Saddled with student loans and massive unsecured debt, distrustful of financial services, and generally unsatisfied with their financial circumstances: that is the portrait of Britons aged 18-34 – the so-called ‘millennials’ – in the Financial Conduct Authority’s annual survey, Understanding the financial lives of UK adults. Lorenzo Migliorato investigates how the motor industry can address this growing market.
Millennials account for almost half the UK population that is considered to be in financial distress, despite constituting just 28% of the UK’s adults.
Low to no savings, frequent hops between jobs and cities, and a thin-file credit history all combine to push key financial decisions down the years.
The order and priority of those decisions have also changed. Being a homeowner used to be a big facilitator for any other future credit application; nowadays, however, renting has become the new normal, at least until the age of 30.
“A lot of [millennials] will not have bought a house before they buy their first cars,” says Richard Jones, managing director at Black Horse. “A car is probably the first major, big-ticket purchase in their life.”
That is not because millennials are strangers to the concept of ‘product as a service’, or recurring payments. They have subscriptions for broadband, mobiles, Spotify and Netflix. Additionally, they rely more on electronic transactions, which creates a trove of data that has so far been untapped by credit bureaus.
However, when trying to deduce how someone with a £9.99 online streaming subscription will handle a regular PCP payment of £200 a month, a problem of scaling inevitably arises.
“If you just look at smaller payments, the behaviour is different,” says Fred Kelly, chief executive officer of Credit Kudos, a London-based tech company aiming to rewire how creditworthiness is assessed.
“It is well known in the lending world that people will default on their mortgage first and stop paying their Sky Sports subscription last. There are some weird trends, and it does not follow that if I pay Spotify each month I will not default on a credit card.”
Nevertheless, Kelly thinks a more holistic view of credit is possible which does not turn lending into a “chicken-and-egg problem”.
Credit Kudos works in partnership with service providers in a range of sectors, including motor finance. Its deep-learning algorithms leverage data from small-ticket subscriptions and transactions to build a better profile of the credit applicant.
“If you think about the credit history model, it is mostly based around previous loan repayment data, and a little bit of open statistical data [about demographics],” Kelly notes. “What we are trying to do is augment those data sources with other kinds of data, mostly transactional data from someone’s bank account.”
Kelly says Credit Kudos already works with a number of car finance providers, and has also collaborated with the financial services teams of original equipment manufacturers (OEMs).
What he finds particularly unique about car finance is the large number of ways a customer can go about their buying journey. “You may know the car you want, you can go online and do a comparison. But then you can also be in a showroom,” he says. “There are many different places where you can come into contact with a customer’s journey, and we are trying to work out how we can embed our technology in each of those.”
Kelly’s impression reflects the wider trend in car buying. While millennials’ online shopping habits now pose an existential risk to electronics, books and music retailers, that is not quite true for car dealerships.
A recent survey from Black Horse showed that half of millennials still wanted face-to-face guidance from a dealer when looking for a car, especially when it came to financing. Additionally, less than a third of those aged 18-24 – so-called ‘digital natives’ – said they would be comfortable with a fully digital journey.
“There is definitely a tendency for an integrated car-buying journey here,” says Jones. “Customers are using quite an integrated set of tools.
“Online is really important for research, narrowing down options and understanding what your options are, whereas dealers still remain pivotal in helping customers get to the ultimate purchase, and then with servicing, warranties and of course financing. These things can be more complicated to millennials than someone [older] who is maybe on their third or fourth car purchase.”
Online comparison is a fundamental tool for narrowing down options: customers are presented with so many options, in terms of brands and vehicle types, that it would be impossible to do as comprehensive a research by physically visiting retailers. But eventually, customers will set foot in a dealership, even if further down the purchasing journey than 20 years ago.
Someone with limited experience in car buying, like a millennial, will probably do so earlier on, but they will probably not be in a buying mindset just yet. The important factor for a dealer is getting hold of the relationship in a way that goes beyond the individual car sale.
“If you keep a millennial customer, chances are they will buy anything up to 10 vehicles through their lifetime,” says Jones. “Can you imagine the power of that repeat business?”
A young costumer may opt for, say, a French city car as their entry point on the “car ladder”, but their preferences for make and vehicle type are bound to change multiple times, says Jones. That makes it all the more important for dealers to diversify their stock portfolio, so they will be able to address new needs of long-term customers.
Additionally, millennials are entering the car market at a time where the intersection of regulation, technological developments and product offers are making the choice extremely complex.
“I think dealers in the more forward-thinking world are starting to realise: there is an opportunity, more than ever before, for them to give good information,” says Jones. “Customers are going to stay with the people they feel give them good advice.”
A shift in car marketing has emerged from an interplay of unavoidable factors – generational turnover and technological advancement. So how responsive have dealers been? “Fairly,” says Jones, but the process is far from over.
“The penny has dropped with dealer groups,” he continues. “They are already completely switched on to the fact that car buying is an integrated digital and physical journey.”
He adds that though carmakers’ websites are probably the go-to for new vehicles, used vehicles are another matter. Additionally, dealers are making it possible to do “an awful lot” online, especially in terms of affordability checks, monthly price search and repayment simulations.
Still, Jones thinks more can be done to embrace customers’ new needs: “The key for me is, if a customer is walking into a dealership, how well does the dealer know what the customer has done online already?
“You see technology being deployed, but there is still probably a way to go until, when customers walk into a retailer, they feel like the dealer already knows what they are looking for.”
Kelly gives his own vision of what such an experience would look like, as someone who is also within the millennial demographic: “Why should my car journey not start and finish with me in a showroom?” he asks.
“I take a picture of the number plate of a car, and the device knows exactly what car that is. I then send that off to a range of finance companies that, based on my personal open banking data and perceived risk, can bid for my business, and give me a decision on the spot,” Kelly continues.
“To me, that is the way it would work, and there is no reason not to do that. But there is a lot of movement that lenders have to make to get to that scenario.”
Part of that movement will involve fine-tuning finance offers for a new generation of customers.
“While it would be wrong to say that all young customers are potentially vulnerable, it is true to say that they have little understanding of…what an APR is and what an appropriate offer of credit looks like,” says Lee Streets, chief executive of broker Evolution Funding.
He adds that the lack of experience – not just in the sales process, but in servicing and insurance costs as well – is compounded with an employment situation that may either be difficult to assess, as with zero-hours contracts, or that may involve multiple changes of circumstance over the lifetime of a financing contract.
“As an industry I believe we must recognise that young customers should be treated differently, especially during the sales process,” says Streets. “Finance companies, brokers and retailers must alter processes to accommodate or identify the [factors] above.
“New car providers offering fixed, low-APR contracts, with free or subsidised insurance, servicing and the peace of mind of a manufacturer warranty currently appear to be better placed to manage this.”