Recent figures from the Finance and Leasing Association (FLA) have revealed the full impact of multiple coronavirus lockdowns on UK consumer car finance. A Motor Finance Online post said: “In the new car segment, new business volumes declined by 28% year-on-year in January, while the used segment reported a fall of 34% when compared to January 2020.”
That’s quite a drop for an industry very much used to reasonably healthy year-on-year demand for new and used cars. However, the recent decline in car finance business isn’t simply down to the effects of Covid-19. Relatively new entrants in car finance across multiple disciplines are disrupting traditional models. Those still investing heavily in the showroom model ought to have an eye on what’s happening elsewhere, and what the next 10 years of car finance may look like.
The emphasis is on digital services, but there’s also heightened emphasis on encouraging customer retention by enhancing the overall experience of buying a car. By adopting a multi-faceted approach to how vehicles are bought and sold, new or used, the successful operators in car finance will reap the rewards of a post-pandemic future by being proactively transparent about what options are available to the customer. Let’s look at a few of the early disruptors.
The middlemen are still out there
Have you noticed how there are noticeably more TV adverts for brands selling direct to the consumer? Covid-19 has had a devastating impact on retail department stores, for example, which were already in a state of remarkable decline going into the pandemic. This has led to more brands setting up their own deliver-to-home solutions, cutting out the middleman. But middlemen are still around, and they’re still serving the nation’s spending habits across multiple sectors, not least in motor finance.
Zuto is a broker for finding “the right motor financing deal”. It does the work of finding a lender to support a particular customer’s financial circumstances, cutting out the dealership but essentially doing the same job as that showroom guy at the computer. The difference is that online brokers search the markets for the best deal for a specific customer rather than with a single lender. (Which, until recent intervention by the FCA, was open to abuse by unscrupulous brokers who would set the interest rate to inflate commission.)
Brokers like Zuto and CarFinance 247 scour financing opportunities available to customers across a range of models, including hire purchase (HP), personal contract purchase (PCP), conditional sale and personal loan. From the outset, before you’re even allowed to salivate over your new car, online brokers will assess affordability considering criteria such as credit scores, monthly budget, address history and employment details. It’s a far safer model for ensuring people don’t fall into debt traps they struggle to emerge from. It’s also beneficial for those with poor credit scores.
Technology solutions for dealers
There are also brokers for dealers themselves, with Evolution Funding being a major player in the UK. While this type of broker is set up to help dealers increase leads, conversions and ship more cars, it’s also out to improve how customers are treated throughout the process.
Auto finance software solutions use algorithms to help all the above, but compliance is easier to track because the process the dealer and its customers go through is more transparent. And turnaround for finance decisions is often quick, which helps dealerships inevitably sell more cars, while the customer doesn’t get bogged down in the mire and complexities of motor finance administration.
These brokers usually have lending partners or product providers they regularly deal with, making the process of selling the right financial product much simpler for dealerships – simplicity which is (fingers crossed) passed on to the customer.
The benefits of online experiences
For people who would prefer not to visit a showroom at all, there are the likes of Carvana in the US, which operates a website that sells used cars. The neat trick is that Carvana sources its vehicles from auctions and dealer partners, trade-ins and private sellers and offers them up in an eBay-style online shopping environment. Once you’ve gone through the finance options – through Carvana’s in-house Bridgecrest Acceptance, as well as third-party financing, or even cash – you can enjoy free delivery to your door. Or pick it up yourself from one of the eye-catching vending machines.
This almost completely online experience is what the future of motor finance looks like. As well as the examples outlined above, some specialist lenders are automating approval for vehicle financing so fast, traditional physical dealerships have barely fumbled for the showroom keys in the morning. And then there are services such as Oodle, which offers a concierge approach to handling the buying process for you, right down to negotiating with the dealer on the customer’s behalf.
And that’s the motivating factor for real change in the motor finance industry: digital services are quicker, more compliant, more transparent and more fun. Of course, people will still need to take a car out for a spin, and perhaps that’s something else that may change over the next few years.
Imagine a scenario where a customer spends 10 minutes working out what they can afford using an online dealer, which in turn sends out a representative to their house so the car can be driven before entering into the finance agreement. The reps themselves could finalise the deal with the customer by using an app, where the new profile has already been set up. Finance is sorted, car is ordered, and fists are bumped in happy agreement.
Customer-focused processes
It’s interesting to ponder the implications for the used car market when you consider how many more attractive incentives there are in buying new. Motor finance disruptors offer finance models for all sorts of circumstances, but there are many pros and cons. PCP for used cars, for instance, isn’t as attractive a proposition compared to PCP for new. And online services seem to be gearing up for a market based on the subscription model. This is where everything is taken care of in one fell swoop: pick the car and finance model, and insurance, maintenance and after-care is all part of the deal. (We wrote recently about Tesla and Volvo doing this particularly well.)
This type of customer-focused process is transparent, simple, and fun. (Never forget fun, as it’s one of the hallmarks of a successful customer experience endeavour.) There will be more focus on the entire customer life cycle and retention, particularly from the lender’s point of view. As the relationship middlemen, motor finance brokers and dealerships have a head start in laying the groundwork for solid, authentic customer engagement that transcends the financial transaction. This is where customer loyalty becomes one of the primary motivating factors for building a sustainable business for the next decade.
So, the journey for dealerships going digital is fraught with jeopardy and abundant opportunity in equal measure. As motor finance adapts to a different kind of buyer, dealerships have to follow fast or lead innovation. If showrooms are to inevitably change, what’s the point in waiting around for it to happen?
It appears the days of traditional models around buying a car and financing it are numbered. It may take a few years yet, but young customers are digital natives who use apps, online banking, Netflix and social media. They grow up fast, make more money and demand better services. When they come around to spending a little of their hard-earned savings, will it be the local dealership they visit first or Tesla.com?
Photo by welcomia
