Automotive Point of Sale Finance to Race Ahead of Traditional Bank Loans

LONDON, July 29 -- Automotive point of sale (POS) finance is fast becoming an integral part of vehicle manufacturers' (VM) product, sales and marketing strategies. Equipped with competitive interest rates and a wide array of value-added services, captive and independent finance companies are challenging banks, which were earlier considered the most economical and simplest source of automotive financing.

The total value of advances in the European POS finance market in 2003 was EUR 72 billion. A steady increase in the borrowing trend due to greater consumer disposable income and declining interest rates is expected to further increase this value at a compound annual growth rate (CAGR) of 6.4 per cent to EUR 111.4 billion in 2010.

Though banks and direct lenders accounted for the largest share of total financing in this market with almost 47 per cent in 2003, their share is anticipated to reduce to 35 per cent in 2010. This is largely due to the innovative offers and financial campaigns initiated by the captives that are expected to raise their share of POS finance from 45 per cent in 2003 to 50 per cent in 2010.

"Captives are developing a `one-stop-shop' concept wherein customers, in addition to the financing options, can take advantage of added perks such as free maintenance, repairs, gap insurance and extended warranties," explains Frost & Sullivan (http://www.transportation.frost.com) Automotive Industry Analyst Akhila Venkitachalam.

In order to compete with banks on a level footing, captives aim for a pricing structure that increases affordability and offers value for money to customers. Successful promotional campaigns include extended loan terms from 36 to 48 months, deferred monthly payments, subsidised interest rates, low deposits and seasonal offers.

Due to the possibilities of a multi-brand dealership, captive finance companies are also likely to face competition among themselves. Captives need to develop a strong brand proposition and clearly defined market identity in order to compete with another captive finance company.

"Captives must use the brand affiliation with the vehicle manufacturer to develop their own brand image," says Frost & Sullivan Industry Analyst Soikot Sengupta. "By enhancing their brand equity based on the service they offer to the dealer and customers, captives will be able to withstand competitive pressures."

Captive finance companies dominate the new car market compelling independents to return to their roots in the used car and wholesale finance segment. Additionally, with VMs imposing exclusivity clauses in their agreements with dealers, independents find it increasingly difficult to access the new car sales.

Consolidation among top-tier independents across Europe has enabled them to survive the competition from captive finance companies. Such mergers and partnerships have allowed independents to bring together their experience with different car brands, benefit from a diversified customer database and use economies of scale to offer competitive rates to customers.

Internet financing, which provides greater convenience and turnaround time compared to traditional alternatives, challenges both the captive and independent financing companies, especially in Germany. However, it is expected to have limited impact on the demand for POS loans, due to unaddressed regulatory issues concerning data protection.

In spite of the boom in Internet financing in Germany, the region still has the highest number of POS finance cases in Europe. In Germany, captives govern nearly 70 per cent of the market due to aggressive promotional campaigns. Additionally, increasing car sales volume and balloon products have increased the popularity of POS finance among German customers.

Though hire purchase is the most popular financing method for new car sales in Europe -accounting for 62 per cent of new cars sold on POS finance - balloon purchases are growing in number. Balloon finance contracts are expected to increase from 21 per cent in 2003 to 26 per cent in 2010.

Balloon finance is attracting younger customers with less disposable income due to nominal monthly payments, low deposit, refinancing options and the provision to return the car at a guaranteed market value. The United Kingdom has the largest number of balloon purchases, putting it in second place after Germany in the overall European POS finance market.

For greater success in the POS finance markets, both captives and independents need to develop strong retention programmes with financial incentives for customers and dealers. Appealing to dealers with bonus packages and customers through targeted promotional offers is expected to improve customer retention and ensure long-term success.

If you are interested in a summary of this research service providing an introduction to the European Automotive Point of Sale Finance Market, please send an email to Kristina Menzefricke, Corporate Communications at kristina.menzefricke@frost.com with the following information: full name, company name, title, contact telephone number, email. Upon receipt of the above information, the summary will be emailed to you.

Key participants in this marketplace under review in Frost & Sullivan's analysis include Volkswagen Financial Services, Ford Financial, RCI Banque, Banque PSA Finance, GMAC, Blackhorse Motor Finance, Cofica Credit Universel (Cofica CU), CC-Bank and GE Capital.

Title: Strategic Analysis Of The European Automotive Point of Sale Finance Market: The 21st Century Profit Centre of the Automotive Industry Code: B316