Motor traders have faced a dual challenge in the last year or so, reviewing their affordability assessments to meet new guidance from the FCA at a time of economic uncertainty.
There has been an underlying theme in the conversations I have had with people across the industry since joining Experian as managing director of Automotive towards the end of 2019.
How best can traders implement new affordability practices at a time when many customers are either managing shrinking budgets, or waiting to see what the future holds?
Following the FCA’s guidance, when appropriate, prospective car buyers and leasers should be screened on their ability to pay – not just at the beginning of a loan or lease, but right through to the last payment.
For example, a customer paying for the majority of the vehicle up front may not require these checks.
Affordability assessments also cover the entire cost of buying and running the vehicle including insurance and servicing, not just the initial purchase price.
There is an advantage in this. It helps to minimise exposure to default risks and it’s also possible to create personalised offers for customers depending on their individual situation.
However, there’s no doubt the in-depth affordability assessments have also created challenges.
I’m sure more than one customer you’ve met this year has grumbled about the amount of financial information required, compared to when they last changed car.
Friction means time, and time can kill deals. I have no doubt you can also recall a customer walking away because they were put off by the length of affordability screening.
All of this comes at a time when SMMT figures show new car registrations have reached their lowest level since 2013 – a statistic partly influenced by would-be customers holding out until the economic landscape is more certain.
So, what should be in a motor traders playbook in order to outperform the market while adhering to regulations?
1. Create fast, frictionless customer journeys
The goal for every automotive manufacturer or finance company is to remove potential barriers to sales. You need to create fast, frictionless customer journeys that make it simple for customers to gain approval for the loan or leasing agreement they want.
One approach is to build automated affordability assessments into your existing customer journeys. Paper identity documents can be replaced with electronic versions which are verified against government sources in real time.
Once you have identified a customer is who they say they are, you can bring together further valuable data about their financial situations to assess affordability for the finance.
2. Improve customer convenience
Searching for a vehicle and getting the necessary financing in place can be a complex and drawn out process for customers.
To make customers’ lives easier, implement technology which uses their data to pre-populate application forms and ensure that data must never be collected from customers more than once. You’ll need to track any changes in your customer’s circumstances, and to update and enhance their data on an ongoing basis.
If a customer gives their consent for data sharing under Open Banking, you can make their onboarding experience even more convenient. It becomes possible, for example, to prepopulate more than 80% of their financial information automatically, saving customers hours of time and giving them an answer to their application much more quickly.
As an additional benefit, you can be sure that the data will be accurate, with no risk of incomplete, false, or mis-keyed information. You can also save time for customers who begin their vehicle and financing searches on price comparison websites.
3. Increase customer approvals
Certain groups of customers can find it difficult to access credit for vehicles. New and alternative data sources help lenders to create a clear view of affordability among these customer segments, potentially allowing you to broaden your customer base.
For example, young people who are just embarking on their adult lives may not yet have loans or credit cards and therefore their data footprint is limited, making them credit invisible.
However, most will have a current account, and, with the right tools, you can accurately calculate a young person’s monthly income and expenditure based on their transactions.
In-depth data can also help you to make higher quality decisions on customers who may have been marginally declined in the past, which could instead result in acceptance.
4. Boost conversion based on personalised customer offers
Data from traditional and non-traditional sources can help you to understand your customers’ needs and preferences more fully, allowing you to create compelling, personalised offers for them.
If a customer has given their consent for data sharing under Open Banking, for example, you may be able to see if their existing car lease is up for renewal, giving you the opportunity to start a conversation with them about their next vehicle.
You can look at the affordability of their existing loan or lease to see if they would benefit from having a less expensive contract, or if they can afford to upgrade to a premium vehicle immediately.
5. Streamline compliance with evolving FCA affordability requirements
By being able to connect data, you can streamline compliance with changing FCA affordability guidance.
You can bring in data from manufacturers, insurance companies, servicing data and other data to ensure that customers can still afford their lease or loan.
It’s also important to be transparent with all the information you provide to customers, along with when and where you offer it in the car buying journey so it’s easy to check later.
The ability to bring in new and non-traditional data sources, and automate the insight it contains, means you can stay ahead of regulatory requirements while also ensuring the fairest and best experience for your customers.
Author: Gerardo Montoya, managing director of automotive at Experian UK&I