Leasing firms capitalise on broker market boom, as partnerships drive volumes in SME and personal leasing space.
Broker business is booming. Some are supplying thousands of vehicles a year and in the eyes of one major leasing company they could now be considered ‘small leasing companies’.
In fact, if our sister title Fleet News tore up the rule book for the FN50 and, instead of focusing on total risk fleet, it considered the number of vehicles supplied or managed then several brokers would make the listing.
Take Fleet Alliance, for example, which now has a managed fleet of more 25,000 vehicles. It would theoretically sit in the top 15 of the FN50.
Up until January this year its growth was purely organic but it bought a controlling interest in another broker, Neva Consultants, adding around 7,500 vehicles in the process.
Like most brokers, the core of its business has been in the small-to-medium enterprise (SME) space and it has grown by providing “consistently competitive” pricing through its panel of funders, according to managing director Martin Brown.
But Fleet Alliance has also tried to be different compared to a traditional broker by focusing on consultancy and fleet management, an area which major leasing companies with consultancy divisions might consider ‘their turf’.
“In the early days we were always looking to offer fleet advice and then, as technology has come in, we’ve adapted that. We’ve developed our own fleet management software, our own app,” Brown says.
“A lot of the recent growth has been as we became more confident.
We thought ‘if we can do this for a 50 car company, we can do this for a 100 car company’ and then that continued to grow and now we’ve got fully outsourced management for fleets of up to 500 vehicles.
So our expansion has been from a core SME, we’ve gone up in the corporate scale to the larger fleets and latterly we launched a new business, Intelligent Car Leasing, which is geared to consumer and back into that more traditional broker space – the bit that, up until latterly, we had really stayed out of and left to the others.”
Growth in personal leasing
Around 20% of Fleet Alliance’s business is now consumer, the majority is business-to-business (B2B), and Brown points out this is “not a traditional split” for a broker.
In fact, some brokers focus almost entirely on personal leasing. And for those that have offered both business and consumer leasing from the outset there has been a rapid rise in the consumer side of their business.
Synergy Automotive, for example, estimates that back in 2012 the majority (80%) of its business came from SMEs or business users and 20% came from personal leasing. Now it’s more like 50/50.
The latest leasing survey from the British Vehicle Rental and Leasing Association (BVRLA), published in September, confirms that personal leasing is growing faster than business leasing.
It shows the total business fleet leasing market for cars and vans has grown by 7.6% year-on-year to 1.35 million, but the personal contract hire (PCH) sector has grown by 36% in the same period.
Growth has largely been fuelled by a change in people’s buying habits, with retail customers choosing to lease rather than buy, and company car drivers opting out of traditional car schemes and using their cash allowance to fund a personal lease.
But the customer service brokers offer has played a part, too.
“Brokers are the easy go-to point for the retail customer and the company car opt out driver because we are a sector that is used to dealing with individuals, a sector that is interested in dealing with individuals and small entities.
"Whereas, if a retail guy contacts a major leasing company he might get a quotation, but he probably wouldn’t get the type of experience he would hope to get,” says Paul Parkinson, managing director of Synergy Automotive, whose business has grown by 90% since 2012 and who is looking to supply 2,000 vehicles this year.
‘Clicks and quality’
Speeding up online transactions
LeasePlan is investing significantly in the digital side of its business and wants to make online transactions easier for customers and for its broker partners.
It has made a multi-million pound investment in an application which will automate, digitise, and, ultimately, speed up the process. .
“It’s been 24-to-36 months in the making,” Tom Brewer, Network board director says. .
“We ran a pilot in June with one of our franchisees. We’ve concluded that pilot, we’re in the latter stages of doing further releases to accommodate some of that feedback and fix some of the teething issues we encountered. .
"It will be rolled out across our franchise base by the end of 2017.” .
LeasePlan hopes brokers “will see significant value in that” and increase the amount of business they do through Network rather than steering volume towards leasing companies that pay the most commission or who have the lowest price. .
“There is an opportunity as a leasing company to differentiate in a market that is very difficult to differentiate in by being the lowest cost operator. That’s where our focus is,” Brewer says.
Parkinson’s strategy for his team is what he calls “clicks and quality”.
“You go online, you click, you find the product and suddenly you’re wowed by the experience that you have,” he says. “Our people are enjoying providing that experience to our customers.”
Synergy has been working with customer review platform Feefo since 2014 and has 4.9 star rating (out of five) for customer service, based on more than 500 reviews.
