Anis Chakroun, founder and CEO of Teamwill Consulting, discusses the phenomenon of leasing with a pay-out option (LOA market in France) and looks at the players and the challenges of this ‘new trend’.
The genesis of leasing. In 1750 B.C., a Babylonian king named Hammurabi acknowledged the existence of leases of personal property in his code of laws. Other antique cultures, like the Egyptians, Greeks and Romans, contributed to the use of personal property and real property leasing.
Most people assume that leasing appeared quite late, by around 2000. Actually, a Californian business man developed the concept which consisted of buying machinery and transportation vehicles for the purpose of renting it to business entities. In 1952, he created the first leasing company called United State Leasing Corporation in San Francisco.
This business model was exported to Great Britain 10 years later and other European countries followed.
The birth of leasing in France. Two financial firms “Banque d’Indochine” and “Société Centrale de Banque”, founded the company “Locafrance” in 1961. In the early 1960s, the leasing company invested more than e1.6m in moveable assets. In France from 1970 to 2000, leasing brought an important contribution to the investment efforts of French companies. Leasing permitted the financing of €175bn of equipment and more than €95bn of immovable property.
While companies had already adopted and were seduced by the LOA (hire-purchase), the next step was to attract individuals. Thanks to a new consumption trend where people were increasingly adopting a subscriptions for many services, hire-purchase began to be used by French households from 2014 and was set in the consumer’s mind by 2015.
Hire-purchase (LOA) principle. Before going through the analysis and the understanding of this trend in France, let us look at the LOA principle.
The LOA permits an individual or a business to use moveable equipment (for example, a new car) by paying a monthly loan until the end of the lease term. At the end of this rental agreement, the customer has the choice: either to buy or return the leased goods.
The LOA solution is mainly used for vehicles (cars, trucks, agricultural vehicles, etc.) allowing the customer to possess a new vehicle without paying the total cost at once or contracting a credit while still having the choice to buy it at the term of the contract.
The first customers for this financing option were individuals but businesses soon appropriated this advantageous solution too.
The reason for choosing LOA. In France, this scheme mainly attracts young individuals. Indeed, 43% of 25-34-year olds opted for this form of consumption in 2016. However, older people prefer to use cash or to contract a loan: 72% of the 50-74-year olds.
Both individuals and businesses mainly choose this option as they do not have to gather a large amount of money for just an “object” of consumption. Moreover, leasing is an easy way to “consume” a car; indeed, dealers and loans firms highlight an all-in-one system offering maintenance, support and insurance. LOA permits consumers to regularly change their vehicle which answers the need of renewal ingrained in today’s society.
Sylvain Schuler, Marketing Director of DIAC (subsidiary of the RCI Bank, the captive financial company of Renault-Nissan) believes that: “it corresponds to an evolution of the consumption behaviour of the individual customers, who are less attached at the idea of possessing their vehicle. French people drive less and less and it is the useage value that takes over”.
According to Schuler, the most attractive aspect of LOA is the maintenance of the vehicle: “LOA permits to disburse money on a monthly basis, with packages which incorporate the vehicle funding, but also warranty extension and servicing.”
Other notable advantages are the possibility to have a large choice of models; a simple and convenient solution if the customer wants to change their vehicle (lease term estimated from one year to three years); customers (individuals or businesses) can negotiate certain features such as the monthly payment or duration; the residual value is known and stated in black and white; and unlike classic credit there is no surprise at the end of the contract term.
For businesses, there are additional fiscal advantages. They do not have to pay in “one shot”, they can spread the expense. The monthly payments are considered as charges that are deductible from taxable profits (within the limit of a depreciation not deductible of €18,300). There is no tax on business vehicles and a spread payment of the VAT.
LOA: The players who pull the strings. We have distinguished two main players: manufacturers and financial firms.
Concerning manufacturers, advantages are not negligible. Indeed, LOA allows the increase of the market share of the captive banks against the traditional banks. Moreover, LOA encourages the loyalty of consumers because at the end term of the contract, they return the vehicle and, in most cases, they restart a new contract with the same brand. The last benefit for manufactures and their subsidiaries is the maintenance of the vehicle fleet. As they propose all-in-one services, including support and maintenance, customers will have to deal with them for this type of service.
To face the increasing demand, non-banking companies and banks have to be at the cutting edge of technology. For instance, Teamwill Consulting intervened in the rebuild of the information system of captives’ financial entities such as Hyundai Capital, Banque PSA Finance, Volkswagen Bank and Toyota Finance.
Banks also benefit from this situation because captive companies do not have their own subsidiary dedicated to credit; consumers are then obliged to appeal to banks. A credit loan is a good strategy to ensure regular income, to target new consumer business and potentially retain their business for other types of credit (consumer finance, real estate credit, etc.). They also increase their margin thanks to additional services such as insurance or maintenance.
The “leasing boom” in France. Whether in newspaper or television advertising, we see more adverts highlighting the benefits of car leasing instead of purchase, e.g. “The New Peugeot for only €249 per month”. Most manufacturers now present their car’s prices with that model by indicating the price of the monthly instalments. This trend has been evident since the 1990s, but for the past three years the phenomenon has grown considerably.
It is noteworthy to identify the benefits of leasing to understand the reasons for this market. Indeed, in 2000, leasing represented 9% of funding for new cars, against 41% for personal loans and 50% for car loans. These figures have considerably changed over the past four years, with the rental rate more than doubling.
The ASF (French Association of Financial Companies) figures show that the rental solution has skyrocketed in 2015. In fact, in one year (from January 2015 to January 2016), LOA operations increased 54% whereas car loans remained unchanged. Investment recorded for LOA reached €1.5bn in April 2016.
The limits of LOA. LOA offers many advantages because of this turnkey solution, giving a feeling of tranquillity and security. However, this service does have a higher cost than classic credit. For instance, the customer pays maintenance and support from the start of the contract even though a new vehicle does not require it. Some other major drawbacks are raised with hire-purchase: the customer is not the owner of the vehicle so he cannot do what he wants to the vehicle, e.g. upgrading or customising must be avoided, and the mileage written in the contract must be respected otherwise this will cost an additional fee. From a financial point of view, it would be difficult to compare the cost of LOA because interest rates are not explicit.
As a general rule, hire-purchase is a flexible solution because some conditions in the agreement can be changed: the due date of the payment is adaptable, the duration of the contract can be extended, early settlement is possible. Once again, these possibilities show us that this flexibility and simplicity imply an extra fee and therefore a higher cost.
Conclusion. Throughout our analysis, we can emphasis that hire-purchase has come a long way to be accepted and become a part of everyday business. While the concept was originally intended for companies, it has eventually conquered French households.
We can note that over the past few years, many goods are subject to leasing, e.g. furniture, high-tech equipment like televisions or smartphones, as well as clothes. Thus, we can wonder how far this phenomenon will go, where the rent supplants the property.
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