On 16 March, motor finance experts from across the continent gathered at the Westin Grand Frankfurt to discuss the future of the industry. Motor Finance reports back with the main talking points
According to a number of industry commentators, motor finance is either at the beginning of a transformative period, or is about to go through one.
New technologies including driverless cars, the internet of things and big data, as well as new concepts such as usage over ownership, are combining to potentially fundamentally change both the motor industry, and its finance arm.
These were some of the key themes discussed by a range of European panellists over the course of the Motor Finance: Europe Conference and Awards 2017, which took place on 16 March at the Westin Grand Frankfurt hotel.
Opening the day was Dr Peter Renkel, managing director of Banken der Automobilwirtschaft (BDA), the German captive association. In his capacity in this role, Renkel has been able to observe the German finance industry’s development, including the rise of digital.
A consequence of this rise that Renkel has observed has been new threats from outside the industry – from global technology firms with banking licences such as Google and Apple, to new payment options such as the P2P industry, as well as the rise of comparison sites and even larger brokers.
Another challenge presented by the rise in digital is how it is diminishing the role of the dealership in educating the public about cars. While dealers remain an important part of a customer journey, consumers are increasingly researching cars online.According to Renkel: “The customer journey when buying a new car has already changed significantly over the last few years.” Customers are visiting dealerships less frequently before making a purchasing decision, and the number of independent dealers in Germany has shrunk from 18,000 in 2000 to 4,500.
Despite the evidence that online is an important battleground for the future in automotive retail, the BDA has found reticence from some dealers in adapting to the new world. In a recent survey, it found just one in three car dealers planning to invest in online lead management within the next two to three years, for example.
Importantly, Renkel did not suggest that finance providers should immediately prepare for an all-digital future. Customers still want a dealer experience, and dealers are still an intrinsic part of the buying experience. As such, he said investing in both bricks-and-mortar and online was important.
Regardless of the ratio of ‘bricks-and-mortar to online development’ investment predicted, it seems that most in the industry are anticipating change. Sandra Speckbacher, director of global automotive financial services at KPMG, and Ulrich Bergmann, a partner in the same team, looked at some of the results of KPMG’s Global Captive Survey, which confirmed this view.
For example, 79% of participants expected some sort of business disruption, answering that this is either likely or very likely. Bergmann noted: “Companies often feel too comfortable to initiate a business model transformation – it can be too late, as Kodak, RIM/Blackberry demonstrate.”
Reinforcing Bergmann’s view, 94% of respondents said they believe their IT architecture is up-to-date. This was something both speakers disagreed with, and was something that would be brought up again later in the day, repeatedly.
For Chris Bosworth, director of strategy at Close Brothers Motor Finance and the next speaker, the issue of Brexit is another area which might affect the market, and should not be ignored, especially bearing in mind the conference’s European context.
One impact which was almost immediately felt was a fall in subsidised finance in the UK. For potential car buyers looking for a car with a set monthly budget, subsidised finance has meant that, in some cases, new cars on 0% finance have been available for a similar monthly cost to a used car. As a result, subsidised finance has been an effective tool in pushing consumers towards the new car market.
However, with a drop in subsidised finance, and increasingly competitive finance PCP finance offers in the used space, this is beginning to change, and Bosworth speculated the UK might see a rebalancing of its car market, with growth in the used space.
On the topic of PCP in the used space, Bosworth noted that the Brexit vote coincided with an increase in its market share. He pointed out that in quarters one and two of 2016, PCP and HP maintained similar market shares to each other in the used market, but they began to diverge in quarter three, when PCP accounted for 50% of all used car finance, compared to 48% from HP. In the fourth quarter this gap jumped, with PCP accounting for 54% of all used car finance, and HP just 44%. Given that the majority of subprime lenders do not offer PCP and only offer HP, these figures are even starker than they first appear.
Next on stage was Brendan Gleeson, chief executive officer at White Clarke Group, who began with a bold message for the audience: “We are at the beginning of the most transformative revolution ever!”
A number of factors are contributing to this revolution, however Gleeson highlighted two as especially important. The first is the emergence of artificial intelligence (AI) as a mature technology. The second he named was quantum computing, which is starting to be developed.
Gleeson noted that a number of specialised sub-fields of AI – namely machine learning and deep learning – have already seen “spectacular” successes.
“The combination of better algorithms, huge data sets freely available on the internet and massive cheap processing power has enabled the creation of self-learning software that turns out to be particularly good at pattern recognition, whether that be text, voice or images,” he said.
All this has opened the door to technologies including self-driving cars, voice recognition, and the creation of chatbot technology. It will also impact credit decisioning, as use of big data and AI will allow lenders to base decisions on a large number of “weaker” variables, as opposed to the traditional technique of following just a few “strong” variables.
A second area was intelligent vehicles, which Gleeson noted do exist currently. These vehicles are driving a shift from product to services and data, he said, adding that intelligent vehicles should enable the sale of dynamic insurance products, in-car finance applications, better fleet and floor-planning solutions, as well as finance based on new information.