Fleet Alliance’s Intelligent Car Leasing brand uses Trust Pilot and has a five-star rating, based on 70 customer reviews, while Fleet Alliance itself has picked up a number of customer service awards including ExpertEye’s FleetEye CSI award last year.
“We’re constantly looking at our customer service and I guess that leads into another reason why the broker sector can be effective for clients is that we’re more nimble, arguably, than some larger leasing companies,” Brown says.
“It’s easier to speak to someone here and perhaps get decisions or get through to the right department.
"That’s not true of all leasing companies but if you compare us to the super-size companies then you may say there is an advantage in dealing with a company closer to the size of an SME. Some SMEs have ‘got lost’ dealing with major leasing companies.”
Being more ‘nimble’ also applies to brokers being able to capitalise on ‘special deals’ from manufacturers.
Parkinson says: “In my business we are reacting to the situation as we find it. An opportunity may come along with a particular brand, some stock that may become available that we can bring to market in an effective way.”
Some brokers invest heavily in their websites and online marketing, with some spending five-figure sums per month on SEO and pay-per-click advertising.
This is backed with in-house expertise.
“I’ve got a team of professionals working with me,” says Parkinson. “I’ve got a director of IT and technical services, I’ve got a director of marketing and communications, I’ve got a client services director.
“We’ve got a team of user journey and user experience and SEO specialists working with us.
We’ve got an 11-year relationship with our web designers and web developers who have grown with us in the sector and the knowledge base we’ve got.”
In total, Synergy Automotive now has 32 employees and plans to grow this number to 50 by 2020 as it looks to increase its volumes to 5,000 vehicles in the same timeframe.
Fleet Alliance has around 100 employees and is looking to expand its managed fleet to 35,000-40,000 vehicles in the next three to five years, provided the market “stays strong”.
“Having managed to do one acquisition we’re not immediately saying ‘let’s go and acquire, acquire, acquire’, but we’re certainly keeping an open mind,” Brown says.
“I see us having good organic growth ahead of us, market permitting. I see growth in SME. I see growth potentially in personal leasing and if the right acquisition was there we would consider that, too.
"Our corporate space is doing quite well just now also.”
‘Are brokers a threat?’
Many predict further consolidation in the broker market and some can foresee private equity taking a greater interest as the broker business model is an attractive one given there is no asset risk and no credit risk.
So, could private equity-backed sizeable brokers, looking to acquire small brokers and to win major corporates on top of their traditional SME and personal leasing customer base, pose a threat to leasing companies?
On the face of it ‘yes’, but brokers, by their own admission, are reliant on leasing companies. Without them they don’t have a panel of funders.
“I think brokers are always going to need leasing companies and it’s an alliance,” Brown says.
The credit crunch and recession of 2008/09 showed how quickly funders can pull the plug on the broker market.
But not all leasing companies exited the market and some that did have since re-entered, with strict criteria about which brokers they will partner with.
Hitachi Capital Vehicle Solutions now stipulates that the brokers it works with are registered with the BVRLA and the Financial Conduct Authority (FCA), have a data protection licence, trade out of office premises and have a minimum of five employees.
LeasePlan has similar criteria for brokers to join its Network brand, which it launched more than 30 years ago.
It also does due diligence on the brokers in terms of the way they are advertising their products, looks at the business model in terms of the segments they serve and expects a broker to do at least 100 units a year with it, although not necessarily in the first year of the relationship.
LeasePlan currently has 85 broker partners, down from 2016 (97) and 2015 (100).
It has the third biggest broker network in the FN50, after Lex Autolease, which has 125 and Hitachi Capital Vehicle Solutions, which has 100 (although it has core number of around 60).
Hitachi puts between 8,000 and 10,000 units a year through its broker network, while for LeasePlan it’s around 25,000-30,000 vehicles.
“It’s about 40% of the total LeasePlan UK fleet so it’s a significant part of our business,” says Tom Brewer, Network brand director.
This is slightly less than last year, which Brewer puts down to the market being “highly competitive” with new entrants like Santander Consumer Finance and existing players looking to grab share.
“From a LeasePlan strategic perspective we have been more selective around the type of business we want to write through this particular channel,” he adds.
“We’ve generally looked towards three- and four-year contracts and away from two-year contracts and we’ve looked to grow the number of maintained vehicles we write as opposed to non-maintained, from a profitability perspective.
“It’s a bit of a transition for us from ‘volume to value’. We’re not the only ones trying to do that but the broker market is generally viewed by a lot of leasing companies as a way to grow volume.”
Approximately 60% of Network’s business is B2B and 40% is personal leasing.
