European automotive

Resetting the boundaries: agency, connectivity and subscriptions


Players from all divisions of the auto finance industry came together at the Asset Finance Connect Auto Finance Unconference, sponsored by Sopra Banking Software, to discuss three emerging trends in the shifting auto finance ecosystem – Agency, the connected car, and subscription and new finance products.

As the sessions progressed, it became increasingly apparent that all three trends are interconnected, with common threads running between them:

  • All ways for the OEM to connect with the customers
  • All circle around data and meeting the customer’s needs
  • Changing customer behaviour and expectations is central
  • OEMs are reimagining their role in the value chain but are uncertain of the future. But they are not experts in any of these areas – connected car data, customer relations, Agency, finance products
  • The tech titans are a real threat to the status quo
  • Are we at the crossroads between ownership, usership, membership and Caas?


Many OEMs and prestige car brands have declared that they have started the journey to the Agency model, while value car brands are still watching from the sidelines. A number of pilot Agency schemes have been trialled around the world, including Mercedes in Sweden, BMW in South Africa, and Toyota in Australia and New Zealand.

Agency, “one of the hottest topics in town” according to Elevenci’s Gary Elliot, will result in a fundamental change to the DNA of the auto finance distribution chain, causing a shift in the relationship between customers, dealers and manufacturers.

OEMs are historically good manufacturers but they are not customer service companies. However, they want to be a more valuable part of the chain in the future, and believe that by going direct they will gain increasing interaction with consumers and access to the customer experience and data.

OEMs see many positive aspects to a move to Agency including:

  • Today there are more customers than cars so maximising profit from each sale is critical
  • Distribution costs (including dealer margin) are high and Agency is seen as a way of significantly reducing them
  • The digitalisation of the consumer journey has enabled this development
  • OEM controls the customer journey and re-purchase
  • Further development will see the OEM attempt to control the used car element as well
  • Do OEMs see this as a first step on the new mobility/subscription journey?

Agency was always going to be one of the possibilities for OEMs in the auto industry over time. As one participant commented: “Don’t panic about the Agency model – it’s a natural evolution of the industry.”

There is no “standard” Agency model. Every OEM will do it differently which causes some concern in the industry:

  • Genuine Agency, where the OEM controls the new car sale price, dealer fees, used vehicle trade in value, Financial Services income and any VAP income
  • Hybrid Agency, where the OEM controls the new car sales price, dealer fees, Financial Services income (usually 0% or similar)
  • Limited Agency, where the OEM controls the new car sales price, dealer fees
  • In the Hybrid and Limited Agency models, the dealer can control the used car valuation, finance and insurance, and other add-on revenues

“Don’t panic about the agency model – it’s a natural evolution of the industry.”

Role of the dealer

The ‘bricks and mortar’ presence of the dealer is still an essential part of the sales process for some customers who do not want to buy direct online, and as one participant highlighted, the consumer voice must be front and centre in whatever model is adopted. The retailer currently removes any friction for the customer.

The role of the dealer is still an integral part of the car eco-cycle but in a changing capacity:

  • There is a fixed margin (compare to low/negative margin on some new car sales today)
  • OEM/Captive manages slow moving stock and over-supply problems
  • No requirement for a wholesale credit line, so frees up balance-sheet capacity
  • This balance-sheet capacity can be used to leverage new opportunities presented by the new mobility market, including subscription

One participant observed that automation and new innovations within the auto industry are taking longer than predicted, and “Agency is just another part of that journey”.

The connected car

The connected car was originally designed to bring more services and features to the customer, according to AFC content leader David Betteley, but now it is a ‘cash cow’ which is causing upset amongst customers who are now paying for features which used to be standard.

By 2030, 95% of all cars produced globally will be ‘connected’, but what does that mean for the car industry:

  • The starting point was all about preventative maintenance
  • Now it is about how to monetise the idea
  • What data is relevant and what can be monetised?
  • Can the data be used to deliver features and/or services?
  • Can the data be used to generate one-off revenues or recurring subscription income?
  • Can the data be used as a sales tool (with a digital audit trail)?
  • Who owns the data?
  • Will connectivity be a reason to switch brands or will it become a hygiene factor?
  • BEVs are more connected (7X semiconductors) and may prove to be the catalyst.

Substantial revenue growth is expected from the provision of connected car services which could well be funded by merchant acquirer fees derived by the OEM using in-car payments. The 2021 McKinsey report, Unlocking the full life-cycle value from connected-car data, highlights that connected car services will on average deliver $310 revenue per car by 2030.

There are three stages of (payment) development for the OEM:

  • Car as an enabler. This needs hardware to be fitted to the car and the irony is that the customer pays for the hardware, but it seems like the OEM is presently attempting to monetise the data.
  • OEM as an issuer. Using the car as a payment method. My understanding is that these (so-called interchange or “cut of the transaction” c 1.75%) fees are relatively small (OEM may need to issue a new payment card (possibly OEM branded) in order to make this work).
  • OEM develops a (new) payment method. That is the OEM becoming an “acquirer”. Fees could be in the region of 5-20% of the contract value.

