For some years now, there has been intense speculation as to when the automotive industry – and the provision of motor finance in particular – will see significant disruption. The drivers for change, as well as many of the technologies required to facilitate it, have certainly been there for some time. But, until recently at least, the incumbent norm has remained relatively unchallenged.
Indeed, with auto sales riding high over the last decade, linked to a run of unparalleled success for finance houses, an “if it ain’t broke” mentality has prevailed; after all, with “business as usual” producing ever-increasing returns, why embrace disruption?
Now, however, the long period of growth has plateaued and the economic future is uncertain. The market seems braced for a rapid increase in competition, as players with ambitious growth targets battle for market share. Regulatory focus is also ongoing, with dealer commission structures, customer outcomes, affordability, and product explanations all under the spotlight. In short: the status quo is about to change, and this is exactly the time in a market’s life cycle where, with business as usual producing diminishing returns, disrupters take their opportunity to shake things up.
The discussion should no longer be about whether to believe the hype about fundamental transformation. It should be about pinpointing what will be transformed, and working out how existing players can adapt before it’s too late to change. This paper will address this discussion in three stages:
Part one: Which fundamental assumptions about the essential nature of the industry are most fragile, and what factors (social, technological and competitive) may break them?
Part two: If these supposed constants are changed, how will the value proposition of motor finance in particular be affected?
Part three: What are the potential end-states for disruption, and who are the likely winners and losers in a radically transformed market?
Part one: Drivers for change
As already mentioned, the biggest factors discussed by the industry when anticipating change tend to be economic and regulatory. These issues have been discussed at great length elsewhere, with the consensus being that they will put much greater pressure on the existing model of PCP- and HP-dominated, primarily point-of-sale, dealer motor finance. In other words, they are the issues that will strain the incumbent business model to the point where the opportunities for disruption become greater.
Without downplaying the importance of these factors, we would like to examine a set of secondary drivers that may seem less pressing now, but which we have identified as the facilitators for that disruption. These come in three categories:
A: Social and demographic
As successive generations take on a larger slice of purchasing power in the UK, there will be a fundamental shift in customers’ priorities when looking to find mobility solutions. For example, the emergence of web-native generations has been massively analyzed in terms of how it may change the classic state of play with regard to forecourt sales, and where it will leave those without the ability to offer vehicles and effective finance online.
But while much of the present debate has been framed in terms of where people will be most inclined to enter the sales process, it’s equally critical to examine – on a fundamental level – what they will want to buy. At the moment, the industry is geared for the assumption that people will want to buy vehicles for individual, private use, with ownership of the asset being the ultimate preference. However, many are betting on the shared economy, citing the success of services such as Airbnb, where, on a single day in August 2017, 2.5 million people stayed in accommodation booked through its platform, which boasts more than four million listings across 30,000 cities worldwide.
The growth of the global car-sharing market is expected to be equally large, hitting $16.5bn by 2024 from just $1.2bn in 2015, according to a report last year from Global Market Insights. China is expected to see particularly fast growth, where Didi, which bought out Uber’s Chinese business in 2016, is investing in an electric car sharing service with 12 OEMs. With more than 260,000 electric vehicles already available, the firm aims to have a million electric cars on its network by 2020.
There are a great number of emergent technologies with the potential to facilitate disruption of motor finance. Here are some we think may be worth looking into:
With every car written in blockchain, the vehicle as an entire asset, as well as all of its components, can be traced from the point of manufacture right through to the point of scrappage. IBM in particular has been conducting extensive research on the potential application of blockchain to the auto industry.
Internet of Things (IoT) and 5G
Increased device and component connectivity, combined with fifth-generation mobile networks, will allow the capture of much more detailed and granular telematics information, with owners able to log the usage, maintenance, condition, and location of their vehicle, and share it with their OEM or another third party.
Artificial intelligence (AI)
More intelligent vehicles, capable of semi- and fully autonomous driving, will be a seismic change in themselves, yet perhaps just as impactful will be the advent of in-car virtual assistants (in the Siri/Alexa mold), that can interact with OEMs and finance providers alike.
Not only are advances in battery technology making more environmentally friendly vehicles feasible for the mass market, they’re also increasing the penetration of vehicle use into other areas of customers’ lives, as electric vehicle batteries gain the potential to aid in the storage of household energy.
Equally as important as identifying avenues of disruption is identifying the likely disrupters. There are many companies currently on the fringe of the motor finance environment that seem poised to carve out a larger presence, and we’ve grouped them into three main categories:
The tech giants
Google/Waze – Waze, originally a GPS app acquired by Google in 2013, now operates a carpool functionality, in which drivers using the app can pick up people who are heading in the same direction. Originally trialed in San Francisco, Sacramento and Monterey, Waze Carpool has since expanded across California, as well as to Texas and Israel. Riders are able to pick drivers based on factors such as star ratings, gender, mutual friends, whether they share the same workplace, and more. For each mile driven, drivers are paid 54 cents.
