Controversial US scheme
has UK firms interested. Fred Crawley reports.
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A controversial but effective
scheme has brought down delinquency rates dramatically in the US
deep subprime market, causing British motor finance providers to
wonder whether the technique could work on this side of the
Atlantic.
Starter Interrupt (SI)
technology is an offshoot of the GPS tracking industry. The scheme
involves a matchbox-sized box being connected to a consumer’s
vehicle which is linked to a GPS tracker and the car
lender.
What happens next is
straightforward: as well as logging a vehicle’s location via GPS at
all times, the box alerts drivers when they are overdue on payments
and – after a certain level of delinquency is reached – prevents
them from starting their vehicle.
The system improves customer
payment habits significantly and gives lenders a big hand when it
comes to collecting locked-down vehicles, since their locations are
logged at all times.
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By GlobalDataTimo Saarela, vice-president
of servicing at Los Angeles-based Westlake Financial Services, has
been using SI systems at his company for the past two
years.
Westlake has outstandings of
around $870 million (£540 million). Of this, a portfolio of $40
million lies within the deep subprime sector.
The 2,000 vehicles within
this portfolio are fitted with SI devices, and Saarela says he has
seen delinquency levels drop 40 percent as a result of the
introduction, to around 6 percent.
Incidence of fraud has
declined “significantly” since SI technology has been in use, he
said, while efficiency in vehicle collections has been directly
improved. Only 10 vehicles issued with SI devices have not been
successfully recovered.
SI technology is not without
its drawbacks, however. While Saarela says Westlake has heard “very
few complaints” over SI from customers, he admits troublesome
situations could theoretically arise.
Say, for example, a
delinquent customer had to stop to buy fuel while delivering his
pregnant wife to hospital, and found his car unable to start
afterwards due to the SI device kicking in.
The key factor in preventing
such situations from arising, Saarela says, is
consistency.
“We apply the same policy
across our customer base, and make circumstances very clear
beforehand,” he adds.
“The customer has to sign up
to authorise the use of SI in the first place, so they are always
aware of what will happen if they miss payments.”
All in all, there seems to be
a clear case for SI’s ability to improve profitability in deep
subprime lending. A cost to the lender of around $300, the units
more than pay for themselves in delinquency savings across a
portfolio.
But there may not be a place
for them in the UK market yet. Most companies expanding into
non-prime are targeting those customers who would have been
considered prime just three years ago, and who have relatively
dependable repayment profiles.
In addition, non-prime
customers are reported to be showing the best payment habits in
years, as the scarcity of non-prime finance in the market ensures
they make every effort to hold on to the agreements they
have.
Nevertheless, any investor that decides to make inroads
into deep subprime once again could well consider SI technology to
provide a worthwhile return on investment, should it satisfy UK
regulatory requirements.
