The FCA’s review’s findings set the scene for changes in the commission model, transparency and affordability, with lenders set to adopt an active role in dealers’ promotion of finance. Addressing the changes required is clear. The FCA has thrown down the gauntlet to lenders and dealers to improve the customer proposition and experience. We see this as a significant opportunity to move decisively to embrace a new retailing model centred around the finance that 80% of customers need and the sustainable margins that dealers require.
While in the short-term, I recognise that the findings from the recent FCA report on motor finance will create short-term challenges, our overwhelming view is that overall, the report provides the catalyst for the retail motor sector to create positive change that will engender greater trust and sustainability in the market. Our company is committed to being alongside dealers at the heart of this change.
While the FCA report might be the ‘spark’ for change in motor retailing, the evidence that the established used car retailing and financing model can only benefit from a ‘re-boot’ is evident:
- In used car financing, around 65% of current used car buyers choose their bank or direct lender for a personal loan offered at a cheaper rate, within a customer journey that provides them with a greater sense of transparency and control
- The growth of a range of vehicle and finance intermediaries and aggregators, who without the costs and risks of a used car motor dealer are presenting themselves as consumer champions capable of sourcing cars and finance to help the customer. In doing this, they are often retailing dealer stock, at a cost to the dealers and finance. As with most successful market disrupters, their success reflects that an existing process is broken, inefficient or out of step with the needs of today’s consumers
The FCA’s findings must be seen as crystallising shortcomings in used car financing in the dealer market and help highlight the benefits of embracing a fresh new approach;
From its press release headline on their final report, the regulator makes it clear that they expect change in the commission model. The industry must also recognise that the distribution of dealer income between metal and ancillaries (particularly finance) will have to change. The FCA will just not accept a cross-subsidisation model designed to create a lower car price to enhance aggregator rankings.
Addressing these issues can help create lower interest rates in dealer marketing and enable appropriate rate for risk pricing to be developed, vital when finance and car buying are so connected today and when increasing finance competition and online pricing transparency are prevalent.
While there are examples of dealers who do far better, typical finance penetration rates within the independent used car dealer segment are no more than 15%; yet the 90% new car finance penetration performance points the way to what is possible.
Moving forward, as well as addressing the FCA’s key findings around commission models, disclosure of information, affordability and monitoring of intermediaries, that motor dealers will need to look critically at their business models. Distribution and marketing costs will need to be optimised, margin in the metal will need to be enhanced and the approach to finance income will need to be based around; ‘a little and often’ approach that will see dealer finance become the preferred financing method for the vast majority of used car buyers.
It is time for an industry re-boot as we work to disrupt the disruptors and competitors and work to create a new customer-centric car retailing and financing model and the two are interwoven.
As a business, we have a successful track record in innovating to help dealers; customer self-serve technology, the launch of findandfundmycar.com and the ongoing development of risk-based pricing, are some of the most recent moves to help dealers. They are part of a broader package and culture that is delivering to dealers the most customer-centric and digitally enabled proposition available in the market today. In the weeks ahead we will be consulting with dealers and sharing our thoughts on the opportunities available and as outlined, the prize is well worth the effort!
Mark Standish, CEO, MotoNovo Finance