Turning the tables at the point of sale
As UK car dealers and lenders face a downward economic spiral,
with a consequent softening of the marketplace, some industry
observers believe that the time is right for a model change in the
way that finance is used to sell new and used cars, says Brian
Rogerson.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
No-one can deny that point-of-sale (PoS) finance has taken a
battering in recent years. The old model is palpably failing
despite some stalwart attempts to remedy it. Professor Peter Cooke,
KPMG Professor of Automotive Management at the University of
Buckingham, in a new study, “Rethinking Dealer Point of Sale
Finance Strategy”, commissioned by Black Horse Motor Finance,
offers a “call to action” for dealers and lenders.
The size of the potential market
In the past few years the UK new-car market has hovered around
the 2.5m a year mark, although some would claim it has been
artificially buoyed by manufacturer incentives and heavy sales
pressure on dealers. The used-car market is around three times the
new-car market and has been a little more volatile, varying between
7.7m and 6.8m a year across the seven-year period (chart 1).
While it is realistic to assume that virtually all used cars are
bought by private buyers, close to half of new cars are acquired by
businesses. There is an additional group of cars run “on the
business” to a greater or lesser extent – often referred to as
“grey cars”. Those units are part funded by the organisation but
owned by individuals and used occasionally on business
journeys.
There has been a significant split between private and fleet
vehicle acquisition in recent years (chart 2). In periods of
economic restraint, the fleet sector, arguably, keeps the new-car
market buoyant.
Fleet cars are generally on an economic replacement cycle and
are changed as part of the business process. Private buyers, on the
other hand, are more likely to delay replacement if they are unsure
of the economic climate.
While the “grey” fleet may be partly financed by employers, part
may also be funded by the individual through mileage allowances or
soft loans. The true private-car sector represents around 800,000
cars a year – a significant market.
A huge market to play for
The total value of private new- and used-car finance has been
quite volatile over the past decade. The finance value for
private-sector new cars has fluctuated between a high of £7.1bn and
a low of £5.7bn (chart 3), while used-car finance has moved between
£4.3bn and £6.3bn annually.
A disquieting message at the PoS
Peter Cooke says: “A close look at the value, number of advances
and average value of PoS finance shows some disquieting messages.”
Tables 1 and 2 show PoS data for new and used cars.
- Value of advances experienced a drop from £6,895m in 2002 to
£6,626m in 2007 with the corresponding performance index down from
100 to 96.1. “While on the surface this fall might not look huge,”
says Cooke, “we must remember there is a degree of inflation
running across the period, so the drop in value is more
significant.” - Number of advances is an altogether more worrying trend. “It’s
down from 719,000 to 513,000 deals over five years,” Cooke
explains, “and from 100 to 71.3 in performance index terms. Chart 1
has already showed how relatively buoyant new-car volumes were
across that period.” - Average value of advances is the only one of the three new-car
finance indicators to grow across the period – its performance
index rising by over a third.
The three sets of data again show a disquieting but different
picture to that for new-car PoS finance.
- Value of advances has risen during the period by some nine
points, although the performance index has fallen back
significantly from the peak of 118.4 reached in 2004. - Number of advances rose from 723,000 in 2002 to 765,000 the
following year, thereafter falling by around 140,000 deals to
622,000 in 2007. In index terms the index moved from 100 up to
105.8 in 2003 – then down to 86.0 by 2007. - Average value of advances climbed steadily from 100 to 127.1 in
index terms – and from £7,366 per advance to an average of £9,364
in 2007.
Lost finance profitability
“The value of advances was highest in 2004,” Cooke says,
“fuelled by rising average advance values of £8,480 per deal.
Thereafter, continued increases in average advance values were
unable to overcome the drop in the number of advances, the used-car
PoS market value falling to £5.8bn in 2007. Once more, the lost
finance profitability does not bear thinking about.
“The question must be asked – do dealers have alternative
sources of profit readily available to replace such a serious
downward trend on PoS finance contribution? Clearly the market is
there, but only providing dealers have the desire and motivation to
grasp the opportunity of the much higher PoS finance penetration
they reached in the past.”
Chart 4 shows the trend in franchised and independent used-car
dealers’ finance deals as a percentage of their new and used car
unit sales over the past ten years.
Here Cooke identifies three disconcerting trends:
- The ‘best’ performance is franchised dealers’ new-car finance
penetration where there has been a fall from 52 per cent in 1997 to
40 per cent in 2007 – a drop in business of more than one fifth –
and that is the best - Franchised dealers’ used-car finance penetration suffered a 15
per cent setback, falling from 51 per cent to 36 per cent – down
more than a quarter - Independent used-car dealers have seen their finance deals go
down from 38 per cent of used-car sales to just 18 per cent during
the same period. “This is more than a 50 per cent drop in
penetration,” Cooke points out, “meaning that less than one in five
used cars sold is financed by these dealers.”
In disguise
As has been noted, overall advance values have been largely
disguised by rising average transaction values. “All the more
reason”, says Cooke, “why dealers need to investigate, arrest and
turn round such a long-term, downward trend. Business is not only
about matching and exceeding competition in terms of sales. It is
also about matching and exceeding the revenue and profit
opportunities in the marketplace.
“Should tighter credit become a longer-term situation, dealers
may be forced to rethink vehicle finance strategy, the finance
offering and the way it is presented. The jury is out, and the
market will need to adjust to changed circumstances.”