However, there are many obstacles facing the OEMs in their quest for connectivity:

  • Generating a digital audit trail to support RV setting and end of contract repurchase
  • The effect of connectivity on the trade cycle (ability to upgrade)
  • Staying ahead of tech development if this becomes a “brand value” factor
  • Phone vs car (GAFA vs OEM)
  • OEMs developing mutually profitable partnerships with tech companies
  • Dealer networks developing their own “omni-channel” marketing and sale strategies

Phone vs car

A big debate, with strong feelings on all sides, regarding the relationship between the phone and the car, and software companies v engineering companies surrounds the connected car.

At present, the tech giants such as Google and Amazon have a massive lead when it comes to the software needed for the connected car, and the OEMs can’t catch up quick enough as they are a traditional engineering company not a software company.

So, can the OEMs win the battle? The OEMs haven’t invested enough in the software related to the connected car as they can’t see the potential revenue from the data, but they do have the car – so they have the customer. There appears to be a lack of collaboration in the industry in moving forward with the connected car and the endless data possibilities. Should OEMs form strong partnerships with tech companies as that is the way it seems to be moving in other industries? Does the future of the car industry lie with partnerships or a battle between OEMs and tech companies? Whoever ‘wins’ the battle will hold the key to vast amounts of customer data which will be worth billions of pounds.

Monetising data

A vast amount of data is available from connected cars, but who owns the data? The owner could claim the revenue – but until we decide who owns the data, we can’t advance this.

Monetising data and sharing that data can deliver value to all parties in the auto finance industry, for example, through cheaper finance for the customer. Using data, the manufacturer can give the customer what they need and what they want. As Tony Whitehorn commented, “The more data you get, the more flexible you can be.”

“The more data you get, the more flexible you can be.”

Data can be used to understand customer behaviour which is worth endless amounts of revenue. Avenues will open to manufacturers and other sector players to use the data in a very intelligent way, and not just for designing and building cars.

As well as making money from data, the connected car provides another stream of revenue for OEMs through features and financial services on demand. The industry is transitioning to a place where basic spec cars are manufactured with an option to buy add-on features on demand via connectivity and as one participant noted “this is how the industry is planning on making a living.”

However, the key problem for OEMs is that they need their connected services to be customer focused otherwise they appear to be effecting the Ryan-Air-isation of auto. There is a clear problem with charging customers for add-ons which used to be available as standard, without adding some advantage for the customer, such as a cheaper purchase price.

Residual values

The connected car will have a significant effect on residual values in terms of limited car models and telematics data. The data available on the car will mean that a far more accurate record of how the car has performed and been serviced and maintained will be available. It will therefore be easier to set residual values if you have limited car models and can adjust the RV according to the car data.

The telematics data generated from the connected car is also an enabler for new mobility products. For example, if excess mileage is detected through the data, the customer can swiftly be moved to a subscription or pay-per-use finance product which will suit their changing needs.

Subscription and new finance models

New financing models are all about flexibility, but there is a strong correlation between flexibility and price. The more flexible the product, the higher the cost.

And a big barrier to the uptake of subscription is that price is still central to the customer – and they naturally compare subscriptions to other less flexible and, therefore, cheaper ways of paying for the right to use a car. Similarly, sales people are used to selling on price and not on flexibility – and they need to learn how to sell the value of flexibility.

“There is a place for subscription in the auto finance industry, but it needs to focus on consumer demographics and locations, targeting communities who value the change.”

New mobility financing products are therefore only suitable for a very limited and small group of consumers who want the flexibility and convenience which would justify paying the premium monthly payment. This customer demographic is looking for:

  • Shorter term contracts to limit their on-going liabilities
  • All-in payments
  • Pay by use
  • Ability to change the car frequently
  • Always new (ish) cars
  • Easy to hand the car back and walk away
  • Convenient logistics

But all the above are very costly to deliver, with logistic issues being extremely difficult to navigate, only working in certain geographic and demographic locations.

Many unconference participants believe that there is a place for subscription in the auto finance industry, but it needs to focus on consumer demographics and locations, targeting communities who value the change.

It was also highlighted that the subscription model is not suitable for new cars, with a focus on used cars which can then extend the economic lifecycle of the car.

How well has the industry responded to these new products to date?

  • Lot of talk about subscription but very little revenue generation to date
  • Dedicated fleets suffer from low levels of utilisation
  • OEMs and Captives don’t (currently) have the people and processes to deliver
  • Early subscription models offered too much flexibility
  • Current subscription models offer seriously limited flexibility (with some exceptions)
  • It is a premium product currently, e.g. “JLR Pivotal” (£550 joining fee and from £850 (Disco Sport) to £2000 per month (Range Rover) with used cars under 12 months old
  • Logistics still a difficult (and costly) problem
  • Concerns about brand loyalty and customer retention

The increased adoption of subscription and new finance products will result in a number of changes within the industry:

  • Financier to Service aggregator
  • Leasing to Rental
  • Fixed terms to Flexible terms
  • Retailer/dealer to Service provider
  • Intermediary to Direct

Dealers are particularly uneasy about online subscription and how it will affect their ability to sell cars. As mentioned above, with new mobility products comes a shift for dealers to a service provider role for these new finance products and logistics. And this could be part of the solution. In terms of the logistical problems of subscription, dealer groups are well placed in their communities to tackle that challenge.

