The increasing role for risk-based pricing

There is a level of maturity being established in the post-lockdown ‘new normal’. Initial consumer confidence has waned in the face of rising prices, notably utilities. Arguably, motivated by these increases and directed by growing confidence in online banking/finance, consumers are shopping around for their finance needs increasingly.

Current used car financing trends

• Used car consumer finance volumes fell by 7% YoY in August 
• The overall consumer credit market in August fell by 2.8% 

August’s numbers followed a YoY fall of 19% for used car finance v a fall of 2.7% for consumer credit. While it is not an exact comparison, the numbers suggest that dealer finance could have lost ground to personal loans in July and August.

It would be fair to recognise that July/August 2020 was part of the post lockdown ‘bounce back'; so, a fallback in volumes may be reasonable. However, that would overlook an average rise in UK used car prices that market analysts, Indicata, estimated at 16.6% during the first eight months of 2021.

Consumer behaviour changed by the pandemic

• Increased shopping around to save money (on almost everything)
• Accelerating shift to digital banking/financing
• A third of adults became more aware of their finances since the start of the pandemic – only 30% have never looked at their credit score (Experian)

Experian’s data suggests that a significant cohort of people know their creditworthiness right at the start of their financing journey; they know they will be accepted and get an interest rate that reflects their circumstances. The reality is that an online interest rate comparison between personal loans, dominated by risk-based pricing (RBP) and dealer finance, will commonly reveal a lower headline APR for personal loans.

I hear the argument that consumers do not understand RBP and that the simplicity of a fixed rate is easier for all concerned. The counterpoint is that RBP dominates the personal loan market. Consumers, it appears, do recognise the rate they are offered reflects their circumstances.

So would embracing risk-based pricing change things?

As the one motor finance company to launch a RBP model to date, ‘MotoRate’, it is an unequivocal YES.

MotoNovo led the industry implementing RBP 6 months before the Financial Conduct Authority ban on discretionary pricing models in January. It has now been in place for 12+ months and has been embraced by two-thirds of MotoNovo’s dealers. Uniquely, we can benchmark the differences between RBP and a fixed interest rate model; the difference is compelling;

• MotoRate agreement acceptance rate for August was 50% (45% for non-MotoRate agreements)
• Proposal to Pay-out rates - 40% on MotoRate Terms vs 28% on non-MotoRate Terms

I suspect that if we moved as an industry, these trends would be even more impressive, with more people seeing the sector as attractive.

Karl Werner, Managing Director