What your car says about your credit risk - Insights from Carmoola’s CEO!

0:06I love how transparent it is and how clear and simple the way in which we've demystified the whole process of getting car finance.

0:17Aidan Rushby:Welcome to Curious Customer, the consumer podcast. This show is for anyone curious about the world of consumer. from insights, trends, companies, brands and design, we'll uncover the hidden stories from the people at the forefront of consumer industries. The show has a wide range of guests, from marketing leaders to startup founders. So whether you're in the world of brand building or the startup ecosystem or simply curious about the world around us, then this podcast is for you. My name is Matt. I hope you enjoy the show. Aidan, thanks so much for joining today. So you are a co-founder and CEO of CarMoola, which is a direct-to-consumer car finance provider, making really easy, rapid decisions for consumers looking to buy cars, which, according to my research, is how 90 % of cars in the UK are bought.

1:06So you're enabling for a proportion of that, which is really exciting. And let's just start off with that insight that led you to start this business in this category. Yeah, it seemed like the core insight was driven by several things. One, I had a personal need for the product. I remember thinking to myself, I really want to buy a used car. And I was petrified of the feeling of going into a dealership and being rejected for finance. I had no idea. I'd buy a car for£10 ,000,£20 ,000,£100 ,000. I just had no idea of how much I could buy a used car for. and that then led me to start looking at the used car market and just saying wow this is a huge market there's about seven and a half million used cars sold in the UK every year and then I started to research the market and see what was going on and there was this just huge growing trend of consumers that wanted to get their finance sorted before they'd started their car buying experience and they were searching online they were looking at ways of doing that and then And when I looked at the traditional ways that you could access direct-to-consumer finance, it was very analog.

2:19It was done by old-school brokers where, yes, you complete a digital application form, but then a lot of it was on the phone and pretty clunky for the consumer. So I kind of saw what some of the more neo finance apps, whether that's Klarna or Zilch or some of the other kind of neo banks and thought, hang on, there's this expectation now for younger consumers where they want the ability to get a line of credit and then be able to pay instantly using a virtual card or instant bank transfer. And they just expect the whole journey to be very digital. all. So people want to know what their budget is first before they start shopping around for cars, which seems totally reasonable.

2:58Can you expand on the virtual card? What actually is that in practice? It's a means of paying. What the consumers love about it is it gives them a sense of empowerment. I'm sure we've all watched gangster movies where somebody walks into a car dealership and they've got a bag full of cash and they can just go in and just pay for the car. For many consumers, it makes them feel like they are in control and they're empowered to just walk into the dealership and buy the car as if they were buying it with their own debit card or credit card, if you like. So let's go into the product. How does it actually work?

3:31Can you walk us through that customer journey from the first interaction with Carmoola? Yeah, so customers can find the product through various channels. If they come direct, they will fill in an application form, which was about seven questions. And then we will run like a fully automated decision and we'll tell the customer how much you can borrow instantly and at what price. So we are the actual lender. We're not a broker. So we're basically using our own money to lend to consumers. So we'll tell them you can buy a car of up to£30 ,000 on a HP or if you want a PCP, you can buy a car for£50 ,000.

4:11And this is what your monthly payment will be. Now go and find a car. And then what customers do is we basically give them the ability to check cars as they go through their search process. It just enters the reg of the car they're interested in and will tell them a huge amount of history about the car. So has it been an accident, what the value of the car is. Usually you would have to pay$20 for that and it would tell them all the history of the car. And it makes it really easy for customers to get the security of what they're buying is a really good quality product. But we then say to the customer, yep, it's okay for you to buy that car.

4:45And then the app then generates them a virtual card where they can pay online on an online platform or they can add it to their Google or Apple wallet. Walk into the car dealership and just buy the car there and then. And then post-purchase, we've gamified the whole process, making it fun and rewarding. And the customer gets to earn Moolah in the system, which builds so that they can earn enough of a credit so they can then go and buy their next car. But the whole experience is very fun and rewarding. Like when you enter your date of birth and the application tells you what celebrity you share your name with, you get to name your car as part of the experience.

5:21We're using old English names and Norman and fun names like this. So it's highly personalized. We're big fans of behavioral economics. So you're using a lot of kind of techniques in there to enhance performance and also nudge the customer to make smarter and better decisions. and say, for example, once you've got a loan, we encourage people if they want to pay it back sooner, they can just do that in one tab. It's really straightforward and simple to use as well. It sounds incredibly simple and speedy and your point around nudging as well made me think, how do you actually protect customers from doing something rapidly that might be an impulse decision?

6:00We're actually taking on that level of debt, you know, might not necessarily be a good thing for them. How do you kind of pump the brakes? Yeah, so it's a highly regulated industry and so we have to be very aware of customer vulnerability and so we're using a lot of analytics to understand how customers are using the product and we'll actually put delays in there if someone is going through it too fast it flags and then we can pick it up with the customer and we'll stop them doing that there's a lot of regulatory control within the industry and then we also keep safeguard our customers and make sure they're making that smart decision and not rushing into buying a car in two minutes.

