The used car finance sector is experiencing steady growth, and while there are challenges facing the sector, many are looking forward to the coming age of regulatory clarity. Chris Farnell speaks to key industry figures to find out more.

In a time where car sales are moving ever closer towards lease and PCP-style models, and where the relationships between financiers and manufacturers are getting ever closer, the used car sector can appear to be something of an odd throwback.

“The new car finance market is dominated by captive finance providers, owned or linked to the appropriate OEM. They have different operating priorities to the independent sector, which tends to dominate used car finance,” says MotoNovo’s Karl Werner.

Despite increased independence, and more traditional finance models being prevalent in the sector, Werner believes the used car sector has a lot to learn from new car markets.

“The new car finance sector has adopted a strong finance-led marketing approach, typified by special-offer finance and positive promotion of PCP/PCH finance. In this respect, captive providers often benefit from the support of their connected OEMs seeking to maintain a strong product push. It has worked well, as evidenced by the circa 91% of private car buyers opting for dealer finance on their new car,” he explains.

“The used car financing model is different because there is no comparable OEM support and because PCP/PCH residual values are inevitably less significant. Nevertheless, we must recognise the importance of finance-led marketing to sell cars and the appeal of an attractive and transparent finance approach to car buyers.”

Werner continues: “Ninety-one percent finance penetration may be aspirational, but at MotoNovo Finance, initiatives such as the car sales and finance aggregation service for dealers demonstrates that, we are at the vanguard of helping used car dealers to fully realise the potential of finance to develop a fresh, customer-centric car retailing model.”

The used car sector also offers challenges not found elsewhere in car finance. Finance customers always come with a history, but in the used car sector, so do the cars themselves.

“As far as Billing Finance is concerned, the type of customer that buys a used car is different from one that buys a new car. You won’t get near-prime customers buying brand new cars, for instance,” explains Billing Finance director Oliver Mackaness.

“Fundamentally, I guess it’s just that the customer is not as financially strong and the vehicle won’t necessarily have the five-year warranty. There is more underwriting for the vehicle as well as the customer.”

Caution and Opportunity

The used car finance market has been doing well and growing respectably, as Tim Smith, Black Horse’s head of motor finance, points out.

“The used car finance market continues to grow steadily in both volume and value, the latter due to higher used car prices. The number of PCP deals has also risen, as this product continues to make the crossover from its established position in the new car market.”

Some believe this market expansion is a result of a more cautious consumer keeping an eye on unpredictable economics trends such as Brexit.

“We had a very strong start to the year. We’ve had record levels of new business in January, February and March, so for us it’s been very positive,” Mackaness tells Motor Finance.

“Some of that is things we’ve been doing ourselves. We are open on Saturdays, where we weren’t before, so that is going to have an impact on our business. But I do think maybe people are a bit warier of buying new cars with Brexit coming. They are looking to tighten their belts, and it’s cheaper to buy a used car rather than a new one.”

Financiers are also urging caution, warning that the recent boom in quantity of saleable vehicles may come at the expense of quality. Werner notes: “There have been volume opportunities, but it is important to recognise that too often these have been gained at the expense of margin and quality.

“For those of us who have been in the industry for a long time, this is a concerning development. Commoditising finance is not good for dealers or lenders, especially at a time of increasing activity by market disrupters. Looking back, we can see that it led to market exits, consolidation and a lack of investment and innovation; it is this investment and fresh thinking that the market needs, arguably more than ever before.”

“The quality of vehicles is always something to keep an eye on,” Mackaness agrees. “We need to deal with the right brokers to find vehicles of the right quality.

“I think the challenge is still providing a high-quality customer experience. Although you’re not buying a new car, people still expect the same quality of service with their used car. The selling process has to be slick; with online purchasing and e-signatures, the sales journey itself has to be as smooth as possible. We’re all used to buying things online. In a way it’s irrelevant that the car is second hand.”

“We continue to see consumers weighing up their spending power, alongside increased competition, as the sector becomes more popular for investment and as new car margins are squeezed,” Smith says.

“Overall, regulation will be the key area for thought and action this year – both in finance and insurance markets – particularly how lenders and dealers respond to the findings of the recent FCA review.”

A Time of Openings

While there are undeniable challenges in the sector, Werner is quick to point out that each of these challenges also provides openings for opportunity if a business is able to place themselves to take advantage of them.

Among the challenges the used car finance sector is facing are the changes that will follow the FCA review of motor finance, the pace of a shift towards alternative fuelled vehicles, and the trend towards digitised retailing by dealers, OEMs and market disruptors, as well as the continuing consolidation in the motor retailing landscape.

