IncomeDriver Notes® programme is a win-win-win solution for TFS
For most captive auto finance treasury teams, this past year was a challenging one. Global economies experienced improving growth, higher interest rates, and increased competition for financing within dealerships. These issues impacted the Toyota Financial Services (TFS) treasury group because the team is responsible for providing low-cost funding to the organisation. Being able to source a lower cost of funds relative to its competitors is essential for both the TFS and Toyota Motor North America teams.
As benchmark interest rates increased, so did TFS’ cost of borrowing. However, large US banks, which compete within the dealership for financing contracts, did not experience the same increase in their borrowing costs. These large US banks are able to keep their borrowing costs lower than TFS, because they source most of their funding through their retail deposit base. This retail source of funding provided the banks with a competitive edge versus TFS.
In order to compete with the bank’s low cost of funds, the TFS treasury team determined that it must diversify its sources of funding to include retail investors. As Jeffery DeSilva, Treasury Manager, Toyota Financial Services explains, “Being 100% reliant on institutional funding increases both our borrowing cost and liquidity risk. Having the ability to source funding through retail investors helps mitigate both of these risks.”
After careful planning, TFS’s treasury team created a US retail funding programme. The goal of this initiative was to offer retail investors an opportunity to invest directly in TMCC through a retail demand note programme.
In June 2018, TMCC launched the Toyota Financial Services IncomeDriver Notes® programme and is now able to source funding from retail investors. The US$3bn IncomeDriver Notes® programme is the first of its kind for Toyota and gives retail investors the opportunity to engage with a brand they know and trust. The Notes are being marketed to TFS & Lexus Financial Services (LFS) customers, affinity groups, and the general public.
Best practice and innovation
Throughout the Nemawashi process, several questions were asked: how are we going to get retail investors to put their money into a product they have never heard of before? What are the legal, regulatory and operational requirements to implement the programme? Who would be responsible for servicing the programme? How do we replicate the TFS customer experience? Will this programme have a material impact on lowering our cost of funds? To answer these questions, the TFS treasury team had to Genchi Genbutsu (“Go and See”, a key principle of the Toyota Production System) with key stakeholders across the organisation.
In order to build awareness with retail investors for a programme they have never heard of before, the team developed a dedicated website to market the programme, educate potential demand note investors, and facilitate the enrollment process. Initially, the most efficient way to reach the retail investor was to leverage the Toyota affinity network of TFS & LFS customers. Through a direct mailer and digital marketing campaign targeting potential investors, the programme experienced a conversion rate above industry average and investor acquisition cost below industry average.
TFS is expected to save US$30m in interest expense over the next five years and will contribute to TFS’s maximising profitable growth initiative.
TFS customers earn a competitive interest rate compared to a typical deposit account with no long-term commitment.
The programme delivers value to our dealers by lowering TMCC’s cost of borrowing and provides another touchpoint to positively influence the brand and build loyalty among their customers.
Finally, there are soft benefits including opportunities to support TFS’ financial literacy and community involvement through TFS’ Making Life Easier initiatives.
“Through the launch of the IncomeDriver Notes® programme, TFS is now able to access a US$10trn retail funding market. Despite the past year’s challenges, we have embraced the opportunity to innovate and diversify our sources of funding. Our ability to consistently deliver value to our customers and dealers is foundational to Toyota North America’s success. By thinking beyond our traditional sources of funding, and lowering our cost of funds, this programme further enables us to deliver that value,” concludes DeSilva.