It could also lead to “zero-dollar cars”, as he described them. The idea is that by selling data collected by cars to third parties, OEMs could effectively subsidise the cost of the vehicle and look to make a profit through data, with this resulting in a lower cash price for the consumer. If enough data is collected and sold, he argued, theoretically this could subsidise the entire monetary cost of the vehicle for the consumer, resulting in the zero-dollar car.
With Gleeson’s talk opening delegates’ eyes to some of the opportunities the rapidly evolving environment is creating, Nicolas Ullmo, product marketing director at Cassiopae, looked at some of the key uncertainties that this is causing for software products in motor finance.
One problem that most companies will have to grapple with is that back-office platforms generally remain in production for decades, with timings often only a little shorter for middle-office platforms. Yet customer expectations are evolving so rapidly that customer interaction tools are having to evolve every two years; this presents both logistical and financial challenges.
Looking ahead, Ullmo said there were a number of other potential challenges that his company was keeping an eye on, such as the potential for city-centre consumers to move increasingly towards short-term rental, and some of the implications of autonomous cars, including the introduction of new third parties into the market.
The Polish market
The next speaker, Andrzej Krzemiński, chair of the executive committee of the Polish Leasing Association, give an overview of his home country’s leasing market. He began by noting that leasing generates 3.13% of Polish GDP, compared to a eurozone average of 1.6%, or just over half the Polish rate.
A running theme of the talk was that the Polish market is less mature than some of the more developed markets in Western Europe, such as the UK and Germany, but that it was growing fast. As an example, Krzemiński noted that Poland’s GDP as a percentage of the total GDP of EU states grew from 3.8% in 2004 to 4.7% in 2010, reaching 5.2% in 2015, putting it above the Netherlands in terms of total size.
Quoting data from the Central Statistical Office in Poland, Krzemiński noted capital expenditure on fixed assets in the Polish economy grew from €58.3bn (£49.0bn) in 2014 to €63.1bn in 2015. ‘Means of transport’ expenditure grew from €5.95bn to €6.66bn over the same period.
From both a general economic point of view and from a leasing perspective, Krzemiński was keen to emphasise the importance of SMEs for businesses. Poland is home to over 1.5m SMEs, which together employ 68.9% of the country’s workers. This compares to an EU average of 66.8%.
Looking at leases specifically, Krzemiński pointed out how much more important vehicles have become to the industry. In 1995, passenger cars, LCVs and commercial vehicles up to 3.5 tonnes accounted for just 0.6% of the leasing market. Instead, heavy transport dominated the market, with 59%, and machinery was responsible for 37.3%.
This began to change at the turn of the millennium, and by 2005 vehicles made up 23.5% of all leasing. By 2016, this figure reached 42.1% of the leasing market, overtaking heavy transport with 29.7% and machinery with 26.4% in the process.
Following Krzemiński, Gerry Kouris, marketing manager UK for Alphera Financial Services, told the audience about the company’s recent thought leadership piece, Financing the Car of the Future.
Central to Kouris’s presentation was the importance of talking to all stakeholders. Looking at the legendary King Arthur, who famously gathered his knights to his round table to discuss how to govern, Kouris declared: “King Arthur was wrong!”
Whereas King Arthur surrounded himself with only “his” guys, Kouris said it was better to identify all possible stakeholders and engage with them. So while this includes internal teams, and management, as was the case with King Arthur, Kouris also listed the local community, customers, academics, industry experts, regulatory bodies, the wider business society and even competitors as important groups with which to liaise.
He highlighted a number of fears that could prevent lenders and companies from taking the necessary steps here: a fear of failure, a conservative resistance to change, a fear of innovation, and an unwillingness to disrupt the status quo.
One fear that Kouris highlighted was the fear of competition – that companies were scared of talking to competitors for fear that their ideas might be stolen. Given the fast-developing nature of outside threats to the industry, this is not good enough, he said.
Alphera put its money where its mouth is in this regard, publishing a report including comments and opinions from across the motor finance industry, including brokers, lawyers and academics. The report covered topics including a look at the future of mobility, which has become increasingly clouded, as new technology and business models continue to evolve.
David Fletcher, vice-president of sales at Dealflo spoke about how motor finance is becoming increasingly automated. Dealflo is the new brand of IOCS; the company rebranded in June 2016, saying Dealflo better represented what the business offers.
Dealflo offers application data capture and validation, a verification hub, document generation, electronic signatures and vaulting and securitisation services, something Fletcher described as “end-to-end compliance management”.
While a number of vendors offer some of these services, Fletcher outlined a number of constantly evolving challenges that are preventing companies from resting on their laurels.
Customer expectations today are different from even five years ago, and customers expect to be able to conduct large sections of a transaction online. At the same time, the technology allowing customers to do this is constantly evolving. Finally, the legal and regulatory landscape has shifted dramatically in recent years, which looks set to continue for years to come.
As well as keeping up with customer expectations, moving to a digital automated management system would also allow companies to reduce their carbon footprint, increase sales and response times, and reduce fraud.
Fletcher was the final speaker before the lunch break, leaving Shaun Harris, sales director at Codeweavers, to welcome the audience back in the first afternoon slot.
