Okay, the song “Money for Nothing” was 37 years ago and has long categorized in the genes of “Oldies but goodies” in stream music. In the modern financial environment with intensive competitions and product diversities, you may buy anything you want even if you are just a house mover.
Walking on main streets in downtown Taipei, by paying just a little attention, you may find out and realize the numbers of bank branches are even more than convenience stores. According to the Financial Supervisory Committee, Taiwan has 70 registered banks and 334 credit associations including farmers and fishers associations. In other words, when you need to borrow money, 404 banks and financial institutes are waiting for your business. As the matter of fact, plus those non-banking financial institutes of credit-lease service companies under the supervision of Department of Commerce, Ministry of Economic Affairs, you definitely may borrow the money you need unless you are already registered bankruptcy with credit default records.
To most consumers, the biggest expenditures in lifetime is real estate property and car. For other consumptions, credit card line and maybe plus some unsecured credit loan borrowing is enough to cover all expenses. Interestingly, the concept of spending at borrowing money is not just so different in between western and eastern culture, but also in between of generations.
In western culture, borrowing car loan to finance vehicle purchase is simply as nature as Asian people invest real estate property with mortgage housing loan. With experience of living or studying in western countries such as US, Canada, Australia, New Zealand or Europe, you are supposedly to realize nobody discuss vehicle price but installment amount in car dealing transaction. As long as their monthly income can afford the installment, western people are not afraid of buying luxury brands. Still remember once I visited a dealership in London, the management shared their experience that deals were 90% completed with car loan finance, despite they are running a luxury German brand. Placing the borrowing consumption concept in Asia culture, probably only a famous poet writer, Lee Bei in Tan Dynasty, has such romantic and easygoing mindset like western people. No wonder when I attended an international meeting in Singapore and shared a high portion of car finance in Taiwan is 0% interest program with subsidy from OEM, those colleagues from western countries were so surprised and could not understand why Taiwanese people do not have to pay interest for car loan. Their shocking facial expression is still a fresh and unforgettable memory to me.
When I joined the industry 25 years ago, the brand I serviced released a 1.99% low interest program which was already a huge marketing campaign in that time. Nowadays, if there is no inventory shortage issue from chip shortage and shipment instability, 0% financing program would be long a basic sales measure crossing all brands in Taiwan. According to the chattel mortgage record in Motor Vehicle Office, even with overwhelming 0% financing promotions, the financing penetration rate is around 60% to 65%. In other words, regardless how car brands offer attractive financing programs, there are still 40% of local car buyers prefer to pay cash for vehicle purchase. This is due to the local culture of low debt tolerance and high saving rates.
From financial institutes’ perspective, with such high planned budgets for car finance campaigns from car brands, isn’t car loan supposedly a profitable business? The cruel reality is that none of the six so-called “too big to bankrupt banks” (CTBC, Cathay-Union, Taipei-Fubon, Cooperative Bank, Mega bank, and First Commercial Bank) is willing to participate in car loan business. For international banks who normally aim at high return on asset, from Citibank in earlier time, Standard Charter in years ago, and recently DBS, all withdrew from car loan without hesitation after running the business for a period of time. This is definitely with causes which basically are attributed to following two points:
First of all, as car brands have to bear the car loan campaign cost, the interest rate is certainly the lower the better. As a result, when selecting the campaign partner bank, car brand for sure would ask for rate as lower as possible. Besides, as the interest subvention is a one-time payment, the program interest rate therefore becomes a fixed rate. In recent years, the car loan rate is lowered to the same level of housing mortgage rate. The pressure to car loan banks is even greater this year, due to domestic interest rate has gone higher following US Fed increased rates to fight the expanding CPI. Housing mortgage product is designed with floating rate which is able to reflect the funding cost along with rate increase. Car loan banks however have to cover the increasing funding cost by themselves as the car loan rate was fixed at the time cases were underwritten. The two major banks running car loan business in market still currently offer 0%-subsidized rate at 2% or lower. This makes me really wonder how the car loan management team face inquires from the Board of Directors, how come the car loan rate is even lower than housing mortgage rate!
Secondly, due to group interests, some mainstream brands (Toyota/Lexus, Nissan group, VW-Audi group, MB-Taiwan) all have established brand captive financing services. The interest subvention cost is basically from left pocket to right pocket. Also with incentive program designed to manage and control dealership for car loan business, most of the brands’ car finance is contained by the brands’ captive, and customers are therefore kept within the group system. If banks want to share the pie, this is up to dealers’ decision. To enhance and tighten business relationships with dealers, banks have to lowering rate, giving feedbacks, and taking higher credit risk, to unwillingly underwrite sub-prime credit customers who are screened out from captive financing. Low interest rate plus higher credit risk, the unbalanced product structure is hazardous from profitability viewpoint.
Obviously, car loan market is so much determined by brands’ finance campaign policy, and dominated by dealer channels. Taiwanese car buyers are also very used to “one-stop shopping” solution, assigning all car relevant business including financing, insurance and accessories to car dealer or sales-reps. Consequently, only two aforementioned major banks with financial holding background, plus some local small scale banks are engaged in the business. Most of major banks are observing but stay away from the market.
Along with the new century of EVs and sales model revolution, a new gate is opened to financial institutes, who are interested in the car loan business. Digital financing solutions and customer experience are absolutely two new critical factors to success. Let’s discuss this topic next time.
About the author - Mac
Desired to be a sport journalist when young, but have accidentally engaged in car and banking as professional career. The author had worked in automaker’s captive financing companies for years, in charging of car financing, leasing, insurance and floor plans. Currently is serving in a vehicle financing unit of a financial holding company, responsible for car financing and leasing, cooperating with a wide range of brands.
Born in the era of 60s, a fan of rock in 70s, movies in 80s, NBA in 90s, Stephen Chow in 00s, streaming in 10s and Apple in 20s.
Enjoy jogging, hiking, reading and writing in leisure time. Living in Taipei with wife and a dog.