Carlos del Rio
CEO
Credimotion
/
Expert Contributor

Financial Inclusion in the Vehicle Industry

By Carlos del Río | Fri, 06/03/2022 - 09:00

First, let's take a look at how credit is doing in our country.

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Source: AMDA. Does not include information from some captives such as Daimler, BMW FS, MB FM.

Even though the sum of financing for new and pre-owned cars resulted in a little more than 709,000 units in the 2021 period (discounting auto-financing), a question arises: Are there too many vehicles being financed, or not enough?

Let's recall a couple of numbers that will help us answer that question.

New car sales closed 2021 with just over 1 million units sold.

This means that the penetration of auto loans is at 60 percent for new cars, mostly monopolized by banks and brand finance companies (captives). Here, we realize that most Mexicans were able to get a car through financing, which leads us to conclude that with regard to new cars and with the participation of other finance companies and leasing companies, the credit segment for new cars is mostly very well covered. It is worth mentioning that 100 percent of these sales were concluded at a new-car dealership (B2C).

Now, let's talk about the pre-owned segment. With just over 6.3 million sales, only 1.9 percent of all these sales are financed, considering only sales made by dealers and multibrand dealers, which are C2B2C or B2C. There is basically a big hole in the C2C segment, but why? There are several factors, starting with the one that has money to spare but a low-risk appetite: ¡The Big Banks!

Let's point out that when credit is granted on a movable asset, in this case a vehicle, the grantor acquires two risks. One is the person himself: besides the potential for fraud, the borrower can always fail in their payments throughout the life of the loan. The second is the vehicle itself, as it is always exposed to various risks, including theft, crashes, warranty failures, hidden defects due to misuse or lack of care. Therefore, the only way for banks to grant loans on pre-owned cars is to mitigate these risks through the floors of pre-owned branded dealers and some multibrand dealers, where they perform document verifications, and conduct mechanical and legal inspections to ensure the overall condition of the vehicle. But the problem persists because even if they add to all the financial institutions that exist, including the brand’s, it still results in a 1.9 percent penetration. This is due to the fact that most transactions take place outside of the multibrand and pre-owned branded dealers, which leads us to informal transactions or those between individuals.

For the last two years or so, a series of new startups have emerged that act as managers in these operations between individuals. Every month, a new one appears with ideas that even include leasing. But let's go back to the initial question: Is it enough? The answer: not yet. This is because they are still focused on the sale and purchase and not on the means (credit) to realize such a sale and purchase, and they are still dependent on banks in general.

Even though today many more fintech's are focused on mobility, along with many capital funds, there are still many limitations in their products, such as limits on mileage, model year, credit/lease terms, initial down payments at 20 percent, very closed contracts with no exit or termination options, credit risk eligibility criteria that is higher than the subprime segment, limited to used vehicles and excluding motorcycles, among others.

Without limiting ourselves to our country, let me share with you some very interesting data from all over our continent:

Here is a standard country measure which consists of the number of vehicles per 1,000 people.

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USA* Latino community estimate of +20 MM vehicles of the total overall.
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The potential outcome is overwhelming:

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Result excluding the US:

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*Results are from dividing the estimated market value by six years, the average period in which people change their cars.

Estimating figures for the market size at the end of 2021, by discounting the penetration of vehicle financing of 1.9 percent on average, gives us a result of a little more than US$213 billion per year of the potential sale and purchase of units for financing in Mexico, Central and South America. If we were to take only 5 percent of this result and, taking as a reference the total result of our country (709,000 loans) at the end of 2021, it would mean that we would need around 27 times all the financial participants in our country to be able to cover this demand.

Having established the size and potential of the market in the mobility segment, it remains for us to get to work and focus on solving part of the main problem: the lack of financial inclusion. What better way to solve this than through this new era of fintech startups that are born every month. Luckily, as I mentioned at the beginning of this article, there is a lot of foreign investment appetite for this segment which, with a very good approach, related experience and, whether we like it or not, some good luck, we can make a real difference to the public.

Last but not least, none of this data includes motorcycles, which already occupy an extremely important place in all the countries of the continent and where the discrimination of financing is extremely higher for the pre-owned segment.

Finally, a brief message to all those fintech entrepreneurs who are in this segment. Before defining a product and its rules, go out and listen to your future customers. What are their needs, what are they looking for, what are their challenges and what problems do they face? Understand their frustrations. Do not get carried away by statistics, by your own experience or by the comments of a few.

Photo by:   Carlos del Rio