THERE are warning signs that the UK economy may tip into recession in 2020 – and this could bring a hefty dose of uncertainty for the car finance market.
In the third quarter of 2019 the UK economy suffered its biggest year-on-year slowdown in nearly a decade, clocking just 0.3 per cent growth.
If a recession does arrive, it will be the first economic downturn experienced by many of the new breed of tech-based, peer-to-peer lenders such as Zopa, RateSetter, and Funding Circle who have injected fresh competition into the market in the last few years.
Effect on the car finance market
This will add to the uncertainty that always accompanies an economic downturn. History tells us an economic slump can be particularly tough on the car finance market; not only do brokers have to contend with a possible dip in consumer appetite for leasing vehicles, but an unfavourable economy can also wreak havoc on broker funding panels.
The global credit crisis of 2008 dramatically altered the funding panels for many car leasing intermediaries as finance groups lost their nerve for the market, or saw their funding lines withdrawn.
P2P lenders draw their funds from a different source than conventional lenders, including ordinary savers as well as specialist investors and hedge funds. How their funding will behave if the UK economy dips is as yet unknown. Will ordinary savers take fright if they see P2P lenders investing in car finance deals that don’t get repaid because drivers lose their jobs?
The P2P lenders must also contend with tighter regulation from the Financial Conduct Authority, which has said many investors didn’t understand what they were investing in.
P2P lenders likely to face difficulties
Market commentators caution that P2P lenders are likely to face difficulties in the current economic climate. “Consumer confidence levels have been declining since 2016, the year of the Brexit vote. Several lending platforms have cited economic uncertainties as cause for concern,” Nimayi Dixit, fintech research analyst at S&P Global Market Intelligence, stated in an October report.
“For example, Funding Circle pointed to an ‘uncertain economic outlook’ as a primary cause of lower loan demand on its platform. The company slashed 2019 revenue growth estimates from 40 per cent to 20 per cent, inciting a precipitous decline in its stock price, earlier in 2019,” Dixit added.
The market has already seen one casualty, with P2P lender Funding Secure going into administration in October after an increased number of borrowers struggled to pay back their loans. However, Funding Secure had an unusual niche business: its car loans were on collectable luxury and classic vehicles.
Zopa is one of the P2P lenders that has made the biggest play for the mainstream car finance market. It’s car finance team has been in place since 2017 and its car finance product has been available through brokers since December 2017, and via comparison sites such as Confused.com and ClearScore since November 2018. Ou
An HP offering has now been available on its website since last summer
Building banking technology
Steve Hulme, Zopa’s chief financial officer, told Leasing Broker News: “We’ve taken the strategic decision to build our own banking technology which will enable us to continue to lead the market in providing great value and fair financial products while also maintaining our low-cost operating model.
“As a result, substantial investment was made in our technology, infrastructure and our people during the year.”
However, Zopa’s investment has caused funding strains. The lender in early December was forced to raise £140 million from a US investor to satisfy the tighter regulation it now faces as it transitions to holding a bank license.
Nevertheless, it has expressed confidence it can handle any bumps in the road from the UK economy. Formed in 2005, Zopa is the only peer-to-peer platform to have operated through the 2008 recession. It says default rates rose, but lenders still made money. Since then it has approved £5 billion in loans and is fast becoming a mainstay on broker panels.
RateSetter is another P2P lender making its mark in the sector, operating in the vehicle finance market via dealerships, dealer groups and brokers. In 2017 it bought specialist motor finance providers Vehicle Stocking (which provides stocking loans) and Vehicle Credit Limited (a consumer-facing lender) after their parent company went into administration.
While the company declined to comment on how it might be impacted by a downturn, it appears bullish about its long-term future.
Overall, the firm has witnessed an impressive turnover growth, reducing its losses from £27.5 million in 2018 to £4.2 million this year, while the number of active investors rose 26 per cent. The company also revealed it has around £39 million in its provision fund, which reimburses investors if a borrower’s payment is missed.
Bucking the trend
RateSetter’s CEO, Rhydian Lewis, said in October the company is bucking the trend in a troubled marketplace.
“Our model has always been differentiated from other peer-to-peer lenders because we have focussed on a low risk and liquid product for investors. On the borrower side, we compete in traditional and deep markets where we do not need to take undue risk to build a sizeable business.
“We believe this makes RateSetter the sustainable challenger to the banking model of deposit-backed lending,” Lewis said.
One new, tech-focused lender that seems to be in a unique position is Blue Motor Finance. The firm has grown rapidly to become one of the UK’s top fintechs, lending over £1 billion to more than 120,000 customers to date.
It is trying to build more relationships with dealers, with a dedicated dealer support team and deploying machine learning technology to try and get underwriting response times as low as possible.
While many alternative lenders are finding it difficult to secure financial backing as the economy continues to spiral downwards, Blue Motor has set itself apart by securing nearly £1 billion of new funding commitment from five international finance providers.
“This funding commitment is a remarkable achievement in this turbulent political environment,” the company stated.
“Blue proves that there are UK businesses that can continue to succeed and grow and have the confidence of the investment community in these uncertain times.”
