A move towards risk-based pricing in the motor finance market is inevitable as the new Financial Conduct Authority (FCA) rules come into play, according to MotoNovo’s chief executive Mark Standish.
“While I understand the simplicity appeal of a single rate or banded pricing model for finance; for me, the risks to the future of dealer finance heavily count against it,” said Standish. “I know I am not alone and we are seeing momentum getting behind risk-based pricing from the lender community. While some lenders might start the forthcoming regulatory environment with a fixed-rate model, there is an expectation that a number are planning to move to risk-based pricing as they conclude their development work.”
Standish notes that dealer finance pricing has not changed significantly in recent years, with a ‘one size fits all’ approach often meaning customers will receive a rate that is not tailored to their specific needs. This, according to MotoNovo, is not sustainable as customers now have such easy access to price comparison sites and personal credit data information.
“Embracing change is part of our culture,” Standish continued. “While change can present risks, in this case, the risks of not changing, even in the short term, looked far higher. From a regulatory, technical and above all customer perspective, we concluded that for the future well-being of dealer finance, the connection between the borrower and their risk profile had to be recognised.
“The mean average approach inherent in a single rate pricing model is unlikely to appeal to the prime credit quality audience who represent a prize to be gained from risk-based pricing. Inevitably the single price would need to reflect the audience of people taking finance. Without the prime audience, the implication is that price at an individual and overall APR level could well become higher than they might have been. In turn, this would have long-term implications for the dealer finance model and its reputation.”
MotoNovo is confident that the opportunity afforded by risk-based pricing is to welcome a broader pool of customers to the unique benefits of dealer finance, increasing market share. This has been evident based upon the results MotoNovo has seen. Finance volumes from over 2,000 dealers utilisingg MotoRate have grown over 70% new business year-on-year.
Standish concluded: “Risk-based pricing for us was not a quick fix. MotoRate was two years in development and it is why we expect a trend to risk-based pricing to emerge as other lenders develop their infrastructure. Right now, we are well-placed to help dealers to benefit from that ‘early mover’ advantage.”