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Santander Consumer Finance Case Solution
Santander consumer finance operates in over 20 countries in Europe whereby after Spain, Germany has the largest share. To operate in each of these countries SCF has to follow different rules and regulations as there is a lot of variation in each of the countries when it comes to consumer credit market size, the product mix, and the market penetration. When penetrating in any market, SCF looks into the GDP ratio and the population size of the country.
The risk it faces in other countries can be in terms of regulation, culture, weak macroeconomic growth, heavy competition and low levels of market development. As per exhibit 6 (b) we can see what risk and potential barriers SCF faces in different economies, especially Germany, Austria, Belgium, Switzerland, Denmark, Luxembourg. The economic and financial crisis led to an increase in the cost of risk for consumer finance as household creditworthiness has deteriorated while, at the same time, strict regulation increased operating costs. Each country has its own standard on how the data should be collected and distributed like in France and Germany it has a fully centralized system and did not provide much information to assess the riskiness of the potential customers. In addition to that, the cost of credit varied in all countries and default rates ranged from 7% in Eastern Europe to around 1% in Germany, Denmark, and the Netherlands. Also in countries like France, the government sets interest rate caps, the risks are so high that the company is not able to promote its product.
Following questions are answered in this case study solution
Risks faced by Santander Consumer Finance
Business Model of the Santander Consumer Finance
Santander Consumer Finance and US commercial banks – A comparison
Future outlook of Santander Consumer Finance
Analysis of the recommendation
Case Analysis for Santander Consumer Finance
Furthermore, the cultural barrier seems to be a major constraint, where it takes years to understand the market, and at the same time, the consumer is reluctant to take a loan from a foreign bank as compared to the local bank.
To overcome these global risks and factors the organization should try to do extensive research on the countries they are focusing on. SCF should firstly produce forecasting and feasibility reports as to whether they would be able to work with the rules and regulations of the country. Also, they need to involve the locals of the country, where they are going to set up in, who would run there company on their behalf. This reduces their cost as it would take years to adapt to the cultural and political environment if they send their home-based officials to set up the branch. Since the locals would have more know-how about the market, they can easily gain trust and attract more customers. Furthermore, SCF should operate in a more stable environment, and if we analyze the future economic outlook there will be positive growth in the future.
2. Business Model of the Santander Consumer Finance
SCF basically focuses its lending on auto finance that is providing loans to car dealer’s clients to acquire cars. As shown in exhibit 7, 61% of the lending is done to auto loan finance while 14% focuses on credit cards, 10% is direct financing, 8% on the durables and 6% on the mortgages. Also, Exhibit 8 shows that how SCF allocates its financing activities in different countries. The lending strategy that SCF adapts to is either an indirect approach or a direct approach. The indirect approach includes retail cars and consumer durable loans, basically relying on retailers to attract potential customers and market its credit. This is also known as Point of Sale strategy (POS). In this strategy, it is important for SCF to find good partners who can market and find potential customers for SCF.
For other products, SCF uses a direct approach that is selling consumer loans directly to its customers. In exhibit 9, we see the business model of SCF which clearly shows the two strategies used by them. In addition to that SCF tries a different approach by converting its indirect customers to direct customers. When making a lending decision SCF focuses on the background of the borrowers, their credit reliability and the ability to pay back the loan. They approach the client through POS strategy first, and when it is tested that they are good clients they try to offer them other products directly through face to face contact and this process is known as conversion. According to them, it is important to know about their clients. Also in some cases, SCF gives credit cards to some of its less risky clients as a gift in order to attract them. The conversion rates are different in each of the countries depending on the business and the client.
SCF finances itself through a number of ways, which include mainly senior debt, commercial paper, asset-backed securitization, and customer deposits. Also, it encourages funding from local deposits as they can avoid currency swaps. The company’s major office funds itself from the Santander Group. As per the statistics in 2006, the deposit base from banking operations in Germany, Spain, Portugal, and Italy represented the highest source of funding for SCF.
In order to manage the risk SCF charges the interest rate based on the business and country risk criteria regardless of whether it carries the Santander brand name or the country’s GDP or its credit rating.
SCF avoids the cost over borrowing as the cost of funding is very high. Securing the funds from the groups gives them the upper hand over the local competitors. Furthermore, regulatory restrictions do not allow them to securitize carpool loans across different countries.
3. Santander Consumer Finance and US commercial banks – A comparison
The European market is very new as compared to the US market of consumer credit, whereby the US has the largest market with 2.5 trillion dollars outstanding loans. The lending strategy of the US market is very different when compared to the European market. In Europe SCF basically focuses on to cover the main European countries with the highest GDP per capita and with the highest population. Whereas the US commercial banks focus more on that is called the risk factor. Also, US commercial banks focus more on revolving loans. They focus on pricing the product according to consumer risk. That means if the consumer has a high-risk profile they would charge a high interest rate for that, vice versa if the consumer has a low-risk profile they would charge a low-interest rate.
Furthermore, their business model focuses on a particular segment of the risk. Their main focus is to find out the there likely rate of defaults, the number of cars they are going to repossess and how can they market them.
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