Motor finance: a changing market

Pressure on motor finance companies looks set to see changes in the months ahead and lenders and dealers must adapt. The automotive sector must pay attention to developments like this which further indicate the importance of the market becoming more buoyant and sustainable in order for dealerships to thrive.

While recent years have seen new entrants move into the market, the current economic climate is not as favourable for lenders. We are beginning to see a reversal of this trend, with exits and consolidation among the lending community.

At MotoNovo our commitment to dealer finance remains resolute. We believe in the consumer benefits of dealer finance products and will continue to promote their value through collaborative initiatives like findandfundmycar.com. But the signs are emerging that the pressure is most definitely on for the sector.

The key industry pressure points are:

• Reducing margins as a result of increased competition and rising costs
• Investor concerns about residual value products in light of environmental changes
• The expectation of regulatory changes and increasing compliance costs
• The uncertain economic outlook

There have been signs indicating an imminent change for the industry for some time. For example, the market has broadly seen more cautious outlook in the securitisation market. This has been most notable with regards to PCP-centred portfolios, where prudence due to concerns about residual values has meant that lenders have faced reduced revenue and margin pressure.

And these downward pressures exist within an increasingly active market. New and existing players have sought to increase lending, and the resulting climate is one of over-supply and margin erosion. What’s more, broader economic uncertainty in the UK has impacted the car industry in particular. The combination of these developments means that change is inevitable and already underway.

For the future of the market to be sustainable Standish believes the model has to move towards what MotoNovo calls a ‘triple win;’ where the benefits for the buyer, the dealer, and the lender are fair, appropriate, and proportionate. Without a model that supports an equal distribution of the benefits, customers and lenders alike will be at a disadvantage.

We have seen moves to de-risk lending through more stringent underwriting and the use of rate for risk and ‘maximum advancing.’ There have also been telling operational developments from major players and disruptors alike; from refined lending approaches, to market exits announced over the past weeks and months.

We’re sorry to see major players unwind their operations, as we believe healthy competition is crucial in driving the innovation and change required to make used car finance a leading choice for consumers. But we should expect further re-shaping of the industry in the months ahead.

During this market shift, it will be crucial for dealers and lenders alike to embrace change, flex with the market, and always strive towards continual improvement of customer outcomes to ensure fewer exits from the market and avoid restricting the level of liquidity within the sector.

Mark Standish, MotoNovo, Chief Executive Officer