Santander Consumer Finance Case Study

November 23, 2015

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Abstract
This paper will illustrate the globalization opportunities and challenges of
Santander Group SCF. Through multiple mergers and acquisitions, Grupo Santander
expanded throughout Europe, Latin America, and the United States, after which they
brought the consumer lending groups together to form Santander Consumer Finance.
Their strategy was for their mergers to expose them to a larger number of consumers by
focusing on the used vehicle lending market, to which thereafter they could target
consumers for other services Santander has to offer. Topics to be covered in depth are the
country/political risks faced by the organization, the leading strategy followed in the
process, risk management in the company, and the difference in strategy used from
Europe to North America.

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Introduction and Overview of the Situation

In the early stages of Grupo Santander, they focused on expanding into different
regions by merging with and acquiring banks in different locations. They began by
expanding into Germany, UK, Italy, Latin America, United States, and in 2004 they
decided to bring all banks into one division within Santander named Santander Consumer
Finance. Bringing all of the divisions together entailed decisions such as centralizing
funding and customer data centers. It also opened the discussions of which processes
should be standardized, and which should be left to local initiatives. Their main focus has
been on used vehicle loans that are sold through dealers. Santander did not directly target
clients, rather their financing is offered by car salesman when negotiating the transaction.
This allowed them to convert clients that had a car loan into using other bank services.
SCF realized that some parts of the business were better left for the local branches
to have discretion over. This allowed them to provide branches the big institution mindset
by providing trainings and having large funding capabilities, but at the same time let them
strategize according to their local market knowledge. The advantage for SCF was to learn
from the local markets in order to apply ideas on a larger scale, and ultimately convert
indirect customers into direct ones.

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Assumptions and Methods

Decentralizing and giving more power to the branches rises from the idea that the
optimal approach taken varied depending on the product and market. In Europe it was
easier to price products because interest rates were fixed and did not drastically change
based on the individual. Rather in the US a credit scoring system is far more advanced
and products can be priced according to the customer. In 2008 the European consumer
credit directive was revamped to provide the consumer with more information about the
loan before signing it. Although it did centralize a list that recorded negative episodes
clients had, it did not give banks an advantage to create better credit scoring metrics.
By partnering up with car dealers and retailers, they were able to offer lending
products to consumers through them. SCF created a credit-approval system in order for
dealers to finance vehicles to customers on the spot and help increase a higher number of
deals. By incrementing the number of customers they indirectly financed, it created a
larger pool of consumers they could target with other bank services such as insurance,
savings accounts, credit cards, etc. Making indirect customers into direct ones. SCF has
been highly successful with this by giving car dealers and retailers commission
incentives.

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Business Impacts
Given the size of the institution, they have been able to expand into different
countries. As consequence, it exposes the company to country and political risk across
multiple countries. Ways in which they can become affected is by interest rate caps,
which might limit the possibility of profits in those markets. In France, interest rate caps
are set by the government. Although they have been able to make money in France, if
other countries in which they are doing business were to implement caps, it could greatly
affect the presence of SCF because they might not be as competitive. Not only do they
face the possibility of direct measures implemented against financial institutions by the
government, like Russia being able to revoke a banking license if a loss is incurred three
consecutive months, but also, political decisions can affect the citizens financial stability
and their ability to repay loans.
Then you have currency exchange risk. Not only is devaluation of currency a
major factor, but countries such as Venezuela have implemented currency controls.
Santander might be making percent gains in Venezuela but have no means to repatriate
their capital to their shareholders. Other risks include not being correctly aligned with
their local branches and or car dealers/retailers, and local consumer finance companies or
car manufacturers having a competitive advantage or government favoritism. It can be
said that their success is driven by the individual understanding of the different regions
and their ability to learn and test out new ways of doing business across the globe.

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Descriptions of Sensitivity, Risks, Successes, Failures, Contingencies and Strategies

By having multipliers of car dealers/retailers offer their lending products, they are
increasing the number of indirect customers to which they send promotional material
about their other products on a large scale. They can monitor indirect users interest and
offer the correct product type to increase their chances of converting them into direct
customers. For example, an indirect customer that later applies for a credit card is
categorized as a loan customer and their behavior suggests it wouldnt make sense to
offer them savings products in the near future. This customer analysis has led them to be
able to convert roughly 3-6% of indirect customers into direct ones.
By not having a centralized lending institution that can provide credit scores, they
adopt a lending strategy that invests in countries with large populations and or high GDP
per capita growth rates, and by considering business and country risk. Of course some
individual risk is assessed in their lending, by using the SCF tool (online tool for dealers
to assess the clients risk and obtain a decision within three minutes), but their rates are
mostly set by the region and are not as variable as in the US. Overall they manage risk by
having a clear understanding of each regions economic and political health, tailoring
products to specific markets, centralizing major risk decisions, and offering lower
amounts of revolving credit debt to consumers. Local funding also reduces the risk they
manage and is cheaper because they avoid doing currency swaps in order to repatriate
capital to their shareholders.
Their primary funding originates from senior debt, commercial paper (short term
debt), asset backed securitization, and customer deposits. Although, the other two largest

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methods of funding growth have been obtaining funds from the Santander Group, and by
securitizing pools of car loans, categorized by country. The reason why pools of car loans
are securitized by country is the same as why there is minimal cross-border borrowing. A
riskier individual (with high debt ratios) is not allowed to go to France and take
advantage of the interest rate caps set by the government, because by not residing in
France, the consumer credit company could not properly asses the risk as they are close
to the French consumers and dont have as much insight into UKs consumers. They are
different types of investments for lending companies and they have to be kept separate in
order to properly asses risk.
Lending of US commercial banks is unique because of the American credit culture. In
the US, individuals are used to consuming more and having higher amounts of credit
ratios. It can be said that US consumers are more advanced in their credit culture and that
is why credit score companies play a large part in determining the individuals interest
rate. Rather in Europe, interest rates are mostly based on the countrys risk and only
negative events are recorded from the individuals, such as a black list. Also in the US
there is more lending to sub-prime borrowers, whereas in Europes institutions are limited
in managing risky products. A great example of the difference in credit culture is
Germany, credit cards are not that commonly used, rather Germans like to fully own what
they have and rely mostly on temporary bank overdraft features.

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Conclusions and Recommendations
SCF has been able to manage the globalization of their products by being astute
over giving local offices discretion over the business. They are very clear that every
country is different but at the same time what they learn in one country can be useful for
another situation in the future. Also, their approach of incentivizing local deal makers
such as car dealers and retailers to promote their product shows their understanding of the
market in that they will obtain a numerous amount of indirect customers that can be
converted into direct customers. It is the reason why they view a 60-month term loan as
an opportunity to hook customers into other products during that time, rather than a just a
relief when they finish paying. They also have the advantage of being a large corporation
that can train and centralize some of the procedures to increase efficiency and
effectiveness among the organization.
A recommendation to better understand global perspective is to create more
divisions that connect and understand effectively the individual markets. This will allow
for these division offices to have close contact with the local branches and communicate
to headquarters in a simple manner the needs and issues that have arisen in the different
regions. It would give the organization a competitive advantage because not only do they
understand each individual market, but they can apply all of their intellectual and
economical resources in a more efficient and effective manner. Thus having a more
organized and simplified bank (easy to understand for investors), and at the same time
optimizing each product strategy that is offered to the public.

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References

Trumbull, Gunnar, Elena Corsi, and Andrew Barron. Santander Consumer Finance. Case
Study. N.p.: Harvard Business School, December 13th, 2010.