Amazon – In 2017, Amazon started hiring staff in Luxembourg to build up an online car portal in Europe. Amazon Vehicles already operates in the US as an online platform for users to research cars, auto parts and accessories. It also sells car parts online. In 2016, Amazon launched a promotional scheme with Fiat in Italy, allowing customers to view images and specifications of cars online. Orders are placed via a website, which then directs users to a dealership where the purchase is completed.
Apple – The iCar project is codenamed Titan, according to The Wall Street Journal, which stated there were “several hundred” Apple employees working on the project. While reports originally claimed that Apple was working on a self-driving car, a 2017 interview with CEO Tim Cook suggested that Apple may have changed direction on the project. It could be that it’s simply working on an autonomous driving platform, as seen by Apple’s California test fleet of 45 Lexus RX 450h vehicles fitted with cameras and lidar sensors.
ZipCar – The UK’s market leader in shared mobility, ZipCar now has more than 12,000 vehicles worldwide and more than 1,600 in London alone, having been founded in just 2000. With research firm Frost & Sullivan claiming the number of people using car-sharing services will increase from roughly six million in 2017 to almost 18 million by 2025, it seems ZipCar and competitors such as easyCar, Turo and Drivy, are only going to have a greater presence.
Fair – Calling itself “the future of car ownership”, this app-based service lets customers acquire a car on their phone, sign for it with their finger, and enter into a leasing agreement at an agreed monthly rate and initial deposit, with the option to return it at any time.
Tesla – The electric vehicle giant plans to bundle insurance and maintenance services with finance agreements, as well as a range of less crucial but more aspirational ancillary services such as free in-car Spotify and mobile data.
Part two: The new value proposition for motor finance
One thing that all the trends, technologies, and strategies described above have in common is that they all de-emphasize the finance industry’s current focus on agreements that cover a fixed term, link one vehicle to one owner, and tie finance exclusively to physical assets alone. It seems clear that the direction of travel for motor finance is towards the provision of a flexible or revolving credit agreement, comparable in simple terms with a credit card agreement, and with the type of billing structures familiar from the power industry.
With a line of credit provided according to a customer’s specific needs, billing would flex based on where, how, and for how long an asset was used, how it was maintained, and its condition after use. With the telematic information available through the developing internet of things, the data infrastructure necessary to support this sort of billing is now becoming possible.
Volkswagen Connect enables VW owners to plug a DataPlug into the car’s diagnostic port.
Customers can view, via an app, a log of all their journeys from start to finish, together with the time, duration, route taken, and cost per journey. They can also see an ‘Efficient Driving’ score based on their acceleration, braking, speed, RPM, and coolant temperature data. The app can also tell them when the vehicle is due its next service, how much fuel is left, and where it’s currently parked, as well as directly contact assistance in the event of a breakdown or accident.
And, of course, with the sort of user interface this flexible finance mentality will require, it would make sense to build other mobility related payment functionality into the platform, enabling users to pay for parking and tolls, fuel and charging, and ancillary products such as insurance and in-car entertainment, through the same system.
In looking to develop these, the industry could learn a lot from pay TV and mobile providers, as well as current account and credit card providers, where the packages are marketed as fun, convenient, inclusive and unique (American Express Invites, for example, gives customers access to tickets for large events, such as a Rolling Stones tour, before they go on general sale).
Beyond this change in the product, however, finance houses must foster a commensurate change in the perception of finance. Rather than being seen as a means to an end, and simply the means by which customers can make an asset affordable, there is every potential to make finance aspirational. The opportunity for finance providers here is to offer a convenient, bespoke, and simple way for customers to serve all their mobility needs through a single relationship.
Care by Volvo, a subscription service
The service involves no deposit. Instead, a monthly payment covers the vehicle, insurance, taxes and service fees. Every two years, the car can be replaced with a new one. In some regions, it also brings digital concierge services, such as fueling, cleaning, service pickup, and ecommerce delivery, to the car. It includes the ability to change car for up to two weeks a year to another Volvo model, for holidays or specific trips. Customers can also share their car with friends and family using digital key technology.
Volvo is also developing a performance brand, Polestar, that will launch using the online channel as its primary route to market, rather than existing retailer showrooms.
Drive for free with Nissan and Ovo Energy
In this scheme, electric car owners will be paid for letting an energy company use their vehicle’s battery, in a pioneering scheme to increase uptake of cleaner vehicles and help power grids manage growth in green energy.
Nissan and UK energy supplier Ovo will offer the “vehicle-to-grid” service to buyers of the Japanese carmaker’s new Leaf from 2019.
After installing a special charger in a customer’s home, the supplier will take over management of the car’s battery, with owners able to set a minimum amount of charge they want for driving the next day. Ovo will then automatically trade electricity from the battery, topping it up during off-peak periods when power costs about 4p per kilowatt hour (kWh) and selling it at peak times for about four times as much.
