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How digital can help motor finance providers seize opportunities

Simon Cadbury explores how digital can strengthen relationships and drive product innovation within the motor finance industry.

Simon Cadbury explores how digital can strengthen relationships and drive product innovation within the motor finance industry.

Several hand fists raised



6th October 2016

Simon Cadbury

While there’s no doubting the astonishing success of the car finance industry in the last few years, there’s also no guarantee it will continue. As recent political upheaval in the UK has underlined, the world is changing fast, and it’s imperative that businesses are able to change with it if they want to survive, let alone maintain a lead in their field.

There’s a huge appetite for innovation among car finance providers, and many of the industry’s leading figures are thinking years ahead in terms of how vehicle purchase and finance will evolve, and how they can position themselves to benefit. Yet, as things stand, most of them have been conducting business in a way that hasn’t changed significantly in a long time. And while it’s working great today, it may not be the best fit for tomorrow. It’s time for car finance providers to close the gap between theory and practice, and realize their desire for innovation.

The Challenge

The state of play

Car finance is provided almost universally at the point of sale. It’s offered on the forecourt as a way to incentivize and facilitate vehicle purchase, and to provide a revenue stream and a repeat business driver for retailers. So far, this has worked well for customers, for dealers, and for lenders, and is why, in the 12 months to April 2016, penetration of finance into new car sales stood at 83.6%. And with the industry experiencing such a boom, it’s tempting to leave real innovation for tomorrow under the precept that what isn’t broken doesn’t need to be fixed.

Change before you have to

Former GE chief executive, Jack Welch, famously had an answer to that school of thought, when he warned that companies should make sure to change before they had to. And with business currently so buoyed by years of growth, it would seem there’s no better time to invest in the capabilities that will perpetuate success into tomorrow.

As the way consumers approach mobility is revolutionized by the advent of the digital world, so too will be the demand that finance providers seek to fill. The challenge for today’s industry is to overcome the inertia of a system that has served them well for decades, and adapt in time to stay ahead of change. But what changes lay ahead, and how – from a motor finance software point of view – can lenders best position themselves to meet them?

Why the growth curve will change

First of all, it seems inevitable that correction is due to the new car finance growth curve. New car finance remains so prolific because, soon after the 2008 crisis, it was identified by manufacturers as their primary lever for stimulating UK auto retail. Historically low interest rates made it more feasible to offer a lower cost of finance on a vehicle than to discount the cost of the unit itself, so manufacturer-owned finance companies presented the market with a raft of extremely competitive offers.

Parallel to the growth of new car finance in general has been the growth of the Personal Contract Purchase (PCP) product, which has long eclipsed hire purchase as the industry’s product of choice. With its prompt for renewal on new vehicles at end of term, it stood to drive future (as well as current) sales growth. As a result, in 2015 the product accounted for 76% of new car finance business, with some manufacturers writing almost no hire purchase business at all.

What’s next?

If you strip away this astonishing dynamo effect from the market’s post-recession growth, what remains is a robust, but less dramatic success story powered by non-captive finance and development of finance in the used car market. And while manufacturer finance will certainly remain a strong presence in the market, we may soon see a partial realization of this theoretical exercise.

Up to now, common understanding has had it that either a rise in interest rates, or a change in the prospects of the UK auto retail market relative to others in Europe, were the factors most likely to trigger a change in manufacturer strategy. While the former now seems even less likely than it did at the year’s outset, the emphatic onset of the latter couldn’t have been more drastic.