As with the other two emerging auto trends, would a partnership between OEMs, Captives and dealers solve the problems linked to subscriptions and new finance products? OEMs are once again underestimating the relationship that dealer groups have with their customers.

Resetting the boundaries

The auto finance market was always going to change for many reasons, all of which are so intertwined that it is currently impossible to predict the shape of any new paradigm in the sector.

Agency, connectivity and subscription are all emerging trends in the auto finance ecosystem with fluid boundaries that are inter-twinning and linked through the changing focus of OEMs to reconnect with the customer – an expertise which is not natural to them in the value chain.

Connected car data and reinforcing the customer experience are key to all these new innovations in a changing auto ecosystem of new mobility finance products, transition from ownership to usership to car-as-a-service, Agency and connectivity. But how long before the tech giants stride in with their software expertise and claim the industry as their own or will we see collaboration in the auto industry that resets the traditional boundaries? We will wait and see!

Analysis from David Betteley AFC Auto content leader

There are two threads that link all three subject areas: First, data (telematics output from the car) will provide the OEM with competitive advantage if they can find a way of compliantly using it and, second, the fact that simply making and selling cars isn’t profitable for OEMs.

Manufacturing as a single stand-alone operation hasn’t been profitable for a long time and it has needed to be propped up by aftersales activities and, importantly since the 1970s, the additional revenue generated by selling finance and insurance (F&I).

The new threat is that aftersales income which has helped balance the books, will be severely diluted by the growth of BEVs that require much less service work and consume far fewer spare parts, with the exception of tyres which are today mainly supplied by independent operators such as Kwik Fit.

In response, the major OEMs have diversified to an extent, and have already (pre-BEV) developed large captive operations that in many cases have a balance-sheet size that is more than 50% of the whole group. This has led to many commentators saying that, for example, BMW and VW are banks that happen to make cars.

Perhaps this has led the OEMs to believe that they are now capable of running a service industry as well as a car company?

However, the role of the intermediary (dealer) has perhaps been overlooked in the race to develop Agency as a way of removing cost from the value chain and, at the same time, taking advantage of the new tech tools and customer acceptance of on-line shopping.

Because of these changes, many OEMs feel that the time is right to move to Agency, managing much of the customer journey on-line and removing dealer margin from the equation. Many dealers don’t see a massive change, however, as even today much of their margin when selling a new car is controlled by the OEM in ‘standards’ payments. The issue is, can dealers maintain the same standards and exclusivity of selling one brand if the ‘standards’ money disappears?

Moreover, dealers have developed the skill over many years of selling cars that are difficult to move and those times will return at some point in the future. That’s when the Agency model will be tested, possibly to destruction, when there are more cars than customers and fewer dealers around to sell them!

Continuing the diversification theme, all OEMs have invested millions if not billions in technology both in their factories and the cars they produce. Many of the problems around reliability and production delays have been caused by manufacturers developing their own ‘connected’ solutions; JLR in the former case and VW in the latter.

The big question is, is this a battle that the OEMs can win against the likes of Google (Android), Amazon, Apple and the multitude of tech companies that are competing for a slice of the pie? Or is the solution to partner with one of the foregoing, but then risk losing the intellectual property in the ‘tech’ that is fitted in the car and crucially not controlling the revenue generated by the vehicle.

We are seeing the first roll of the dice with mixed results, for example, the rather cack-handed approach tried by some manufacturers to turn on features (e.g. heated seats) that the customer has already paid for!

OEMs have to decide where the revenue will come from — is it from features such as in the above example or is it services and, if the latter, what services? Is it simply payment services or is it services that will make the customer journey faster, safer and more enjoyable? The big, still unanswered, question is “who owns the data?”

Which brings me on to new mobility products. BEVs have been the catalyst for development. However, the current crop of subscription products suffer from being either flexibility rich and too expensive or flexibility poor and being essentially no different to existing ownership products such as PCP.

The industry has tried to “square the circle” by concentrating on offering used rather than new cars on subscription so they won’t have to price in high initial depreciation costs. This in turn has led OEMs to keep cars on their balance sheets for longer, employing a multi-cycle rather than a single-cycle sales model.

This approach has moved used cars out of the traditional trade cycle and the funding obligation away from dealers to OEMs. It will be interesting to see if this additional balance-sheet exposure for the OEMs will be a burden or a new profit stream for manufacturers.

A closing comment on BEVs: we can all agree that they are the future, but they are still more expensive, putting them out of reach of people on below-average income. It is exactly that section of the population who are most likely to live somewhere that doesn’t have a driveway, meaning that they have to charge at public charging points that cost at least twice the price of domestic electricity.

This, linked with the undeniable fact that government revenue from fuel duty and VAT will have to be replaced (probably) by some form of road pricing, leads me to the conclusion that BEVs may solve one problem while creating a new socio-economic problem for developed western societies.