With the new Financial Conduct Authority (FCA) rules now in place, MotoNovo Finance CEO Mark Standish is clear that the evolution of pricing models will continue. While some dealers would prefer to retain a single rate or banded pricing mode, a move towards risk-based pricing is increasingly inevitable, as he notes;
“While I understand the simplicity appeal of a single rate or banded pricing model for finance; for me, the risks to the future of dealer finance heavily count against it. I know I am not alone and we are seeing momentum getting behind risk-based pricing from the lender community. While some lenders might start the forthcoming regulatory environment with a fixed-rate model, there is an expectation that a number are planning to move to risk-based pricing as they conclude their development work.”
While the broader operating environment for motor retailing has changed significantly over recent years, dealer finance pricing has not. A ‘one size fits all’ approach means inevitably that customers will often receive a rate that is not tailored to their circumstances and in some cases, this will result in customers paying a higher rate. It is not a sustainable approach in today’s digital age when customers have such easy access to price comparison sites and personal credit data information.
Despite the clear advantages of risk-based pricing and its widespread use in other areas of financial services, until MotoNovo launched MotoRate, the model had yet to gain traction in the dealer finance sector. Primarily, the barriers were centred upon technology, verifying the risk model to account for individual and vehicle risks. Arguably, another issue was the challenge of what is a significant change. It is something Mark understands as he notes;
“Embracing change is part of our culture. While change can present risks, in this case, the risks of not changing, even in the short term, looked far higher. From a regulatory, technical and above all customer perspective, we concluded that for the future well-being of dealer finance, the connection between the borrower and their risk profile had to be recognised.
“The mean average approach inherent in a single rate pricing model is unlikely to appeal to the prime credit quality audience who represent a prize to be gained from risk-based pricing. Inevitably the single price would need to reflect the audience of people taking finance. Without the prime audience, the implication is that price at an individual and overall APR level could well become higher than they might have been. In turn, this would have long-term implications for the dealer finance model and its reputation.”
Rather than seeing dealer finance risk such a slippery slope, MotoNovo is confident that the opportunity afforded by risk-based pricing is to welcome a broader pool of customers to the unique benefits of dealer finance, increasing market share. This has been evident based upon the results MotoNovo has seen. Finance volumes from over 2,000 dealers embracing MotoRate have grown over 70% new business year on year.
Returning to the theme of the future trend for dealer finance pricing, Mark concludes; “Risk-based pricing for us was not a quick fix. MotoRate was two years in development and it is why we expect a trend to risk-based pricing to emerge as other lenders develop their infrastructure. Right now, we are well-placed to help dealers to benefit from that ‘early mover’ advantage.”