Once regarded as a dealer’s key source of profit, F&I from independent finance providers is facing relentless pressure from High Street and internet lenders and the manufacturers’ in-house financing operations. Adding to the concerns are the impending new regulations covering the sale of F&I and extended warranties. Report by Arthur Way.
Since the start of the 1990s, there have been several noticeable shifts in the retail motor industry’s approach to the point-of-sale provision of finance and insurance (F&I) and warranty products, and also in the techniques adopted by the players involved in developing and supplying the products. At first, the priority was to educate dealers on the profits potential of offering these add-ons when selling a vehicle to a private buyer. In an attempt to highlight the opportunities, F&I was famously referred to as the dealer’s ‘fifth profits centre’.
Once this message was understood, the race was on among F&I providers to secure a growing share of the sector’s expansion. To further this aim a variety of strategies were implemented at different times according to the sector’s prevailing competitive forces. For example, innovative new products have been developed (such as PCPs) in a move to extend the ability of private buyers to afford a new vehicle, and there has been a ‘technology era’ during which the development of IT capabilities has been used as a means of improving communication between the F&I provider and the dealership and enhancing service levels to customers.
The past ten years have also seen changes in the balance between the independent finance houses and vehicle manufacturers’ in-house operations, with more recently the latter growing in prominence to the extent that the independents are more or less excluded from the new car market. Perhaps more significantly, there has been considerable structural change within the independent sector with some groups divesting their motor finance operations while others have expanded eagerly.
However, a review of the sector’s recent evolution, coupled with a more detailed assessment of developments during the past year, leads to the inescapable conclusion that this is a sector in some distress at present and, in parts, fighting for its very survival.
Take, for example, Abbey National’s decision last May to close its First National Motor Finance (FNMF) subsidiary - one of the country’s largest independent motor finance operations which had been formed as recently as 1999 from the merger of the well established Lombard Motor Finance and Wagon businesses. This was undoubtedly the defining event of the past year and maybe of the independent sector’s postwar history. If that sounds melodramatic it is made in the context of GE Consumer Finance’s judgment that the motor finance operation was of dubious value when it acquired First National Bank from Abbey for £848m last February.
This episode suggests two crucial characteristics of the current independent motor finance sector. First, margins across a wide swathe of the business are wafer thin, where they exist at all. Secondly, there is serious doubt over the value of the remaining businesses and no guarantee that otheroperations would find willing buyers if their parents sought to divest. The exit of FNMF from the sector effectively implies that three major groups are now competing for the same motor finance contracts which previously were supplied by four, so why would anyone invest in further acquisitions, especially when the history of past takeovers has been for the most part lamentable?
The interesting question now concerns the destiny of those remaining. The sector has two clear leagues whose members are differentiated broadly by size and service offering. There are three leading players - Black Horse Motor Finance, Capital Motor Finance and GE Capital Woodchester. The first two are subsidiaries of major banks (Lloyds TSB and HBoS respectively) and are facing increasing competition from other motor finance sources within their groups.
Over the years the larger finance houses have been leaders in innovation and, not least, the application of advanced IT systems aimed at speeding up decision making and streamlining processes. However, today dealers desire ever lower prices in order to win F&I customers and hence these operations have adopted a price and volume-led stance in which controlling costs is paramount.
In contrast, the smaller players - such as Carlyle Finance, Close Motor Finance, Paragon Car Finance and Singer & Friedlander - have emphasised the importance of maintaining high service levels and pride themselves on more personal contacts with dealerships.
The plight of the independents is exacerbated by a number of other factors including the growing influence of vehicle manufacturers’ in-house financing operations along with the prevalence of 0% financing deals on new cars, home equity release schemes and, especially, the impact of direct lenders including high street, supermarket and internet banks. These operations typically have extensive customer lists and, of course, are ultra competitive since dealer commissions do not enter into the equation. An added twist is evident from the tentative steps of major financial institutions into car retailing as seen with moves by both Lloyds TSB and RBS to purchase major dealer groups.
These factors are also affecting the prospects of dealers who have the additional concern of less competition among suppliers following the removal of FNMF. Murmurings from the trade hint that the best days of dealership F&I profits reached a high towards the end of the 1990s and there is a general consensus that a further dip is likely. The outlook will not be helped by the need for dealers to secure Financial Services Authority (FSA) approval before selling F&I and extended warranty products as from the beginning of next year. This could prove particularly irksome for smaller dealers.
Conventional wisdom suggests that private car buyers are becoming increasingly savvy with regard to sourcing finance, but this is hardly borne out by the findings of a GMAC research project which indicates that no fewer than 75% of UK consumers do not investigate the most appropriate means of financing a new vehicle. Perhaps the inference here is that when they do, an increasing proportion will take the direct route.
The importance of being able to offer a complete financial package is becoming apparent so that consumers are able to achieve a ‘one-stop shop’.This includes F&I, warranty, vehicle insurance, servicing and road tax, and has the benefit of simplifying paperwork for the consumer as well as assisting in budgeting. The major vehicle manufacturers are well placed to exploit this trend. GMAC contains a cocktail of operations including Motors Insurance Company and Car Care Plan with the potential to provide integrated packages for both new and used car buyers.
Defining momentsA selection of last year’s corporate developments shaping the UK retail motor industry’s F&I and warranty sector.
FebruaryGE Consumer Finance buys Abbey National’s First National Bank for £848m, but pointedly excludes First National Motor Finance (FNMF) in the deal.
Peugeot introduces the first ever 4-year 0% finance package for retail buyers.
MarchIn a move which contradicts the trend whereby vehicle manufacturers have increased their exposure to the financial sector, Fiat raises much needed cash by selling the majority share of Fidis which arranges financing for European consumers of the group’s cars.
MayAfter failing to find a buyer, Abbey National announces the rundown of its FNMF subsidiary, one of the country’s largest independents.
Direct Car Finance (trading as Approved Car Finance) goes into receivership and is bought later in the month by The Funding Corporation.
JulyBlack Horse Motor Finance launches an accreditation programme for dealers with the aim of using the power of the Black Horse brand to complement dealer advertising and signage.
OctoberAutomech buys Lumley Auto, the provider of insurance and warranty products.The new management intends to launch new, unique and innovative products.