Lending money is easy, and always has been. The trick is to make sure the person you lend it to can pay you back. We all know this, and this is why all banks and financial service providers run credit checks against their customers before signing a deal. The issue is that, as in 2008 when the credit market tanked into near oblivion, today’s customers are borrowing from multiple lenders at the same time.
Credit bureau data, as good as it is, doesn’t always take into account the changing circumstances of the customer: Jobs are less secure, retail prices are rising faster than household incomes, and the tight reigns on mortgages and unsecured lending from the banks are being slackened once again. While a customer may seem good for credit when a score is calculated, it doesn’t mean that within a few months their situation won’t have changed, and their wallets may be running on empty.
Still, the FCA is aware and is doing what it can to keep the balance from a banking perspective, ensuring that, where risks are high, proper affordability checks are being conducted against those who appear vulnerable to falling into arrears.
As with all carefully balanced constructs, however, a single overbearing load could roll the show right over. In a recent Reuters report, there are signs of a new risk to the credit market that could drive it off the road again: the vehicle finance industry. Reuters points out that the connection between the vehicle manufacturing industry and the push of credit to finance the sale of cars could lead to a credit crash and a major slump in what is one of the UK’s most important manufacturing industries.
It’s not just the fact that there is a rise in demand to borrow money to buy our beloved cars that is a threat to the vehicle finance industry, but also the way in which the finance contracts are being offered. The vast majority of vehicle finance deals are tied to the value of the car – the personal contract purchase (PCP). Monthly repayments are ‘artificially’ lower than a regular loan, as only the calculated depreciation value (plus interest and profit) is paid off monthly. The balance of the loan is usually settled within four years, when the customer has to either pay the residual value of the asset (the balloon payment), or hand the car back.
The danger comes in the form of the final payment. The customer has to find quite a large sum of money – probably several thousand pounds. If they don’t already have it rotting away in a so-called savings account, then the likelihood is that they will borrow it from another lender, initiating yet another loan. Without proper affordability checks that go beyond a credit score, will the vehicle finance provider spot that their customer just took on another debt burden? In the rush to secure the customer for another deal, I think that this is unlikely.
Acquire, Connect and Collect
So how can digital engagement help? Plenty, but finance providers will need a cohesive strategy across the full customer life cycle if they hope to keep close enough to their customers, help them manage their finances properly, and keep a close enough eye on them to be able to help before things go bad.
Acquire – At the point of sale, either as a new customer or for a subsequent vehicle, provide engaging, clear to understand and simple to use budgeting and debt repayment tools that help the customer work out what they can afford, while still offering an exciting choice of vehicles for them to buy.
Connect – Existing customer relationships are exceptionally hard to maintain on a traditional engagement basis. Provide a functionally rich, but easy to access, digital financial platform that enforces the importance of the repayments while making them easy to fulfil and offers a variety of ways that the customer can contact and engage with you at any time, 24/7.
Collect – Before disaster strikes, be there with debt and arrears services that allow the customer to spot an early arrears event, and either prevent it from happening or, if it does happen, guide them through the options to resolve the issues and avoid asset recovery proceedings.
If it’s a fully engaging motor finance software platform you need, you’ll have to go beyond just dabbling in digital with bolt-together, a bit of this and a bit of that solutions. You’ll need to find someone who has already delivered such platforms, and can prove that they know what makes an excellent digital customer journey.
Where should you get started? It just so happens that I know someone who can help with that …