Motor finance: giving drivers flexibility and control

In the first of three blogs supporting our recent white paper on how financial providers can find success in the motor finance industry, I’m looking at how providers must embrace the modern consumer’s desire for flexibility and control.

Many consumers today are not feeling well served by the established motor finance and leasing business model. For many years, PCP (personal contract purchase) has been almost the only game in town in terms of new car financing, and it has also overtaken hire purchase for the financing of cars up to three years old. 

Enhancing the PCP experience

While PCP itself provides equitable early settlement terms and gives the consumer protection against a reduction in future car values, the providers could do more to enhance the customer experience in life more broadly. This could be addressed with the enablement of more digital, self-service functionality in respect of contract changes for customers who find themselves exceeding their contracted mileages (or even, for those now working from home more and commuting less, covering a lower mileage than they expected), allowing them to adjust their payments in line with actual recorded mileage, rather than waiting for the contract to end and being faced with excess mileage charges.

Serving the next generation of drivers

We know that younger generations are happy to conduct much more of their lives digitally, including researching and accessing cars. However, we also know they are learning to drive later and will drive less in their lifetime than the older car-driving population. While it is true that these same younger generations are probably not the most economically able to buy cars today, OEMs and automotive financiers ignore them at their peril. 

However, this challenge also presents a big opportunity for a financing organisation willing to think holistically enough to provide a wide variety of mobility solutions in parallel. This is especially true where that challenge is not being met by the OEMs and their captive financial services providers themselves. 

Offering vehicles as pay-per-use

One such opportunity comes from pay-per-use (PPU) products, such as the subscription model. Genuine subscription rewards consumers willing to commit to a longer-term arrangement in the form of lower monthly payments, in much the same way that a longer lease deal costs less per month than a short-term lease. 

A provider prepared to offer a suite of use-based products could thus be seen as addressing three consumer issues at once:

• flexibility
• affordability and
• consumer education.

This is a radical change in business model for most financiers, as rental-based products represent a shift from credit-risk evaluation, something in which banks and leasing companies are highly experienced, to utilisation-risk, where they would now have to actively seek a pool of customers ready to take on the vehicles they own on any number of different occasions in the vehicle’s lifecycle.

Rental, like leasing, confers ownership of the asset on the financier, which is not a problem for established lessors, but does present funding and balance-sheet challenges to disruptors trying to enter the market. Most established players already have the advantage of scale and accepting the utilisation-risk challenge for subscription could act as an enabler for other PPU products and services.

Established financial providers would neatly fill the gap between daily/short-term rental and traditional finance and leasing terms, as well as augmenting existing finance and leasing products, with different financial products lending themselves more naturally to different times in a vehicle’s extended lifecycle, not to mention attracting and retaining new customer segments.