Driving the market: car buyers gain as banks and manufacturers' in-house finance companies fight it out for purchasers' credit.

WHEN CARMEN ROMAN wanted to buy a new car ten years ago, her search for possible lenders was short. In fact, it was non-existent.

"We didn't have credit then," said Roman, a magazine editor. "My dad sold me my last car, and I had to pay for it in cash. Friends I know bought lousy vehicles, just because they could not get credit. No one had a new car."

Thanks to the 1995 financial crisis, commercial banks in Mexico stayed away from the credit market for many years. Now, though, Roman and her peers would have found a very different lending climate.

Three years ago, banks in Mexico started to fight more aggressively for the credit market, and car loans were no exception. The battle for the favor of car buyers between banks and financial companies of major car manufacturers ended up in ever-greater proportions of auto loans being approved, as well as new services attached to the credits.

Bital, now HSBC, hit first, when it started re-offering car loans in 1998. Since then, the bank has stayed ahead of the other banks in the market: Last year, it held a 28 percent market share in terms of loan portfolio and 25 percent in terms of cars financed, with 4,500 units every month.

But for HSBC, leadership doesn't equal complacency. The bank launched an innovative program last March called "Venta Directa" (Direct Sale), a credit for people wishing to buy a used car.

"We are the first bank to do it," said Lorenzo Ramirez, executive director of Consumer Credit of HSBC. The interest rate is 16 percent, 2 points above the average interest rate for purchasing new cars, which stands at 14 percent.

HSBC promotions include offering to waive the traditional loan arrangement fee for customers who sign up through its website and free life insurance for the term of the credit. The bank also promises to decide on the loan within 24 hours, and this month will shoot for approval of car loans in just 25 minutes, for customers who present an application form and an official ID.

The rest of the big commercial banks in Mexico have also increased their bets in the car loan market, especially Bancomer and Banamex.

Scotiabank, too, has become a bigger player, offering attractive incentives and packages. Ricardo Garcia Conde, the bank's director of Consumer Credit, said that Scotiabank is lowering the barriers to loans: no longer demanding a formal statement of income from a borrower's employer, for instance. "If we can see the income going into the account on a regular basis, then that is enough," he said.

Scotiabank approves over 65 percent of prospective loans. Although this is low compared to the captive financial service companies, officials say it is on the rise.

And they insist that higher approval rates be seen as a positive change. Garcia is adamant that lending more should not be seen as lending recklessly. "We are learning more about our clients," he explained.

The aggressive promotions of banks have been rewarded by a ratcheting increase in market share. For example, in 2004 the percentage of cars sold by General Motors (GM) that were financed by banks jumped to 21 percent, from 9 percent the year before. Now the figure stands at 22.5 percent.

In general terms, some 36 percent of auto loans have been placed by banks this year, as opposed to 34 percent last year, according to BBVA Bancomer.

Banks are also chasing business by developing alliances with car dealers, as is the case of Scotiabank.

"We see the agencies are just as much our customers as buyers asking for credit," said Garcia. He estimated that 90 percent of Scotia's auto-loan agreements are generated by dealers at an auto distributor, rather than over the counter at the bank.

Results are clear: Scotiabank's business has grown at more than 20 percent a year over the last eight years. The bank is targeting the still-substantial number of clients who go into dealerships intending to pay in cash. "There is still ample room to grow," Garcia concluded.

FIGHTING BACK

The array of credit options offered by banks has forced car manufacturers hoping to keep financing in-house to get creative with innovative financing options.

Captive car finance companies also have to offer all kinds of extras and add-ons to please their customers, said Fausto Cuevas, general director of the Mexican Auto Industry Association, know by its Spanish initials as AMIA.

"Due to greater competition for car finance that the 'auto-brand finance' houses face from high-street banks, they have been offering an ever-greater series of packages which allow a client to distinguish between banks' products and 'auto-brand finance,'" said Cuevas. "They may add breakdown services, insurance for the car, for your life or against unemployment."

For example, General Motors Acceptance Corporation (GMAC) worked alongside its mother company, General Motors (GM), to offer subsidy plans, for example with more installments without interest. Today, with different combinations of initial payments, installments and interest rates, GMAC offers more than 500 plans in Mexico.

"Competition is good," said Aureliano Garcia, director of Sales and Marketing at GMAC headquarters, in Monterrey. "It makes you stronger, faster and more aggressive, and you have to look for opportunities that nobody else has found."

Like most auto-brand finance firms, GMAC interest rates are above the ones offered by banks: an average 17.9 percent in 12 months, when banks offer between 14 and 16 percent.

"Banks compete mostly by interest rate, we do it by added value and services," said Garcia.

For example, the company reduced the average time to approve a credit down to an hour and 36 minutes. An online applications system shortened approval time by giving dealers quick answers to credit questions.

"We approve 80% of the applications," said Garcia.