6:41But the reality is you have to be relatively considered. It's not like, I don't know, the app and suddenly I'll buy a 50 grand car. I think there is like an element of you need to get the budget and then you need to go find the car and then buy it. I think some customers have brought in four hours, but I don't think the value proposition is that strong as like speed. What a lot of consumers tell us is that they love that it makes them feel empowered. It puts them in control. They love how transparent it is and how clear and simple the way in which we've demystified the whole process of getting car finance.

7:18It's really interesting that, right, because those speed bump parts in the product that you mentioned, are they driven by regulations or are that internal product decisions you've made? Because there's sort of two competing forces here where you want to drive more customer volume through quicker for your own growth agenda and milestones that you want to hit as a company. But the converse of that is you want to make sure you're ethical, you're doing it all the right way. How do you kind of balance those two things? I see what I say to the team and ultimately it's very easy to give away money. The hard part is about collecting the money.

7:51And so for us, we measure internally, not only like NPS, and we have one of the probably highest NPSs out there, right? NPS last quarter was 94. You may have seen some of the reviews online. And the customers really, truly love the experience. But even customers that have been with us two or three years now are now taking second car loans with us. So they really love the way in which we look after them. But ultimately, it's about making sure that you're lending to happy customers. And for us, it's not about giving loads of people loads of money. Does that really grow? It's about lending to the right people.

8:29So I think today we only accept about 35 % of people that apply. and so we've spent a long time designing the negative journey if you like and the customers that get declined and how can we help them and provide them a great service because we always knew that there was going to be customers that we wouldn't be able to help but we have less than like a one percent loss rate so very low levels of default and i think that's if you look at a lot of behavioral economic studies about if you build trust with the customers if you really truly look after them and they're there for them and they feel supported, you're generally seeing much higher performance in things like collections and helping customers along that journey.

9:10How are you getting to understand your customers, both in the sense of how you can provide amazing, delightful moments in the product itself, but actually how are you understanding their credit worthiness? Are you still leaning on credit scores? Do you think credit scores are still fit for purpose? Or what's the future of actually really understanding deeply a 21st century customers' creditworthiness? From a high level, there's three elements. There's creditworthiness, there's affordability, which is, I think, really important when you're talking about a large monthly payment. And then you've also got fraud that you need to consider as well.

9:43So those three elements, and they're all very interlinked with acquisition as well, because actually how you acquire customers can impact those three things dramatically, whether that's adverse selection or different channels, different value proposition, different ways of measuring it. And yeah, we on the credit risk side of things, we are obviously using highly predictive models, quite sophisticated underwriting, which is a combination of bureau data, open banking data, proprietary models on top, behavioral data in the product, various other third party data that we're using to really understand the customer.

10:22On the affordability side, which is more of a regulatory side but our kind of view is that we want happy customers that are able to afford the loan so we've built our own models around how we assess affordability that we think are very robust and very strong that kind of give us a view of what's their income what's this customer's expenditure even on a forward basis how much disposable income do they have and what is their current car commitment and how does that look like going forward and then you have kind of fraud which is more complex. We started to do quite a lot of sophisticated stuff around customer segmentation.

10:58We have a segment which is leading ladies and we know an awful lot about them from what is their income, what is the credit scores, how are they spending their money, what cars are they buying. So that means that you can then build very targeted marketing and value propositions that really align to those customers and you can adjust the product depending on lots of variables there. Are there any shareable data points that you look for when assessing an individual outside of typical credit scoring that are actually really useful data points, be it the positive or the negative, that actually when you started the business you didn't necessarily think would come true?

11:35Yeah, I think what's quite interesting, we're able to split risk now based on the type of car someone's customer is buying, which I think is quite interesting. So a customer that is buying a Mercedes or BMW or Range Rover is regardless of price, regardless of credit score, they are much more likely to default than customers that they're buying a Honda or a Ford Diester. and when I've reflected on this I think it's quite interesting because I think is that really a data point or is it just a reflection of human psychology which is customers that care about what other people think about what car they're driving probably are just overextending themselves in other areas of their lives.

12:23I've got to carry this on then come on what car do you drive? I drive a Mercedes. these. Let's leave it there. So you mentioned earlier that you guys are the lenders. What does that actually mean for the end customers? Is it lower interest? Yeah, so like our model supports customers to number one, I'm sure it's been quite prevalent in the news that a lot of the traditional car finance companies were incentivizing dealerships through big commissions. Ultimately, the consumer was having to pay for this. And I'm sure it's been in all the headlines about the DCA scandal, this is a direct reflection of a lot of the traditional lenders were ripping customers off and the consumer were paying higher APRs because they were having to pay the commissions that their intermediary partners were being paid.