Ovo chief executive Stephen Fitzpatrick has claimed the savings made by users will cover the £350-400 annual cost of charging an electric car. “Being able to feed back into the grid will mean that customers will be able to drive for free,” he said.
Part three: Possible future states for motor finance
It’s very tempting to get lost in the possibilities for the evolution of motor finance, yet equally we know that some trends posited as the “next big thing” will inevitably turn out to be red herrings. As such, what certainties can we ascertain for the role of finance providers in a transformed automotive environment?
- There will still be a requirement for finding and connecting those who need to borrow money in order to make an affordable purchase.
- This process will become increasingly digital, and consumers will demand an even faster, simpler and smoother lending experience.
- The dealer business model will evolve due in part to a mismatch between distribution costs and retail sales, and in part to customer and regulatory demands to make motor finance origination completely digital and fully auditable.
- The value proposition for finance will evolve:
- A wider choice of mobility options – full ownership, shared ownership, and fully flexible mobility (pay as you go).
- An inclusive, subscription-based model – finance agreements will incorporate a bundle of products and services including car ownership, maintenance, insurance, tax, and other value add services (for example, concierge services).
- Agreements based on a flexible line of credit – agreements will enable the customer to pay less, or more, based on usage, condition, payments (for fuel/recharging, parking, in-car entertainment, WiFi, and accessory hire), and whether they want to offset costs by sharing their vehicle.
- Customer engagement will become increasingly important; this will center around a digital self-service experience designed to foster a relationship between the finance provider and the customer. In other words, a remote control on motor finance.
These end points are relatively certain. What’s unknown, however, is how long it will take the industry to reach them, and what route it will take to get there. While economic and regulatory pressure on incumbent models and competition from potential disrupters will have some influence on the pace of change, the biggest influence will come from consumer attitudes to car ownership. After all (to play devil’s advocate), it’s worth remembering that while a lot of players are betting on car sharing becoming an established norm as younger generations take on more economic power, not everyone buys into this. A survey of 5,500 UK motorists by Auto Trader (March 2017) found that 73% of 17-44-year-olds said independence was their primary reason for car ownership, with 81% of all car owners expecting to continue to own cars for life – a note of caution for those expecting immediate and revolutionary change.
As such, we see change taking place on a spectrum defined by the speed at which consumer attitudes towards asset ownership end up changing:
|Incremental change from current attitudes to ownership||Car sharing rapidly becomes the norm|
|Vehicle ownership||Vehicles remain personally owned – owners opt for the privacy, flexibility and convenience that comes with owning their own vehicle.||Ride- and car-sharing becomes more cost effective and convenient for many (particularly in densely populated areas).|
|Impact on incumbent finance providers||Incumbents remain dominant players.||Lower loan volumes from private buyers; fleet finance remains stable or grows slightly.
Increased competition from tech giants, mobility providers and emerging OEMs.
|Impact on dealers||Dealer numbers dwindle slightly.||Dealers pivot their business to support mobility providers, a model KPMG describes as “universal service factories”.|
Preparing for the future
Whichever way you look at it, the motor industry is going to experience profound change and disruption. Business models will need to evolve and leverage new sources of growth and value creation, especially as tried and tested methods produce diminishing returns. As with all industry transformations, there will be winners and losers, and change could easily come more quickly than many currently imagine. To prepare for this uncertain world, finance providers need to accomplish two things:
- Invest in a digital self-service platform that will enable them to engage with customers in more ways, and via more channels, than they do today.
ieDigital’s client Toyota Financial Services has adopted the Interact platform to integrate management of finance agreements into the ‘My Toyota’ app and digital portal. Through this portal, customers not only engage with their finance agreement, they also arrange services and MOTs, renew their insurance, check owner manuals, and access rewards.
- Adopt a new way of working
- Design thinking – When tackling problems that are ill-defined or unknown, finance houses must habitually question assumptions and seek out hidden implications. Problems must be reframed in customer- and human-centric ways, with a hands-on approach to prototyping, testing and trying out new concepts and ideas.
|Traditional thinking||Design thinking|
|Detailed planning||Trial and error|
|Avoid failure||Fail fast|
|Detailed analysis||Detailed testing|
|Arm’s-length customer research||Deep customer immersion|
- Agile methodology – Finance houses must take an iterative and incremental approach to the designing and building of new services and customer experiences. With so much change on the horizon, and a corresponding amount of uncertainty, it makes sense to handle transformation in small incremental steps.
Want to know more?
ieDigital can help your organization deploy a digital self-service platform that gives you the foundations to foster a relationship with your customer and, in time, extend and flex your value proposition.
We can also work with you to better understand your customers’ needs and to prototype, test, and try out new concepts and ideas with them.
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