TFS president and CEO John Chandler

TOYOTA Financial Services (TFS) is only three weeks away from launching an innovative algorithm-based F&I product that personalises loans, and it will beat by five months the stringent ASIC regulations that come into force on November 1.

The car-maker said the product, trialled around Australia with a high success rate earlier this year, is designed to offer a custom finance solution for both private and commercial clients.

At the same time, TFS president and CEO John Chandler told GoAutoNews Premium that dealers will be the big winners with unprecedented flexibility.

The product will be rolled out to Toyota, Lexus, Hino and PowerTorque F&I staff from July 16 with the first group of dealers expected to start writing loans for customers from July 23. All dealers are expected to be changed over by the end of September.

This puts them one month ahead of the changes demanded from the Australian Securities and Investments Commission (ASIC) that introduced stringent F&I rules after years of investigations alleged overcharging through products including flex-rate loans and add-on insurance contracts.

Mr Chandler said TFS’s solution had taken more than three years of development, indicating the company was aware of rumblings in the industry before ASIC and federal government intervention.

“We’re positive of the direction ASIC is going because it’s consumer-focused and it’s very much Toyota’s consumer-centric approach,” he said.

The system combines the use of algorithms created with actuarial support from an unnamed supplier, with digital and cloud-based financial services coming from US-based Pegasystems.

Mr Chandler said he believed the Australian automotive industry was likely to go for a rate card approach “but for us we think the algorithm approach will be more accurate and gives the customer a more suitable rate”.

“We have designed the product based on how we can most effectively put a personalised price into hands of the customer and the best way to do that, in our opinion, is to use risk-based pricing,” he said.

“We spent three years developing an algorithm based on analysing our history and understanding predictive factors and so produced an algorithm that would be delivered in a decentralised way up to the dealer point that they could then deliver to the end user.

“So we’ve done a lot of work on that and we trialled in March this year and that was successful and the 12 dealers who participated, really liked it.

“At the end of the trial, many dealers told us that they didn’t want to go back to the old system. For us, that was a good indication that it works successfully.”

Toyota has 491 dealers in Australia which Mr Chandler said “have a lot of volume so a lot of training and support is involved”.

TFS general manager of retail for F&I, Paul Williams, said the participants were dealers in each capital city, plus some rural dealers.

“It wasn’t just private consumers but there were some commercial customers,” Mr Williams said.

“ASIC focused on the consumer though we also have commercial applications.

“Rather than go to the market with two systems – consumer and commercial – it made sense for us to apply the algorithms to commercial applications. That trial was also very successful.”

TFS will next month launch the program to both consumers and commercial customers, with training starting on July 16.

“We’re not just rolling out a new pricing system but we are rolling out a state-of-the-art system that is efficient and saves the dealer time,” Mr Chandler said.

“The benefit to the consumer is that this provides a personalised interest rate for them that’s suitable for their particular circumstances, as opposed to them being lumped in with everyone else or negotiating with the business manager.

“Consumers get a scientifically based rate that is made for them.

“Importantly, the same data goes into the system so the interest rate is the same across the dealers. That consistency is important for us.”

Mr Williams said that in forming the new rules, ASIC spoke about trust and transparency and trying to get financial institutions to head down that path.

“Our algorithm does treat our customers honestly, efficiently and fairly which is what ASIC wants,” he said.

“We found that in the trial, as business manager confidence grew with our algorithms, it actually changed the relationship between the manager and the customer.

“He felt confident to turn the screen around – it takes only about three seconds for the algorithm to run – and show the customer so they can see what the program has done for them. It works really well.”

Mr Williams said TFS did 635 contracts during the trial with a strike rate of 67 per cent.

“There was only a need for two adjustments where two clients challenged the rate,” he said.

Mr Chandler said TFS believes that the trust level offered by the system will improve the relationship with the customer significantly.

“We would like to reach the point where the dealership is seen as the place to get finance,” he said.

“It is a safe and easy process for people to go through. At the moment, the (dealer) reputation may not be too great but I think we can turn that around and we think this is the way to do it. So we are pretty positive about this.”

There is another bonus for dealers and it centres on the sale process, according to Mr Chandler.

“We are seeing some dealers talking of putting the finance decision earlier in the sales process,” he said.

“When they can integrate that into the early discussion, particularly quoting the rates, that will become part of the whole process and we won’t necessarily have to hand the customer over to the finance guy at the end of the sales part. Affordability is a key part of the decision.”

Mr Williams said that change could be accelerated by the movement by businesses that offer to create a credit score for consumers.

“The more popular this becomes, the higher incidence of people taking their credit score into the dealerships and buying,” he said.

“Our algorithm clearly takes one of those predictable indicators – the credit rating – into account when formulating a rate for the customer.

“We are also looking beyond the finance industry with this. It is well documented that there will be a lot of FinTech (finance technology) start-ups and they will have access to credit scores.

“They will start pitching for A-grade credit through an online service and the benefits for us is not to have our market disrupted but be part of it. So hence the algorithm and that type of thinking.”

Mr Chandler said the personal status of the customer impacted on the rate given.

“When we did the analysis, we found that there was a certain portion of people who went through the entire process of applying for – and getting – a loan and then never took it up,” he said.

“We think some of that is due to mis-pricing through flex, so we are pretty confident that we can now lift the volume by making the process more acceptable to those people. That’s another big opportunity.

“We think people will want to finance this way because of the trust and honesty factor and eventually it will extend to online.

“More and more people are doing research before they go to the dealership and that means they will go online.

“We have some tools that we will bring onboard once we get the system right. The combination of young people doing their research online – and even some older people – means we will be really well placed by having an omni-channel into the dealership itself.

“At the moment, that’s about 12 months away. It’s the next phase after this.”

Mr Chandler said staff changes under the new F&I system would be up to the dealer.

“We think the most tangible first step is where the quoting process is put earlier in the sales process and that could possibly lead to some changes in the duties of some staff,” he said.

“I think over time there would be some more changes. The business manager no longer has to pitch a rate, so that is a huge change. Frankly, many business managers in the trial appreciated that because the pressure was off. It’s not an easy thing to do.”

By Neil Dowling