Consumer Automotive Financial Services in the USA
25 April 2014 | Surveys, Reports and Ratings | General | David Parry, Finaccord
A large used car market and high customer attachment rates driven by first-class training and point-of-sale technology make the US the largest market for automotive F&I products in the world.
The value of finance and insurance (F&I) products sold with automobiles in the US far outweighed those sold in any other country in 2013, according to new research from Finaccord, a market research consultancy specialising in financial services. Three factors above all contributed to this result, which were the high attachment (take-up) rates achieved by American dealerships in selling these products, the size of the used car market in the US, and the importance of vehicle service contracts or extended warranties within this total.
Although China became the largest new passenger car market in the world back in 2009, the US has by far the largest used car market in the world, thanks to the maturity of its automobile industry. As a result, Finaccord estimates that a total of 53.6 million new and used cars were sold in the US in 2013, almost level with the combined total of 55.1 million for China, Japan, Germany, Russia and the UK. However, the value of finance and insurance products sold at the point of sale with these automobiles was far higher in the USA than in these other five countries combined.
Looking at finance and leasing to begin with, and focusing only on private customers (i.e. excluding company cars and fleets), Finaccord estimates that the value of gross advances and assets leased at the point of sale in the US in 2013 was USD 375.0 billion, well ahead of the equivalent figure of USD 210.5 billion for China, Japan, Germany, Russia and the UK taken together. The main reason for this was the high proportion of customers that take out a loan or lease at dealerships in the US compared to other countries, especially for used cars, as shown in the graph overleaf. In the US, 73% of new car customers and 70% of used car customers took out a loan or lease at the point of sale, where these products were made available through dealerships; Russia had the next-highest scores, also at 73% for new cars but dropping to 55% for used car buyers.
"About 41 million used cars were sold in the US in 2013, compared to 25 million for China, Japan, Germany, Russia and the UK combined. More of these were financed at the point of sale in the US than in these five other countries, with a significant proportion of used car buyers being sub-prime customers. In most countries, sub-prime customers can't get a loan through dealerships and must either pay cash or get finance separately from specialist lenders; in contrast, there are many lenders active through this channel in the US, including dealerships themselves" comments David Parry, Managing Consultant at Finaccord. "The economic crisis has squeezed this segment even further in Europe, but it has recovered well in the US since 2009."
Finaccord also looked at a range of additional products sold by dealerships in each country, notably automobile insurance, creditor insurance, GAP protection, prepaid maintenance, road assistance and vehicle service contracts (or extended warranties) plus niche products (where relevant) such as excess wear and tear protection, minor damage protection, and tire and wheel protection.
Once again, the US emerged substantially ahead of all of these other major markets together, with an estimated USD 24.8 billion of premiums and revenues for new contracts sold in 2013 against USD 18.3 billion for China, Japan, Germany, Russia and the UK combined. Another way to gauge the importance of these revenues is to measure them against the underlying value of new cars bought by private customers and used cars sold by dealers. For the US, these additional revenues amounted to 3.6% of this underlying value, significantly higher than in these other five markets where they averaged 2.5% of the underlying value of automobile sales.
"In the US, vehicle service contracts (or extended warranties) are the dominant product cross-sold with automobiles, in contrast to China or Russia where auto insurance is the major product. But policies such as GAP protection, prepaid maintenance and minor damage protection also sell well in the US. There is a limit to how many 'extras' can be added to the sale of a car, and one of the ways that dealerships achieve strong results in the US is through efficient menu-based sales systems and good staff training, to tailor a proposition to a customer's needs," concludes David Parry.
