In a ‘wildly imbalanced recovery’ – credit access must reflect consumers’ circumstances

The UK economy is evolving rapidly as the UK adapts to what the Institute for Fiscal Studies (IFS) recently noted is a ‘sharp – but incomplete and wildly imbalanced – recovery.’ It is a reality that has significant implications for all businesses because, as the IFS has noted, the future isn’t going to be what it used to be. What we buy and how we buy it is changing. Car retailing and access to credit are both changing as MotoNovo Finance Managing Director Karl Werner observes both must adapt; “The post-lockdown environment sees many of the changes in patterns of household spending and working now persisting. In an emerging ‘new normal’, only a rate-for-risk pricing model for credit can truly provide an agile and tailored pricing approach for consumers.”

The pandemic saw mixed signals for peoples’ finances; record levels of consumer saving with high levels of financial uncertainty. Now, the economy sees rising employment, with many people in new jobs, alongside increasing inflation. It is a dynamic credit risk landscape that is a long way from maturity. To all of these levers is the increasing regulatory focus on delivering good customer outcomes, with a new Consumer Duty scheduled for next year.

One of the joys of risk-based pricing is its fluid nature; everything is personalised to the customers. The model can adapt to the highly creditworthy and, as MotoNovo is demonstrating to the needs of people whose financial circumstances are improving as the economy improves in what remains, according to the IFS, ‘a period of acute structural change.’

Reflecting upon the trends and future for dealer finance, Karl reflects; “Yes, a fixed rate model can also deliver acceptances across all areas of the credit curve, but its aggregated nature means inevitably that the most creditworthy would subsidise other borrowers. As our evidence continues to demonstrate, many such people are not choosing a dealer finance acceptance at what they see as an unnecessarily high interest rate. Dealer finance must adapt to reflect the risk curve, which is arguably more divergent than ever before.”