Finance captives & Mobility revolution

With strong assets, finance captives are at the heart of the mobility revolution – but there are pitfalls to foil 

Carmakers’ finance captives are historical key players in the automotive industry. Some of them were created in the 1930s, developing close to their carmaker and achieving their business mission: to sell more cars thanks to affordable prices. Finance captives are the cornerstone of three activities and culture: banking to finance their assets, their carmaker’s industrial culture, and retail as they distribute through car dealers’ networks. They are also close to the final customer, providing services around car use, anticipating change, taking advantage of their knowledge of a loan’s maturity to propose a new offer. Consequently, finance captives generally finance 30–50% of new cars sold and contribute, on average, to one-third of carmakers’ financial profit. As a downside, they are also asset-greedy, averaging up to 50% of group carmakers’ total assets. 

Finance captives are not immune from the rules of a fast-changing environment, and they have the particularity to face the transformations occurring both in banking, and in manufacturing and car distribution. On the one hand, captives are banks, or closely related to the banking environment. The requirements of the European Central Bank (ECB) are tightening, forcing a greater focus on and investment in compliance and operational risk management. More globally, captives are directly affected by risk-weighted asset (RWA) management, which can limit business expansion when the risk covered becomes too costly. In other words, the revenue sources could be capped, when the cost is structurally increasing. On the other hand, the introduction of Worldwide Harmonized Light Vehicle Test Procedure (WLTP) regulations leads to major uncertainties regarding the types of cars that should be financed, taking into consideration their potential residual value in three to five years. The market shift is dramatic, from car ranges with up to 90 % diesel for sedans or SUV to the emergence of EVs or plug-in hybrids that are not competitive without state support. On top of this, one should bear in mind that 47% of car owners claim that they would be willing to abandon their car in favor of alternative solutions. In this disruptive environement, it would take a crystal ball to predict the second-hand car business in 2025. Residual value management is one of the major risks that finance captives and fleet management companies bear, selling around 380 000 a year on the French market, for a value of €3 billion. 

The finance captive market is also changing fundamentally. So far, profit is 90% asset-based, meaning that it is derived from financing a means of transportation, which is primarily distributed through a dealership. Captives have a place privilege in this physical channel, where they can leverage the “one-stop-shopping” concept. Finance captives commercialize a wide range of services related to car use, such as warranty extension, car or driver insurance, and car service. They are good at packaging these offers in one monthly payment and they have the competitive advantage of being integrated in carmakers’ and car dealers’ ecosystems. This advantage should still be developed however, because today’s driver wants not only a car, but also mobility solutions. This is particularly true in the fleet business, where companies seek solutions that provide better mobility for their employees – not only for the sake of efficiency but also to improve quality of life or assuage environmental concerns. To go from car lending to mobility, captives must develop new service offers and bring intelligence to the way cars are used. Mobility can sometimes mean shooting yourself in the foot if you limit the use of a leased car when it is not time-efficient, in order to promote the use of e-bikes or public transport. In this situation, the car driver will either arbitrate himself, opening the field for alternatives and potential competitors, or finance captives can strive to offer the right mobility mix, turning into a mobility provider that brings together solutions, creates a seamless customer journey, and offers a single invoice to the driver. To be the platform, or to be in the platform? That is the twenty-first century question! One could argue that car makers may be more relevant in building and managing a service platform, but captives master the payment process.

 A clear signpost in this shift from pure financial concerns to mobility ones is the renaming, in July 2019, of Daimler Financing Services to Daimler Mobility AG. This move consolidated all Group activities around mobility, and resulted in 70 million users registering for the company’s mobility services. Daimler Mobility now covers the full spectrum of mobility, either directly or through partnerships (BMW, Geely) and startup acquisition, building a new mobility value chain: Share Now for carsharing, which brings together Daimler’s car2go and BMW’s Drive Now, Charge Now to locate EV’s charging stations, Park Now to book a parking, Free Now as an app to book a taxi or ride-sharing services, and Reach Now, as an app to plan multimodal commutes using diverse means such as bicycle, public transport, and carsharing. ALD Netherlands blazed the trail a few years ago, offering Mobility-as-a-Service. This mobility revolution is just the platform for the next sea change, the one around leisure consumption in mobility.

To stay in the race, captives will have to fundamentally transform. What is true in banking is certainly true for captives – become a tech company or die. In this respect, the challenge is significant, as the benchmark is no other finance captives, it’s neo banks with swift and full online subscription processes, or even Amazon’s #1 Leadership Principle “customer obsession,” which features an excellent mix of digitalized processes and human interactions. Today’s finance captives’ ecosystems, which rely heavily on the selling power of car dealers, may not offer the best customer experience. The path starts with building a customer-centric culture, identifying key moments of truth, and improving user experience – both for the sake of customer satisfaction, and to improve efficiency. The best in class are now fully dematerialized, offering e-signatures for all documents, and e-safes for contractual documents. It looks so easy from the customer’s vantage. From the captives’ perspective, it means partially reinventing the business, using the tremendous possibilities of AI to speed up credit decisions, chatbots to interact with customers or car dealers, and RPA to improve back-office process efficiency. And, since the future is all about cooperation, open architecture is a must. Data is a parallel burden, first to build an efficient asset for CRM and provide the car marker with relevant insights, and then to get the full impact of the possibilities of AI. 

In other words, the future of captives heralds tremendous change, managing increasing constraints, and taking the best from upcoming technologies. Strategically, there are two major issues to bear in mind. First of all, who will be the competitors of tomorrow? Today, they are mainly cash purchases or the customer’s bank. But the competitors of tomorrow will be mobility providers, offering flexibility, subscription possibilities with limited commitment in time, and a trendy image in a world in which having a car may seem outdated. Secondly, how to distribute? The structure of their distribution model in a closed network is uncertain and there is the potential to explore direct sales, which opens up the possibility to offer standalone products online around mobility and develop their footprint. In these uncertain times, one thing is certain. Captives are alive and kicking, some of them even coming up on their centennials. In a world where complexity around mobility is on the rise and solutions are evolving, this is not their first transformation, and hopefully not their last.

Franck Dansaert (VP at Capgemini Invent France - Head of Automotive) & David Pitoiset (Principal at Capgemini Invent France - Captive Finance Leader)

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