Like Fletcher before him, Harris noted that companies need to look online to meet modern customer expectations. As evidence, he pointed out that 74% of consumers conduct their car-buying research online, 71% want to start their finance process online, and 73% of buyers are more likely to buy finance in a dealership having previously accessed information online.
Despite this, he said that when he looked at most manufacturer websites, the results were not encouraging. Although finance is at the fore, and is often a headline figure, websites tend to list static offers which are not personalised. Often what is listed is a single product – sometimes a PCP special offer or a PCH offer.
Another problem he found was that websites make it difficult to configure a car, look at the monthly cost and total cost of finance, and then adjust the specifics of the car, and compare the prices. On most sites, Harris said he had to use a pad of paper to note the original price for comparison’s sake.
Once exception noted was Mini, which clearly put finance at the centre of the offering, and even allows customers to search by finance, including options for PCP, HP and contract hire. This is combined with a lifestyle search function, meaning that on this site, finance is put on a level with the car.
This is what manufacturers need to look to, Harris said, if they are to keep online offerings to the standards customers expect.
Following Harris, Patrick Mayerhörmann, car editor – Germany – at cap hpi, spoke about the use of data science and analytics to cope with an increasingly globalised world. Since parent company Solera brought together CAP and HPI to form cap hpi, the company has been building up its international presence.
The traditional method for valuing cars is too labour-intensive and manual, Mayerhörmann said, so instead the company has begun to look at ways to ease the workload.
The aim for cap hpi is to allow easier cross-border sales. Supply and demand differ in various parts of Europe; for example, some countries have stronger used car markets, and some markets are looking to shift away from diesel much more rapidly than others – which will have obvious impacts on residual values of diesel cars. As such, companies may be able to maximise returns on used stock by selling cars across borders.
Currently, vehicles are independently coded on a national basis, often with regional variations in models, making cross-border price comparisons extremely difficult. To ease this problem, cap hpi has created global coding and a unified methodology to generate consistent data across markets.
The penultimate speaker of the day was Nikolaj Køster, vice-president, commercial, at Spiri, a relatively young company looking to shake up the urban motor scene by introducing a ride-sharing product.
As Køster pointed out, the urban environment suffers a number of problems. The VW emission scandal highlighted the struggle built-up areas face with emissions, while a lack of parking spaces is evident in most large metropolises. Similarly congestion can be a real issue – so much so that London has a congestion charge. Finally – and not exclusively to cites – cars tend to be underutilised, both in the sense that most cars spend most of the time in parked, and also that most cars have spare seats.
Spiri is looking to change this by introducing a new, smaller, efficient vehicle, which people are able to use. Describing the typical car as a jack-of-all-trades-type vehicle, Køster said the company had designed the new vehicle specifically to fit Spiri’s purpose, and to work well in urban environments.
As opposed to the typical retail model, in which consumers generally buy or lease, people will be able to drive a Spiri free of charge, on condition that they pick up and drop off passengers. From the passenger side, the cost will be “comparable to using public transport”, but the experience will be more comparable to an Uber or a taxi journey.
Køster was keen to point out that he did not view the audience of delegates – the majority of whom were C-level executives, and probably on relatively large incomes – as Spiri’s potential audience. Instead the company is targeting lower- to middle-income consumers, who would rather not take public transport but cannot afford a car that israrely used, or to regularly use taxis as their means of transport.
For this system to work, a number of technologies need to be in place. For a start, the internet of things needs to be at a point where all Spiri vehicles could be connected to its network. The cars themselves need technology, such as keyless pickups for drivers, and alcolocks and cameras for safety, and advanced dispatch algorithms need to be developed to ensure that drivers are not too inconvenienced in their journeys by picking up passengers.
The final speaker of the day was Martin Müßener, vice-president of sales and marketing for Toyota Financial Services, Europe and Africa, who looked at how mobility could be a game changer for the entire automotive industry.
According to Müßener, two basic factors are driving the industry in this direction. The car itself is moving towards self-driving technology, while consumers are moving from private ownership to car-sharing models. The combination of the two is pushing the mobility revolution.
For what this means on a practical basis, Müßener gave five predictions on how the industry might look in the future:
- Manufacturers will move from judging performance on car sales to miles sales.
- The industry will move towards a few integrated one-stop platforms.
- Collecting and structuring data will be key, and this will drive processes and payment modes.
- Data will be handled in open spaces, shared and jointly used.
- Cross-selling will increase customer value and generate new revenues, while product development will be agile and participative.
One thing that is clear is that whatever happens, manufacturers are keen to control the process themselves. While there are numerous examples of them working with third parties, Müßener was able to point to quotes from several senior executives at other manufacturers on their journey.
For example, Dieter Zetsche from Daimler was quoted as saying: “Digitization will fundamentally change sales. The key point is that we must own the direct interface with the customer. No third-party provider should get in between.”
The first part of the quote summed up much of the day. While the talks varied in terms of topic and focus, the encroaching importance of the new digital reality rang clear throughout.
Indeed, the majority of the speakers on the day would have readily agreed with Zetsche’s assessment that “digitization will fundamentally change sales”. <