Who uses whom?
During April 2008 the University of Buckingham carried out an
e-survey of franchised dealers and non-franchised used-car dealers
to elicit their opinions on recent trends in the PoS finance
market.
The results confirmed that while all franchised dealers use
their manufacturers’ new-car finance, some 60 per cent of them also
use independent PoS finance for this purpose. “On the used-car
front,” Cooke notes, “some 100 per cent of non-franchised dealers
use independent finance, as do 70 per cent of franchised dealers.
Equally, some 85 per cent of franchised dealers also use their
manufacturers’ finance programmes for used cars.”
Furthermore, 49 per cent of respondents use one or two
independent finance companies, 28 per cent use three companies and
a further 23 per cent use four or more sources.
While a good number of respondents claim to discuss PoS finance
with prospects during the sales process, the proportion of car
buyers actually presented with a finance quotation is relatively
low (table 3).
Cooke observes: “Only 24 per cent of dealers say they provide
more than half of their prospects with a finance quote. Surely
there is a clear opportunity to push finance quotations harder
during a period of tight credit?”
Dealers’ responses to the question “what do you believe are the
main benefits of PoS finance from an independent finance company?”
(chart 5) could be called a wake-up call for those not making full
use of its perceived potential.
Cooke said: “The question might well be asked, why has PoS
finance slipped in popularity over the past few years, given the
clear benefits it offers both new and used car dealers?”
What is the dealer really selling?
Cooke dispelled the notion that in times of credit squeeze PoS
finance effortlessly comes into its own again. “Even in times of
credit shortage and a credit squeeze,” he warns, “high street banks
and other financial institutions will continue to promote finance
deals aggressively, although many attractive schemes may have been
withdrawn and replaced with new programmes and terms.
“However they may become ever tighter which could mean dealers
losing vehicle sales – unless, in some cases at least, they have an
alternative finance outlet to offer customers. As important, even
customers with pre-arranged finance might, in times of tight
credit, be more open to alternatives. Dealers need to be aware that
as traditional sources of finance become tighter, customers may
increasingly look to dealers as an alternative source of
credit.”
Once upon a time dealers sold cars – but no longer. Dealers,
Cooke believes, have the opportunity to sell a personal “mobility
package” which includes the car and the wherewithal to pay for it
in a form most convenient for the customer.
As a result, PoS finance provides the ideal platform for
dealers’ sales consultants to work with the customer to structure
the most suitable finance package for each car buyer’s precise
needs.
PoS finance: a new paradigm
Historically, the monthly rate charged for PoS finance has been
set by the value of the car. The more expensive, the newer the car,
the larger the sum borrowed, the better the rate.
However, that approach can be claimed to be flawed in current
market conditions and attitudes to borrowing. There is no assurance
that the person asking for a bigger loan is more able to repay that
sum than someone borrowing a lesser amount.
Cooke says: “It surely makes sense to link the risk and the rate
of interest to the person doing the borrowing, and their risk
profile, rather than the vehicle. After all, it is the person and
not the vehicle that will be repaying the loan.”
The historic “one size fits all” approach to PoS finance
measured the sum borrowed for the car rather than a risk assessment
of the individual. That, Cooke, believes, has got to change, so the
measure is the borrower’s personal circumstances rather than an
arbitrary rate determined by the dealer.
The new approach is to judge a finance proposal against a
borrower’s ability to repay and to determine the appropriate rate
using the finance company’s credit ranking process. The result will
be that the finance rate quoted will broadly be in line with a rate
quoted for bank borrowing or internet provider plus commission –
tailored to the customer’s proposed purchase. Thus the dealer’s
sales staff will be able to provide a quote, with considerable
confidence, to match the customer’s bank or car manufacturer’s
finance rate.
The paradigm below (chart 6) shows the new situation taking into
account the would-be borrower’s creditworthiness, and then tailors
the rate as part of the quote provided by the PoS finance
company.
The vertical axis shows the interest in the exercise. The
horizontal axis shows immediate recognition of a buyer’s credit
worthiness, with the best risks attracting the lowest rates, shown
on the left of the paradigm.
“The interest rises as the risk depicted on the horizontal axis
becomes greater,” Cooke says. “However, the rate on the right will
still be competitive because the customer would very likely be
charged a similar rate elsewhere. The chart clearly shows how the
rate is tied to the borrower, the car buyer, and not to the car
being bought from the dealer.”
Cooke adds that the changes wrought by rate for risk among
finance providers need to be matched by a similar change in the
mindset of dealers and their sales forces to restore the balance of
new and used-car finance and dealer profitability.
“Despite the tightening of low-cost credit,” he says, “there is
no reason to expect catastrophic changes in the market. Buyers will
continue to need to borrow, but consumer awareness has increased so
customers will become more demanding in a tighter finance
market.”
Dealers have a huge advantage in that the PoS finance proposal
can be presented to customers at their most-charged moment. They
know the car they want, they may already have finance – but with
rate for risk dealers can offer a more tailored, competitive
proposition. Whether it will be enough to reverse historical
declines in the PoS market is a trickier question to answer.
“Previous recessions or near recessions,” observes Nigel
Williams, senior planning manager, Black Horse Motor Finance, “have
made virtually no difference to the point-of-sale model. Perhaps
this time it will be different – and when the industry emerges from
the downturn it will be sufficiently encouraged to produce some
positive changes.”