“For dealers, these are joined by increasing competition to buy and retail used stock, potential changes to the finance income model and rising costs, notably in marketing,” he says. “These are combining to place pressure on the bottom line. The used car model needs to evolve, and we are well placed to help dealers through this potential change.”

Black Horse has also been positioning itself as a company that can adapt to this rapidly changing environment.

“Black Horse continues to lead the way in putting clarity and transparency at the forefront of customer outcomes,” Smith notes. “We already run a comprehensive customer contact programme to gauge our dealers’ performance in this area. We also acknowledge that there’s more to be done. For example, increased use of digital and video give us a great opportunity to clearly and consistently explain key information to customers very early in the sales process.”

Indeed, an ability to adapt, and to innovate is something companies across the sector are prizing as essential.

“MotoNovo has a great track record, priding itself in leading the market in innovation and change; we see the ability and agility to effect positive change as a key differentiator,” Werner says.

Age of Transparency

A discussion of any sector of the motor finance market inevitably comes around to the regulatory environment eventually, and the upcoming FCA findings are at the forefront of everyone’s mind, with many financiers looking at it as an opportunity for the industry to do better.

“We believe that the FCA findings on motor finance could be the catalyst for positive change and help forge a more sustainable future for dealers,” Werner says.

“In this regard, while playing an active role in the consultation process that is now following the FCA’s report, we are working to champion the importance and opportunity afforded to dealers by positive change.”

“We need to make sure in the FCA world that our conduct is open and honest, providing a transparent product,” Mackaness says. “We need to be transparent with our commissions, and keep our pricing methods as simple and straight forward as possible.”

Mackaness also emphasises the importance of building relationships for the future of used car financiers.

“We’re a finance company, but 95% of our business comes through brokers, so I think the broker journey needs to be as agile as possible,” he reflects. “As a finance company, we need to work closely with our brokers to make sure there’s a seamless transition. We’re partners.”

Werner also points out that used car financiers and dealers alike may need a whole new model in order to thrive moving forward. He says companies need to take advantage of upcoming opportunities by encouraging dealers to embrace a new business and marketing model that places finance at its core with an aim to significantly increase used car finance penetration and establish a transparent ‘little from a lot’ finance income approach.

“Repeat anything close to the 91% success of finance in the new market and more customers could be buying the car and finance through the dealer,” he suggests.

“Trust will be enhanced and dealers will have a far more sustainable future. This process was why we built and its unique success fee-only model. It is designed to help dealers to redefine their business models, increasing the role of finance and cutting their marketing costs. It is a distinctive, collaborative business model designed to create feel-good car selling and buying – it is highly dealer-friendly, and it works.”

Smith also believes the challenge offered by regulation is an opportunity in disguise for an industry that has already made a great deal of progress. “Many of our dealers are already extremely advanced in their thinking and these thought leaders are turning what might feel like a challenge into an opportunity,” he tells Motor Finance. “The premise is actually quite simple: it is the clear, transparent and trusted dealer who will win customer confidence, and ultimately their business.

“Ultimately, the purpose of the FCA report is to ensure the market is working well for both a sustainable industry and for consumers. This is something we should all welcome.”

Recurring Optimism

All in all, optimism is a recurring theme among all the financiers Motor Finance speaks to.

With the FCA’s findings offering an opportunity for greater clarity and improved best practice throughout the industry, people across the used car sector are looking forward to finding ways to refine their own practices.

“The future looks bright, and dealers have a clear and positive role to play,” Werner says. “The FCA’s findings must be seen as crystallising shortcomings in the current used car dealer financing model and helping to highlight the benefits of embracing a fresh new approach.

“We aim to see dealer finance becoming the preferred financing method for the vast majority of used car buyers. Central to this will be tools such as, which work for dealers and car buyers; the good news is is already here, so the change can start now.”

“It is a market that is developing rapidly and aiming for ever-increasing standards of professionalism,” Smith adds. “Big groups are continuing to invest, and smaller companies remain agile to opportunity. It’s as exciting as ever, with plenty of opportunity to drive great customer service.”

At the same time, the industry is also seeing a new wave of customers entering the market, as more and more people look to used cars in favour of new ones.

“Personally, I’m fairly optimistic,” Mackaness reflects. “I think the second-hand market will be buoyant in the world of Brexit uncertainty, because it drives people to second-hand businesses. Perhaps in our upcycling world, second-hand cars are just another way to recycle. It’s an environmental choice as well.

“What’s been quite interesting is that since the start of this year, we’ve seen a slight increase in people’s credit scores that are coming to us. I think that says people with higher credit scores are looking towards the second hand market.”

These may be uncertain times, but the used car finance sector is finding that caution can have positive effects for business.