13:11And so ultimately what we enable is customers to bypass that and therefore we're able to not have to pay those commissions and therefore we're able to offer lower rates on the whole, on average for customers. We're also able to underwrite the risk much better than anybody else because of the various benefits of the model and the data that we're using. And so we can reward those customers that do get accepted with lower rates because you're not having to pay for all the customers that don't pay. And then we're very tech-driven and highly automated as a business leveraging AI. So we have very low OPEX.

13:47There's only 50 people in the company. I think we've helped customers buy about 250 million pounds worth of cars so far. And if I compare that to something like Kazoo, I think they have 6 ,000 people in the company and probably at a similar stage in terms of growth we are. And there are a lot of benefits for the customer to be able to pass on those savings. And ultimately, we're trying to pass on those savings to the consumer through better rates where we possibly can. So just talking on the consumer there, I mean, what level of education do you think the average consumer has in terms of taking on debt finance and what are you doing in terms of helping them and educating the market on debt finance?

14:25We're not I would say like in some of the murkier areas of finance it's been pretty standard that you would need to buy a house or a car on some level of finance and so I don't think we're trying to educate or take people that wouldn't take credit to take credit I think ultimately people are already taking credit for their finance we're providing a better way to do it but we do go through like we we de-jargon it we make it very simple for them we put some great explainers in there very transparent about not having any fees we're a customer we encourage customers to repay their loan early so they reduce the amount of interest they have to pay so we're doing a lot to to educate them and show them how they can make their car loan more cost effective for themselves and you've got a huge amount of data in terms of car buying patterns you mentioned a few of them right in your actual underlying model what are you seeing in terms of the secondary car market are you seeing it grow are you seeing any impact of people moving on to different types of business model like subscription are you seeing impact in terms of evs where tesla offer their own financing is i think one of the few oems that actually seem to offer direct financing versus via the dealer kind of how are you actually seeing the industry unfold beneath you?

15:40I think, number one, the market is vast. Tesla sell a very small number of cars, and so do various other people in the used car market space. New cars is different. There's about 1.6 million new cars sold in the UK versus used cars, which is about 7 million growing, respects to gross, about 10 million. So the honest answer is not really any impact. 100 ,000 customers would generate you a billion-pound book yielding 150 million in revenue. It would have to take a fundamental shift for anything to really kind of impact our business. We're actually in the used car space not seeing a huge amount of growth in EVs across the market.

16:23It's relatively with around 6-7 % of our portfolio are electric, which I think is interesting. Obviously, there's quite a few hybrids and other types of cars there. In terms of subscription, we're just about to launch PCP, which is an extremely popular product, which is more of a leasing style product, very close to subscription. So that will be coming live in the next few weeks. But our kind of view is we want customers to have choice to go and buy whatever car they want from whoever they want. And I'm sure at some point we'll also enable customers to do it on a subscription as that model builds for Steve.

16:58Yeah, great. Just coming back onto the consumer side, you've got something in the product called Courtesy Dads. I'd love to hear just a bit more about what that actually is. And then secondly, what other things have you got in the pipeline that you can share that are designed just to create these amazing moments for your customers? Go to Sudan, there's a PR piece, which was a bit of fun where we were offering to help customers go out and choose a car. A lot of customers don't feel super comfortable dealing with a dealer and they don't really know much about the car. And so we do this through our car checker feature.

17:30But I think we also had a bit of fun and said, oh, you can borrow a dad for a day to go car shopping to help you. This is just a bit of fun more than anything else. And yeah, we've got some really exciting things coming. And we are just launching in the next four or five weeks the ability to get free warranty and breakdown cover if you take CarMiddle with us as well, which is going to be a really nice value driver. And we plan to launch car insurance at the end of this year. So not only will you be able to get your loans from us, you'll also be able to get your car insurance with us as well. Wow.

18:05Okay. Busy couple of months ahead. Yes. Cool. Aidan, look, thank you so much for jumping on. We just like to finish each episode with the same question, which is if you have a consumer product or service that you use and you love and want to shout out, then please do. I'll go for one that's more of a mental health one. I've been using an app called Reframe recently, which is a consumer app that really helps with, it's actually geared around to help people cut down drinking. But it's really interesting from behavioral economics on how they educate you around the effects of drinking, but also it encourages you to learn more about your brain.

18:43And they do it through that habit forming. And I think it's super interesting for people that want to be super healthy and kick a habit like drinking. then I think it's really interesting and a great product that I can speak very highly of. Awesome. Thanks a lot for sharing that. Aidan, thanks for joining the show. Really enjoyed the chat. All right, Matt. Lovely to speak to you. Likewise. Cheers. Bye.

19:06Aidan Rushby:And that's it, folks. Thanks so much for listening. As mentioned, please do provide any feedback or ideas of future guests via the website CuriousCustomer.co. And please do click subscribe if you did like it, because it really helps improve visibility in the algorithm and makes the podcast more discoverable amongst a sea of great content. So that one click does really help. My name's Matt. I hope you enjoy the show.