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June 1, 2017

The past decade has undoubtedly been the golden period for the automotive finance business, primarily due to increase in mass affordability. For most global banks, the inclusion of auto finance business from captive OEMs has resulted in a steady increase in revenue in almost all the markets where they operate. However, these banks are now facing multiple challenges to sustain growth. Automotive finance companies had, over the last few years, compensated the slowdown in the loan market with an increase in lease customers this supplemented revenue growth. Battery leasing is still considered to be a growth area, as more consumers move to electric vehicles. For example, the members of the Clean Energy Ministerials Electric Vehicles Initiative, shall cooperate to facilitate the global deployment of 20 million electric vehicles, including plug-in hybrid electric vehicles and fuel cell vehicles, by 2020.

Going from Car Ownership to Car Usership

Affordability was the main driving force for the auto finance business all these years, but now, other factors are also impacting the vehicle purchase. These are environmental concerns, infrastructure, industry regulations and competition from fintechs. The end consumers are becoming more and more aware of the ground realities such as traffic congestion in big cities, longer trip times, and so on. These have fuelled the growth of innovative mobility solutions including car-sharing and multi-modal transportation. All this has culminated into a shift in consumers preference from car ownership to car usership. Automotive finance companies that earlier focused only on the loan or lease business, are now looking to collaborate with automotive OEMs, car rental companies, and fleet operators all of which were not part of their core business earlier.

Increasing Focus on Green Vehicles

Most countries have already signed the Paris Declaration to reduce carbon emissions, and governments are providing heavy subsidies to boost the sale of electric vehicles. For example, Germany has earmarked one billion euros, wherein electric car buyers will receive 4000 euros if they choose a purely electric vehicle, and 3000 euros for a plug-in hybrid. It has also committed one million electric vehicles on the road by 2020 – up from some 50,000 today. It is not only the retail consumers, but also the fleet market that is promoting electric vehicles alongside hybrid vehicles. Many fleet operators offer special automotive finance packages and additional features such as continuous carbon reporting, to encourage corporate customers to include hybrid cars in their fleet. Daimlers Ecostar program and Volkswagens Grune Flotte (Green Fleet), for example, provide driver training, offer emission reduction tips, and influence positive changes in driving habits. Additionally, they provide leasing offers on low emission car models, promote car sharing, and give away green awards for low carbon footprint.

Car Sharing is Our Best Bet

A Frost & Sullivan report makes the case for increasing investment in the car-sharing business, globally. Consumers are looking at efficient ways to commute, with finance companies coming up with innovative digital offerings in this space. The car sharing market is dominated by Zipcar in the US, Mobility in the EU, and Orix in Japan, but OEMs are not far behind. For instance, Daimler has launched Car2Go, which already has two million members and is the largest car-sharing company in the world. Similarly, Volkswagen has launched Quicar, Peugeot has Mu, and BMW offers DriveNow in the European and North American markets. This evolving model means that there are new assets such as electric, hybrid passenger vehicles that need to be financed between OEMs and their car-sharing subsidiaries. For example, Daimler Financial Services has signed a finance agreement with its own subsidiary, Car2go, to facilitate the procurement of vehicles for the car-sharing business. Here, the residual values and resale hold the key to the business, as rental vehicles depreciate much faster than owned vehicles since they have higher wear-and-tear as a result of multi-customer usage. So, captive automotive finance firms are looking to minimize assets for the car-sharing subsidiary by regular leasing contracts between OEMs and their car sharing subsidiaries.

Banks Must Reorient their Business Model to Compete with Captive Finance Firms

Industry reports indicate that captive finance firms will always have an edge over mainstream banks. This is because a captive finance firm, being a part of an OEM, enjoys quite a few advantages, for example, reduced interest rates. Moreover, adapting to new-age mobility solutions like Car2GO, Quicar, Mu, and DriveNow is much easier for captive finance firms, as the vehicles are built to suit their customers needs, thus reducing the turnaround time drastically. Some global technology giants such as Apple are looking to introduce driverless cars, which may disrupt the mobility market even further.

However, this shouldnt stop banks from coming up with similar offerings, and they can do this by collaborating with technology vendors. Another advantage that banks have is that their sphere of influence is a lot bigger. Captive finance firms primarily finance the products of the OEMs they are part of, but banks can provide automotive financing for all types of vehicles, thus having a relatively balanced portfolio.

Banks can look at enabling new features in their regular mobile banking apps. These could include options that allow customers to make car-sharing reservations or help them find a car-share in their vicinity. Here are some aspects that banks will need to think about:

  • Better synergy with OEMs to manage leasing arrangement for mobility solutions
  • Strong digital platform (user-friendly mobile apps integrated with the rental companys systems)
  • Residual values to be calculated based on dynamic and complex environments (usage of electric vehicles, for instance, wherein the battery is a critical component, unlike fuel-powered vehicles)
  • Effective remarketing of vehicles (such as resale)

Balakrishna Rao is a Functional Consultant with the Lending practice of the Banking and Financial Services (BFS) unit at Tata Consultancy Services (TCS). He has been with TCS for over six years and is a Certified Associate in Indian Institute of Banking (CAIIB) from the Indian Institute of Banking and Finance, New Delhi, India. Bala holds a Post Graduate Diploma in Management from the Alliance Business School, Bangalore, and a Bachelors degree in Electronics and Computer Science from the National College, Bangalore, India. In his current role, he anchors strategic consulting and business analysis assignments for TCS banking clients, in the areas of consumer and commercial lending in retail and commercial loans as well as business trade services.


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