James Tew, CEO at the motor finance technology market leader, says risk-based pricing is being adopted before the end of this year by most non-captive lenders for at least some of their products but risks being unfair on the consumer. New approaches need to be adopted – including innovative technology – to overcome its problems.
“Fixed rate motor finance has its own issues. Around half of applicants are declined and with most prime lenders, this leaves a footprint on their credit file which can damage their ability to get finance in the future. However, at least they will have been pre-quoted a deposit and monthly payment they will pay if they are approved.
“With risk-based pricing, even this advantage disappears. The lender generally doesn’t state what rate they will offer until the application is made, just a range of indicative quotations, so the car buyer is left in a position where they might choose to turn down the proposal because it is too expensive and a footprint is left on their credit file anyway.
“It’s not a very fair system. Finding the right motor finance solution for an individual can be pot luck, take time and damage a consumer’s credit rating.”
James said that the solution lay in two developments – uniform adoption of pre-approval technology by motor finance providers, and wider use of multi-lender motor finance panels by dealers.
“Pre-approval is already being rolled out across some lenders, something which we believe is crucial, and we are working on rapidly incorporating it into our technology to make risk-based motor retail consumer journeys as fair and easy as possible.
“These processes use a soft search which doesn’t impair the consumers credit rating and also returns the interest rate and subsequent monthly payment to enable the applicant to see exactly what they will pay prior to a formal application.
“This is great improvement that will lead to better customer outcomes and help lenders and motor retailers to fulfil their obligations under Consumer Duty by demonstrating they are adhering to the Cross Cutting Rules as outlined in the FCA’s Principle 12. This is important when there is so much scrutiny on the motor finance arena.”
The adoption of a multi lender approach in conjunction with pre-approval would create a fair and transparent comparison of motor finance options available to the consumer, James added.
“It seems obvious that this is the fairest and most compliant approach to adopt in a risk-based motor finance world, giving the customer an excellent chance of achieving an outcome that suits their needs as exactly as possible.
“Also, we can see, by the applications processed through our systems, that a multi-lender approach consistently produces better results for not just consumers but lenders and dealers, too. Almost without exception, dealers that adopt multi-lender enjoy a higher motor finance penetration than those with just one or two lenders because they can meet the needs of a greater number of consumers and show the benefits of different products on a direct comparison basis, providingng choice and clarity.
“However, the perhaps unexpected bonus is that all lenders tend to do better under multi-lender through much improved efficiency, even if they lose solus status. The dealer is better equipped to satisfy consumer requirements and therefore sells more finance across the board.”
