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Exclusive: BMW FS reveals plans to reduce dealer finance rate further

BMW Group Financial Services believes it has taken a market leading position in introducing a capped finance rate of 10.9% dealers can sell consumer credit at, while dramatically reducing add-on fees.

But in this in-depth interview its group brands general manager Spencer Halil (pictured) says this is the first step in ensuring the customer comes first (regulator second, dealer third) – and it is now trialling a reduced rate of 8.9%.

AM: When I look at change to the provision of consumer finance, the question it prompts is what are you attempting to do – either solve a problem, or exploit an opportunity? It sounds like the former.

Spencer Halil: Well, it’s a bit of both, really. 

We saw the fact that the customer was expecting much more online interaction. The customer was expecting much more simplicity and transparency of proposition. Our customers expected, and didn’t understand why they didn’t get, a uniform offering when they went into any and every BMW centre.

They don’t see dealer groups as different entities. They expect to be treated to a very high standard, and in a very uniform way, which to a large degree they do get. We’re very good at customer management at the point of sale, but they also expect the offer to be very consistent and at a high level, and fair and competitive.

They don’t expect us to be the cheapest. They don’t get that with the cars, so they don’t expect that around financial services products either, but they’re buying into premium, they’re buying into quality.

The problem was we knew the customer expected these things, and we could identify many, many aspects of our business that didn’t deliver to those expectations.  It wasn’t damaging our business then, but if we didn’t do something about it, it would.

It’s not an entirely altruistic thing that we’re doing.  It’s good business sense, as well.

AM: you haven’t made any reference to the new FCA regime as a guiding force in your decision

SH: Well, we knew clearly we were already subject to regulation, and we knew that the regulator was changing from the FSA/OFT to the FCA.  We hadn’t really, at that point, registered that it was going to be a fundamental change as it clearly has been. 

A day doesn’t go past without the FCA hitting someone with a fine.  They are far more aggressive and proactive, and rightly so.

We’ve never been a company that sees regulation as a negative, but this predates the changes. 

We have a hierarchy of priorities within our business.  It always was dealer first. The dealer was our customer, and the end user, the driver, was their customer.  But we worked with the dealer to make sure that the they delivered a great service to the customer, and in so doing, the customer would receive a good experience.  The priority has changed. The customer is our first priority, the regulator second , the dealer is third. It has to be this way.

AM: Why?

SH: We believe, by satisfying all of our responsibilities to the customer, we will satisfy our responsibilities to the regulator, and in satisfying our responsibilities to the customer and the regulator, we will present better opportunities and more sustainable businesses for our dealers.

AM: How does your introduction of a capped interest rate on credit sales impact the dealer at the point of sale? What is a dealer to do differently?

SH: In the past we had 53 different business units in our network, from individually-owned dealerships to the biggest plcs, and we had 53 different packages.

They were the same products - HP or our PCP Select - and there are a number of more sort of corporate-style products, like leasing and contract hire, but they’re the same products, but at different prices, and the price was presented to the dealer, and then the dealer made their commission by presenting a different price to the customer, and the gap between the two was the margin that the dealer earns. That’s the traditional model. That’s how almost every lender in the country operates. We’ve moved to one package across all of our dealers. There’s no way we can present a uniform proposition to the customer regardless of where they visit one of our branches, if we don’t have one offering.

Also rather than having one rate that the dealer operates up from, we have one rate than the dealers now operate down from. So, we set a maximum rate at 10.9 APR, and the dealers can provide either competitive advantage, or offer lower rates if necessary.

They can discount down. That’s not just semantics in our mind – that’s not just being smart.

The current model is, we give a dealer a rate and they don’t tell the customer what the cheapest offer they can make is, and they see how high they can get it to maximise the earnings. 

We are going to put our 10.9% rate into our online calculators. We’re going to make sure the buying public knows the most you’ll ever pay with a BMW, when you buy a BMW Financial Services’ product, is 10.9%.

The dealers can then choose to discount below that. 

Now, I accept the criticism that 10.9% isn’t the most captivating rate in the marketplace, but at the end of the day, we’ve narrowed the bandwidth. We’ve put a ceiling on it. 

It’s much lower than many customers are paying for car loans at the moment, and there’s still ample opportunity for the dealer to discount, if the customer’s particularly focused on achieving a lower rate.

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  • Steve Boucher - 05/12/2014 17:03

    It's interesting to see that the new BMW Finance advertised rate of 10.9% is higher than the average rate BMW dealers have been charging - could someone explain how this is putting customers first? I appreciate that dealers can discount down the rate, but if you are 'treating customers fairly', shouldn't you be offering all of your customers the lowest discounted rate?

    • Vauxwagen - 06/12/2014 21:16

      @Steve Boucher - Unfortunately most of the industry can't seem to get their heads around TCF. TCF isn't about offering every customer an identical rate and product. It's about offering products that are appropriate to the customers needs and requirements. Different rates create competition (from the manufacturers, dealers, banks, the direct lenders etc) which also means customers are more likely to be treated fairly, as they can always say no. Good qualify qualification, should ensure that customers are offered appropriate products. If one customer is offered a 10.9 APR with a free service contract and another is offered 7.9 APR without a service contract, who is being treated fairly? Well both of them as long as the products are appropriate. Offering a customer a 4 year Contract Hire agreement, when they have told the dealer, that they change every 2 years isn't treating a customer fairly (unless they understand that they won't be able to change at 2 years). TCF is about being clear, open, honest, transparent and ensuring the customer understands what they are buying?

    • Steve Boucher - 08/12/2014 09:06

      @Vauxwagen - There are elements of every deal which are open to negotiation - the FCA are only concerned (at the moment) with finance and insurance sales. Their question is 'why should one person be offered a lower interest rate than another?' Unless the lender is using risk-based criteria to make their decision, there is no reason.

  • jim smith - 05/12/2014 17:27

    These statements from BMW bear little resemblance to what is actually happening in the market place. Customer's are APR driven currently, with many quoting Direct Lender APR i.e. sub 5%. Perhaps the BMW showroom receives few such customers, but the mid market brands certainly do. One final point - virtually every manufacturer answers PCP - now what is the question !!

    • DJB - 08/12/2014 17:51

      @jim smith - The idea that you can get sub 5% APR from direct lenders is not true in most cases. UNLESS they are doing an equity draw down on the house. By the time the customer has applied, the rate will have shifted to over 10% easily in most cases. The rate they offer is not the rate that they get. By this time the customer will have gone through the process so will stick with the rate offered. It's up to the Dealership to get that message across to the customer and do a little research on market rates...

  • R Patel - 09/02/2015 08:33

    This is great and I have seen that starting rate when I made a purchase recently. But there are dealers that use alternative finance house such as Black Horse (Lloyds) and their starting off rates are above 10.9. Should customers specifically walk into a dealer, ask only for BMW finance and start there? I tried that with one dealer and despite their usual blurb about finance houses were quite insistent on using Blackhorse, for whatever reason they veered away from BMW FS. Perhaps they get a better commission from other finance houses rather than BMW FS, but after reading this article it makes sense now. BMW should also think about dealers changing their policy of not emailing out a quote, that still bemuses me considering all quotes must be put in writing first. Some do it but the majority don't. I was once told that all calls are recorded and that lives as proof of the verbal quote. Well done to BMW for taking this step now get the dealers to improve their service levels, particularly on the financing side.