Motor Finance: Beware of creeping commoditisation

As we get 2016 under way, I’m curious to see if the next 12 months will see the same level of new capital enter the market in 2015.

Promethean Investments’ move for a part of DSG Finance at the end of 2015, and Star Capital’s acquisition for First Capital both suggest there is thirst for motor finance from outside the market at the moment, so it seems likely we’re going to see a few more moves over the coming months.

But will we see any new lenders enter the market?  And, importantly, will they bring with them some genuine innovation? Speaking to the market these past couple of months, the impression I’ve formed is that many of the returning players have come back to fill the void they originally left, while new lenders have either entered looking to fill an underserved niche (for example with prestige lenders), or are competing with existing lenders on price.

There are questions about whether competing on price is a viable long-term strategy in the motor finance industry. At the moment, motor finance is an extremely lucrative business to be in. You only have to look at the strong growth and profits a number of companies have posted, and the lines of private equity firms and outside investors looking to buy a piece of the motor finance ‘pie’. And while the market is continuing to grow, it would be a shame to see the industry start harming itself by companies undercharging in a short-term attempt to grab greater market share.

Speaking to brokers for this month’s feature on finance brokers, what has become apparent is that such a tactic also won’t always work.

Anyone who’s been to an industry conference (such as the Motor Finance Conference, which I will shamelessly plug for the next few weeks) knows that this industry is often built on strong relationships.

Brokers, dealers and lenders have all spent a long time cultivating strong relationships with one another, and many of them have expressed the sentiment that they wouldn’t damage these relationships for a quick buck from a new lender, unless that lender could show how their offering was notably better than that which already exists.  

None of this is to say the industry is standing still. Lenders, brokers and dealers are all investing in the technology they use, as they attempt to grapple with the dual challenges of regulation forcing them to consider each of their customers in more detail, and customers demanding easier, faster access to finance.