18 Oct5:50 AM
CITIBANK is upending the traditional vehicle financing model here by pre-qualifying customers for car loans - thus bypassing the motor industry, which could lose millions of dollars in finance commissions if this practice is eventually adopted by other banks.
Under the Citi Direct Car Loan model, customers apply online for vehicle financing and those who are successful receive in-principle approval. With this conditional approval for a loan of a specified amount, a prospective car buyer can shop for a car knowing he or she has already qualified for financing.
This is different from the current model where a new car buyer submits a loan application through the car company for the bank's approval. If the application is approved, the car company receives a finance commission from the bank, which can range from 1-2.5 per cent of the loan amount, depending on the quantum and tenure. Say, the average commission is 1.5 per cent and the average loan amount is S$100,000. For a top dealership selling 5,000 cars a year, with perhaps half of those purchases involving financing, the total commission could come to nearly S$4 million.
If the Citi model catches on with other financial institutions, it could spell the end of a longstanding relationship with motor distributors as well as finance income.
But some car companies doubt that will happen. "Most distributors have a panel of banks they work with," says the managing director of a luxury dealership. "There are advantages to such tie-ups, the most important of which is customer convenience."
He explains that car salesmen take care of the nitty-gritty for the buyer - something the latter won't get if a bank wants to be independent and go direct to the customer.
"The salesman provides one-stop shopping," he adds. "If he doesn't do it, someone else will have to. So whatever is saved in commission may have to be paid out elsewhere."
The sales director of another luxury dealership agrees: "It is part and parcel of buying a car. Of course, the salesman gets a commission but the emphasis is on customer service. Certain processes are involved; it's not as straightforward as it looks."
Another factor working against the direct model is in-house financing, provided by the financial services arm of the manufacturer - something which all the German brands here have access to.
"The dealer can easily take advantage of this alternative to keep financing in-house," the sales director says.
He speculates that Citibank is rolling out this scheme because it wants to increase market share. The American bank is currently a small player in the vehicle financing market here, with DBS, OCBC and Hong Leong among the heavyweights. The latter three have tie-ups with most of the best-selling brands.
"It's a good idea but, ultimately, it will be difficult to dictate terms to motor dealers."