Average loan maturity has also increased from 26 to 34 months today. All GMAC credits include free life insurance. And from October on, they will also come with unemployment insurance, at a cost of no more than US$ 18.

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GMAC, like Scotiabank, has launched a car credit for people without a registered income. With "Plan Accesible" (Accessible Plan), the company hopes to get new customers ranging from housewives to waiters, who rely mostly on tips.

All these strategies have lead to an increase in the number of credits given by GMAC, from 90,510 in 2003 to 92,960 last year. "We want to end 2005 with 100,000," said Garcia.

DaimlerChrysler and Ford are among the manufacturers that have reduced down payments as one way of grabbing back customers--they both have programs that offer a 10 percent initial payment.

For certain promotions, Ford has reduced down payments to zero. The company also offers to wrap in insurance against unemployment and repairs.

From the auto manufacturer's side, competition has also increased with the entrance of new financial branches, as CrediNissan.

The recent boost in credit also means that car buyers' applications are more likely to be accepted.

"We approve 92 percent of the applications we receive. Only eight percent are rejected. Normally they are rejected due to a bad credit reference: An agency will say they have committed fraud or they are in the midst of some legal trouble with the banks," said Armando Reyes, brand manager at DaimlerChrysler Services, the finance arm of the auto manufacturer.

"Five years ago we only approved 85 percent of clients. But now that there is more competition, we have to approve more people," he said.

DaimlerChrysler Services provides a good example of current credit options: Self-funding groups account for around five percent of vehicles sold; various banks fund approximately 35 percent; and about 60 percent are bought with the help of DCS's lending.

Even the luxury Mercedes-Benz brand plays the credit game. Three years ago, the brand only financed 8 percent of the cars it sold in Mexico through Mercedes-Benz Credit, a division of DaimlerChrysler Services. Now the company is financing 30 percent, and the figure keeps growing.

"For us financing is a very important strategy, because it let us reach another kind of client," said Bruno Cattori, general director of Mercedes-Benz and Smart in Mexico (see interview on pages 28 to 31).

AN OUTBREAK OF SPENDING FEVER

With the economic stability, car buyers increasingly take advantage of all the options placed before them: Some 55 percent of car buyers used credit, compared with 50.7 percent last year, according to figures from BBVA Bancomer.

"This behavior indicates that buyers feel it is a good time to buy a car on credit," said Hector Paniagua, director of Finanzia, the car loan division of Bancomer.

As a result, Mexican consumers are on a spending spree, buying some 1.1 million new cars last year, a 12 percent year on year rise, according to AMIA. The organization expects that, by 2010, there will be two million cars sold each year.

"Without a doubt, the car industry has grown as a result of the growth of finance," said Herman Morfin, spokesperson for Ford in Mexico. "In the last five years, the Mexican auto industry has grown around 69 percent."

Morfin said that Ford has been able to diversify its range of cars thanks to the growing number of Mexican clients who, armed with better financial products, were able to access more of what Ford had to sell.

Ford's expansion echoes that seen in the auto industry as a whole. According to the AMIA, at least 10 important manufacturing firms who had previously steered clear of Mexico have launched their products here since the start of the decade.

The arrival of credit can boost company fortunes dramatically. Honda's sales leapt by nearly 21 percent in 2005 after dealers began offering auto loans at the start of the year. The jump comes even though Honda has not yet fully exploited the possibilities that the newfound financing provides, by many measures.

"We support the financing plan, but we have not yet begun to use it as part of a sales strategy," said Ricardo Chan, marketing director of Guadalajara-based Honda. "We have no plans to offer preferential plans for particular Honda models."

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He said that the company's main Mexican-built model, the Accord, was so popular it needed no special support. But in addition to this, the system, known as Global Credit, was organized between BBVA Bancomer and the Mexican Honda dealers association (AMECAH), instead of being organized by the manufacturer. As a result, the Global Credit system looks more like a bank.

On average, customers pay 14 to percent for a three-year credit, the most common type; down from 25 to 30 percent when banks entered the market in 1997, said Scotiabank's Garcia. "We don't see much room for rates to fall," he said.

Elsewhere, there are some things that no one expects to change any time soon. Banks are not planning to lower their down payment limits and everyone expects the up-front fees for signing a credit contract to remain the same.

"We will keep using a standard 20 percent down payment," said Scotiabank's Garcia. "We don't see any reason to lower down payments any more. We ask ourselves--can a person who cannot afford a 20 percent down payment really afford to make the rest of the payments?"

Signup fees, too, will remain static. "The standard fee for opening a credit is 1.5 percent. Some companies might do one percent, some do two. It has been the same for years," said DaimlerChrysler Services' Reyes.

There seems no evidence of a push to lower this fee, he added. The fees are waived only in rare circumstances, such as a special program or a deal offered at a credit fair.

If they play their cards correctly, though, purchasers could find themselves with more money in their pockets and better financial products in their possession. As banks and car manufacturers have met on the car-credit playing field, benefits for the buyers have shot up.