Routes to success

Whether European instability prompts a major slowdown in manufacturer-led growth, or whether it simply reaches a natural plateau, several routes to growth remain open to the market as a whole:

  • Independent lenders and captives will continue to compete for the prime-risk, PCP-dominated new car finance market, and as long as car sales continue to grow, there will be more business to win here. Even in the event of decreased subvention appetite from manufacturers, and potential slowdown in captive participation, there will be a major drive by independents to increase their market share.
  • For manufacturers in particular, but for all new car finance providers, a leasing proposition via Personal Contract Hire offers a route to growth. PCH represents around 6% of the new car finance market, but this is increasing rapidly. Independent lender Santander Consumer Finance launched a PCH program in June 2016, and at the 2016 Car Finance Conference held by Credit Strategy, some 56% of delegates felt it would account for more than 25% of the market by 2020, while 15% predicted it would account for more than half.

Delegates at the 2016 Credit Strategy Car Finance Conference were asked:

What percentage of finance agreements for new cars will be made up of PCH by 2020?

  • While statistics beyond estimates are hard to come by, penetration of finance into the used car market may be as low as 20%. Development of finance offerings (and PCP in particular) for the nearly-new and used markets clearly represents a huge opportunity. Nevertheless, it is one tempered by the huge influx of ex-PCP vehicles now entering the used arena, and the effect this will have on RV positions. Equally, a pullback from manufacturers on subvention may stimulate demand for used vehicles as first-time buyers, faced with less competitive monthly payments on new vehicles, look to used cars instead.
  • Currently, all but the prime customer base is relatively underserved by finance providers, with a limited number of providers (and even fewer large ones) operating in the near- and sub-prime brackets. Expansion of risk appetite to take on a less prime customer base, itself necessitating growth in the provision of used car finance, is a growth option being considered by many players.

Lenders focusing on any of these growth strategies will be advantaged by the momentum that years of growth has built up; consumers have become used to the ubiquity of finance, and will more often than not consider it intrinsically linked with mobility. No matter how finance provision evolves from here, it’s fundamentally integrated into the landscape of auto retail. However, its delivery through the traditional point-of-sale model is anything but assured.

Digital disruption

The development of digital culture has disrupted all retail sectors, and auto is no exception. Change has come more slowly to the motor market, due in part to the strength of the UK’s dealer sales culture, and in part to “tyre kicking”: the consumer’s desire for there to be a physical, face-to-face element to the purchase of such a significant asset.

But even in the used market, the number of physical site visits involved in car purchase is declining significantly, and in many cases cars are being bought directly online. And even though the vast majority of customer journeys still retain a physical, offline component, this isn’t always the point at which the finance sale occurs.

Online competition

At the same time as they research their car purchase options online, consumers may be acquiring unsecured finance (at increasingly competitive rates) from a host of online-savvy lenders. Equally, they may be signing up for HP or PCP with a number of fast-growing online car finance brokers. These deals will make their way onto a lender’s books, but will forego the dealership, leaving the forecourt as the last stage in the purchase once a deal has been approved.

The direction of change is indisputable: In the Credit Strategy research referenced above, some 69% of lenders polled predicted more than half of finance deals would be originated online by 2020, with 30% of them expecting more than 75%.

Delegates at the 2016 Credit Strategy Car Finance Conference were asked:

What percentage of car finance agreements do you think will be originated online, rather than at the point of sale, by 2020

The solution

Beat them or join them?

For traditional point-of-sale finance providers, this shift in the customer journey may prompt one of two responses. In the most basic terms, they can choose to either retain control of the sales journey by offering their product online themselves – a move that requires close coordination with dealer partners if they are not to feel excluded – or they can increase the sophistication of their point-of-sale offering to make it more competitive. In either case, digital development lies at the heart of the solution.

In a piece of research conducted by ieDigital, some 44% of respondents said they had digitized their loan origination process at dealership level. Some 25% of the same pool said they had digitized direct loan origination. However, these are still very low figures when you consider how they compare to other areas of financial services.

Furthermore, digital has even more limited penetration into the rest of the product life cycle: Only 20% of lenders said they had the facility for customer self-service online, while just 16% could offer this via the mobile channel, and 16% again were able to handle arrears management online.