For Agility Fleet, which entered the broker market three years ago and has 22 partners, it’s entirely business leasing.
“That’s a business decision we took some years ago and we’re sticking to it for the time being,” says managing director Keith Townsend.
“Broker-introduced business does one of two things. It either gives us volume, which has low margin, or it gives us good margin but more complicated business,” he says.
Agility targets fleets with fewer than 500 vehicles and, in particular, sub-150 fleets, so the broker customer base complements its own.
Route to market
Types of broker
Chris Swallow, head of Hitachi’s broker division, suggests there are four categories of broker:
1 ‘Transactional’ brokers: web presence brokers that will sell a lot of deals very cheaply and do big volumes, mainly PCH, in the retail space.
2 B2B brokers: focused on business sales and fleet management, more like a leasing company.
3 Commercial vehicle brokers: concentrate on the pick-up and small van market.
4 ‘Specialist’ brokers: concentrate on minibuses, tippers and vehicles that need conversions.
For major leasing companies brokers can be a way to access parts of the market they might not otherwise have a presence in or to quickly grow their share in those markets.
Chris Swallow, head of Hitachi’s broker division, suggests there are four categories of broker: ‘transactional’, B2B, commercial and specialist and it works with all types.
“It gives us a great portfolio to expand our business into all those markets. It’s a lot more cost-effective than employing people ourselves to do all that.”
He adds: “Among our 60 core brokers we have something like 1,200 users on an online finance system so effectively we have 1,200 sales people out in the market finding business for us. For us as a leasing company to have a salesforce of 1,200 people just wouldn’t work so it brings us opportunities we wouldn’t ordinarily have.”
Brewer agrees: “As a multi-national leasing company it’s hard for us potentially to have reach and propositions in all of those places so, by working through the broker market and having franchisees, we are able to provide our products and services into those market spaces.”
Synergy’s Paul Parkinson sees the broker role as being “the front-end of the leasing company’s engine”, dealing with day-to-day issues with SMEs.
He believes there is enough business in the marketplace for brokers and for leasing companies, whether they choose to partner or not.
Colin Tourick, professor of automotive management at the University of Buckingham, envisages leasing companies increasing their direct sales activities with SMEs rather than relying on brokers as they will emulate some of the online sales approaches taken by brokers.
However, he adds: “There is still a huge untapped market out there so plenty of space for both approaches.”
Five challenges for the broker market
1 REGULATION: increased regulation has already reduced the number of brokers and this is likely to continue with the General Data Protection Regulation (GDPR) coming into force next year.
I think some of the less efficient brokers may struggle to comply,says Agility Fleet’s Keith Townsend. LeasePlan’s Tom Brewer adds: "We see a huge variance in the level of CRM systems different brokerages have. To meet the obligations under GDPR, people will need fairly robust processes and quality CRM systems."
It's a challenge for big businesses who have big IT budgets and good CRM systems, so for smaller brokerages it's going to be a big challenge.
He believes it will cause some brokers to think now is the time to exit the market and will be a barrier to entry. Those that remain may need to change their approach to direct marketing.
2 UNCERTAINTY: Brexit, taxation changes, and concerns around air quality are creating huge uncertainty in the marketplace.
Martin Brown of Fleet Alliance believes it is the most uncertain period he has known in his 21 years in contract hire.
Leasing rates have already risen in response to VED changes and manufacturers reducing their support terms on the back of fluctuations in the exchange rate, which impacts the deals brokers can do.
But a greater concern is if fleet operators extend replacement cycles. Brewer points out that while this is quite nice for a leasing company for a broker who needs a high turnover of vehicles it wont help them at all.
3 INCREASING COSTS: brokers are experiencing growing pains, according to Brewer. They have had to grow their employee base, invest in technology and potentially move to bigger premises, which increases their overheads.
What's more, the cost of digital marketing is rising so their lead acquisition costs are increasing. The big brokers are probably seeing the growth in their profits and fleet sizes matched by the growth in their overhead base, Brewer says.
4 POTENTIAL DISRUPTERS: online comparison sites with far bigger digital marketing budgets than some brokers have the potential to disrupt the market, Brewer feels.
He says: "They do mortgages, loans and insurance comparison, why wouldn't they potentially move into vehicle finance comparison?"
5 INNOVATION: there is a growing demand for flexible contracts and brokers need to assess how they might meet the future needs of the millennials and SMEs. Brewer says: "It's a challenge for the leasing and finance industry to create solutions, probably that dont already exist, for SMEs to move away from ownership."