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Lenders take direct action

Direct lenders are facing pressure from high street competitors and from retailers who want the lowest deals but who try to sell to customers at the highest APRs – often putting the finance transaction in jeopardy.

But few finance houses are considering bypassing dealers, despite several murmurings of discontent. They recognise that point of sale is the best route to a market where penetration levels are falling and new car sales have stagnated.

“Neither we nor the dealers have responded properly to the pressure from the high street. We are looking at that now – to give dealers the tools to combat that threat through POS promotions, products, pricing, training skills, commissions and incentives. The answer might not be PCP or leasing; we are looking at other products and pricing options,” says Capital Bank managing director Tom Woolgrove.

Statistics from the Finance and Leasing Association show that half of car sales are financed by personal loans – so this is about having good salesmen who can overcome the customers’ objections. Not everyone who says they have a loan sorted out actually does, nor do they necessarily have the best deal, so they can still be converted, according to Woolgrove.

He rules out going direct, despite losing some deals because dealers’ commission rates are too high. “Our role is to support dealers to sell more cars and make more money from finance, because then we do as well,” says Woolgrove.

“We have to offer high commissions to dealers because otherwise we will lose the business. But if we are serious about maintaining this industry there needs to be a serious talk about commission levels.

“It’s difficult for dealers when margins are falling on new cars, but there is incremental business to win by dealers taking less commission to offer a better rate for consumers. They need to be more flexible when selling to customers.”

Sustainable strategy

Capital Bank, which works with up to 4,000 franchised dealers, believes it needs to accentuate the positive parts of its business, but also recognises that its role might need to change in an industry that is facing significant change and economic pressure.

“Our measures of success are economic returns, finance penetration at dealerships, profit and reputation. We are not into volume for volume’s sake,” says Woolgrove.

“That’s a challenge when some competitors are grabbing volume without an economic return – it’s not a sustainable strategy. There are very competitive deals in the market that we would choose not to participate in.”

The bank is looking to integrate its computer systems with dealers’. It believes this would make it and its dealers appear as seamless as possible to car buyers.

HP at point of sale remains the dominant product although Capital Bank also does a lot of PCPs, particularly on premium cars. Woolgrove predicts that Personal Contract Hire (PCH) could be the next big thing in the finance market. It’s already popular in mainland Europe and dealers have indicated they are ready for it.

Woolgrove adds that Capital Bank is in talks with carmakers about them outsourcing their finance operation, and is confident that a few will start doing this.

#AM_ART_SPLIT# One-stop shopping

Big rival Black Horse is also concerned at the decreasing proportion of car buyers who are taking point of sale finance. To combat the threat from high street lenders and to address new legislation and compliance issues it is improving its dealer F&I training to help dealers’ sales teams promote and sell finance as the most convenient option for their customers.

“The industry as a whole needs to educate customers about the benefits of the one-stop shopping experience and the fact that attractive headline rates from high street lenders may not be available for all customer specific needs,” says Phil Stones, managing director, Black Horse. “We’re constantly looking for ways to speed up our service so that customers get faster decisions and will use our brand to help dealers leverage the trust and credibility of our finance at the point of sale.”

Educating the industry, particularly dealers, about the benefits of taking a long term view of selling finance and retaining customers is also a key focus for GE Money Motor Finance.

It is seeing dealers increasing the rates they offer to customers in order to increase profits in the short term. However, customers are settling early as they find more attractive rates from high street lenders and due to the recent changes to the consumer credit legislation, it is affecting finance houses.

Customer retention

A recent poll carried out by GE of 600 customers that had settled agreements early found that 80% did so because of the high rate they were paying.

“This needs to stop if the industry is to survive in the long term,” says Brendan Devine, managing director of GE Money Motor Finance. “We are focusing a lot of work on how dealers can retain customers longer and increase repeat business.”

He believes that many dealers are still focusing on hitting this year’s profit targets, rather than looking at what it will mean over five years.

With a slowly declining finance sector that is seeing more consolidation, it looks increasingly tough for the smaller companies to weather the storm.

“Once a customer has left because they have found a more competitive rate, they are very unlikely to come back and borrow again. That business is then lost to the dealer,” adds Devine.

#AM_ART_SPLIT# New MD faced baptism of fire

The last thing you want just three months into your new managing director’s job is for one of your biggest clients to go bust. But that’s exactly what happened to Tom Woolgrove in April last year.

Appointed managing director of Capital Bank in January 2005, he was faced with the collapse of MG Rover, a carmaker to whose dealers the company provided wholesale and retail finance on new cars. That meant intense negotiations for dealers desperate to secure higher discounts on cars they feared would attract little customer interest following the company’s closure. In the end they got a £25m fund enabling them to offer a 15% discount to clear remaining stock.

It cost Capital Bank tens of millions of pounds, while dealers collectively lost more than £50m on bonuses and falling residual values. But Woolgrove says: “The industry pulled together to solve the problems and that helped smaller dealers to survive.”

He adds that fewer than 10 MG Rover dealers have gone out of business, although many have since refranchised with the likes of Kia, Hyundai and Chevrolet. These brands have been able to add several prime sites to their networks as many MG Rover showrooms were in town and city centres.

“The MG Rover situation put pressure on our relationships with dealers – that’s why we needed to reach a commercial agreement quickly,” says Woolgrove. “We also made a contribution to warranty, distribution and storage costs.

“It wasn’t ideal timing, but it was an opportunity for me to stand up and be counted, and as a result it’s enhanced relationships with some of our dealer partners.”

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