Digital relationships: a competitive advantage

While it makes sense that lenders are working to bring digital elements into their origination process, it’s only by building digital engagement into the entirety of the customer relationship, from beginning to end, that they can maintain a competitive advantage. Here are five strategic areas where a concerted digital strategy can bring benefit to lenders:

    1. Staying ahead of unsecured lenders. At present, lenders offering unsecured finance for car purchases are not only selling to customers digitally, but offering them the ability to interact with their accounts online, and via mobile too. Car finance providers are already seeing intense competition from these lenders on price (and this may well intensify if manufacturer subvention drops off), and their best answer to this is to outpace unsecured lenders on service.This doesn’t just mean faster approval and onboarding, but a level of consistent accessibility throughout the life of an agreement. Given the intrinsic connection between asset and loan in a PCP or HP agreement, not to mention the products (such as insurance or warranty) that may be connected with it, secured finance providers should enjoy an innate advantage over their more generic competitors when offering self-service capability.2. Boosting retention & renewal. As discussed above in relation to the merits of PCP, point-of-sale car finance doesn’t only facilitate the sale of a single vehicle. Used correctly, it provides a steady stream of repeat business for both dealers and lenders alike.Of course, converting potential renewals involves two things: having the information to know when to make contact with a customer, and having a strong enough rapport to provide fertile ground for a sale when contact is made. Consistent digital engagement throughout the course of an agreement ensures both of these factors. It’s no surprise, therefore, that we found 74% of dealers felt increased digital engagement was significant in encouraging purchases of new vehicles at the end of an agreement.3. Strengthening dealer partnerships. Of course, it shouldn’t be forgotten that repeat business for lenders means repeat business for dealers, too. In addition to providing an advantage when it comes to ease of origination, the ability to offer retail partners the renewal benefits enabled by increased digital engagement represents a key competitive advantage for any lender looking to grow market share.In a dealer finance environment threatened by a ‘race to the bottom’, where lenders can only grow their presence by taking a reckless approach to price competition, the ability to offer the service and repeat business proposition afforded by digital shouldn’t be underestimated.

      4. Mitigating risk in non-prime. The ability to offer customers digital self-service options is a proven advantage in handling (and staving off) collections activity. Regular digital engagement not only puts a lender in a stronger position to anticipate a customer falling into arrears, it enables early-stage communication to nip the problem in the bud.In addition, empowering customers to control their relationship with a finance product via mobile and tablet access makes it more likely that they themselves will take action to avoid an arrears situation, or at least make the first step in rectifying it.

      With more and more lenders looking to venture into higher-risk customer brackets, this advantage in forestalling arrears activity will become more and more pronounced.

      5. Anticipation of further product evolution. So far, we’ve talked about the benefits of digital as they apply to changes taking place in the immediate future, yet looking beyond the next few years, the car finance market as we know it may change beyond recognition. In just the last five years, we’ve seen a nation of HP customers, whose mindset was fixed on asset ownership, transition into a market of PCP fans, who fully expect to return their vehicle and exchange for a new one at the end of an agreement. Now, with the growth of PCH gaining momentum, we’re beginning to see the next phase of that evolution.One model of the industry’s future sees finance houses become, in effect, giant leasing companies; owners of vehicles that are used by customers as and when they require them. In a world like this, where mobility is paid for in the same way that telecoms services are now – as a service, with the use of hardware included – it’s hard to imagine any provider being able to operate without a completely digital service offering.


The automotive retail market may develop along any number of trajectories, and finance houses will be mandated to keep pace with it. While we can only begin to guess at what shape it will grow into, there is no question that sophisticated digital financial solutions must be at its heart.

At the same time, long before it can tackle the demands of the future, the industry has to catch up with the leading edge of the banking world. Legacy systems, cultural inertia and regulatory concerns will provide obstacles to doing so, but must be overcome. The point-of-sale model has thrived for a long time, but to push success any further, it must start to truly innovate.


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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