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After arguably their most successful period ever, captive finance companies (like their OEM parents) are set to face accelerating change as the way people buy/use cars, and the trend towards mobility solutions, gains increasing momentum. The key question is, how well equipped are the captives to cope with this challenge?
Jack Welch, legendary CEO of GE, famously challenged people across the multi-national to “break the business” every year. Clearly, it wasn’t a bid for commercial suicide; rather, a recognition that even when parts of the business were operating at peak level, there was still no room for complacency. There was, and always will be, a new or existing player working to steal a key player’s market share. Perhaps Welch’s insightful approach would be entirely apposite for the captive finance sector right now.
The switch from buying to usage of cars in recent years has benefitted captive players, with PCP and PCH finance booming. However, the natural extension of this model towards a comprehensive, multi-mode mobility solution requires a high level of change in captive and OEM thinking. Particularly in addition to the changes we can expect to see in financial services as the impact of open banking develops, and the challenges facing captives become even more pronounced.
From the outside, the position of captive finance providers and their readiness for the changing marketplace appears to present a double-edged sword. The positives being that captives benefit from strong OEM support, inherent brand loyalty of customers, fast and predictable customer change cycles.
In contrast, however, captives have not historically been known for their agility, having been relatively comfortable in an environment where they have been able to benefit from the OEM relationship to gain customers. In addition, the IT capabilities of captives can be varied, with some tending towards the legacy end of the scale, focusing on gaining customers rather than innovating.
Some of the key challenges the sector faces are:
- The distribution chain – dealer networks look set to continue shrinking at an uncertain pace. The impact here could be limited, unless major retailers are able to leverage their scale to bypass the captives
- Changes in the consumer finance model – if consumers self serve their finance ahead of the car purchase/dealer visit, this could benefit the captives. But it would require changes to the dealer relationship in terms of incentivizing, rewards and stocking support
- FCA changes – these have the potential to redefine F&I in the showroom and move the focus towards customer self-serving. They could also impact dealer commissions/remuneration. But again, captives could potentially benefit from such changes if they can be agile enough
Captives could well be beneficiaries of these changes if they can innovate and be adaptable as these changes are coming to the captives, rather than the result of their own strategies.
With the wide development of fintech and mobility solutions, the barriers to entry for competitors are low (beside from the price of subvented finance). If a competitor can offer a broader, more imaginative and flexible finance option, such as being trialed by Fair in California, then the challenge to captives could come about rapidly.
The collaboration established by Mercedes Benz and BMW with Fair is being replicated in other startup investments by OEMs and may well be an indication of what the future holds. The consensus seems to be growing that consumers have had a taste of the flexibility and on-demand services both finance and mobility providers are starting to provide, and will soon demand a single app or function where they can service all their mobility/finance needs from. All parts of the finance and distribution chain will need to collaborate with each other in the open banking era to provide a single point of reference for all finance and mobility options.
Mobility represents a challenge, however, and is largely about a combination of logistics and accessibility from a financing angle. The vision of the future may be a single application but, right now, from a product perspective, there are some gaps, not least of all the legal hurdles involved in creating new finance products. It seems to me that in terms of product, something will have to give, and that legal changes will be needed to facilitate an equitable development of new finance solutions.
Competition to captives seems unlikely to come from established players…
possibly coming from a combination of new entrants and businesses with high levels of customer data and insight, as they look to leverage this into financial services and transport facilitators, such as Oyster.
Change is coming for the captives, and in a relatively short time, their model, technology and outlook must change. They will need to switch from OEM facilitator to consumer facilitator. Consumers will demand that their journey becomes easier and more intuitive, tailoring finance at customer and risk level.
OEM websites could become an even more important distribution channel for OEMs, but I’m also intrigued by the capacity of some existing platers, such as Amazon and new entrants who are already creating a more engaging customer experience.
We can see this in the airline industry with British Airways vs. Virgin. Effectively the same planes, but an entirely different brand experience, and this seems eminently possible as new digital channels emerge. The key issue is whether captives display the necessary agility and imagination to leverage these changes.