales division.

"A key element to this success, whether in increasing our retail penetration or in maintaining high levels of wholesale penetration," said Wells, "is engaging in open dialogue with these partners to ensure we understand their needs and can provide them with relevant products and services."

Wells called the company "an integral part of the Toyota family" and its commitment to its dealer partners "unique".Such commitment extended to the customer as TFS sought to provide service levels to enhance its car brands and retain consumer loyalty.

Looking to 2014, Wells said "competitors who fled the auto finance business during the recession are returning, which will make it more challenging to increase penetration further from the historic highs of recent years. Nevertheless, TFS remains dedicated to meeting the needs of borrowers across a wide range of the credit spectrum. Furthermore, we remain committed to leasing, recognising the benefits to both consumers and dealers and the sales divisions in terms of managing the trade cycle."

TFS will also introduce a Tire-and-Wheel [sic] insurance product "to meet the evolving needs of consumers and dealers and we’ve been rolling out e-contracting throughout our dealerships, making the car buying and leasing process easier, faster and more accurate."

The combination of these elements, Wells predicted, would bring "another successful year" for the company.