The History of Volkswagen Financial Services

Financial services acquired a prominent position among the Volkswagen Group’s sales support instruments in the early 1990s. Following the successful merger of leasing and banking services in 1992 to form Volkswagen Finanz GmbH, a further strategic reorganisation came into effect on January 1, 1994, when all of the Group’s European financial services operations were spun off and regrouped under the new holding company named Volkswagen Financial Services AG (VWFS). By the end of the same year, two further financial services subsidiaries had also been added, underscoring the international orientation of the newlyfounded financing group. Separating financial services from the automotive business made it possible to fine-tune the two business fields more effectively and ensured a more accurate assessment of the various risks.

Moreover, the know-how transfer and the standardisation of product offerings and marketing strategies brought the prospect of a rise in earning power. In 1994, VWFS with its workforce of 2,236 provided finance and leasing services in seven European countries: Germany, France, Spain, Italy, the Czech Republic, Slovakia and the UK. Germany accounted for three-quarters of the 663,000 vehicle finance agreements and 437,000 vehicle leases. In April 1999, VWFS added a third field of business to complement its automotive finance and leasing activities, taking over the insurance company Volkswagen Versicherungsdienst GmbH (VVD) which – like the other two business units – also boasted a long and successful history in its field.

VVD was founded on February 10, 1948 by notarial certification of the shareholders’ agreement, and was entered in the Register of Companies at the Fallersleben district court on February 28, 1948. Until then, the British-controlled Volkswagenwerk GmbH had produced almost exclusively for the Allies. Following Germany’s currency reform, military transport requirements were replaced by rapidly expanding demand among private customers. In consultation with the Volkswagen organisation, VVD, whose shares had been transferred to shareholder Christian Holler in October 1949, devised a low-cost automobile insurance package. This was extended and expanded over the years, and was marketed through Volkswagen dealer sales personnel, who were given ongoing training in insurance. The package of products and services designed to enhance customer loyalty was instrumental in ensuring the rapid expansion of VVD as the Beetle boom went from strength to strength. By 1961 VVD had issued its 500,000th policy. The company had a workforce of 323 as well as an efficient network of field agents with 12 branches in Germany and offices in Austria, Italy and the Netherlands. A further two subsidiaries were established in the UK and France in 1962. In the same year, VVD expanded its product range to include its “Europa-Schadendienst” Europe-wide accident repair cover, having arranged the direct settlement of claims with importers. Combined with the fast-track settlement of personal liability claims introduced in 1972, VVD now offered an unparalleled insurance service which guaranteed customers the swift and cashless settlement of claims through 2,400 service partners across Europe and brought VVD further growth. In 1982, VVD, with total premiums collected of some DM 400 million, was ranked ninth in a survey of 100 car insurers. By 1983, the number of vehicle insurance policies had passed the 600,000 mark, highlighting the importance of VVD to Volkswagen’s sales policy. The Volkswagen used car warranty underwritten by VVD introduced in 1983 further strengthened customer loyalty to authorised service centres. With low-cost premiums, refunds almost every year, the Europe-wide repair service and the close-knit field agency network, VVD remained a vital sales promotion instrument for the Volkswagen Group when it was integrated into VWFS at the end of the 1990s.

GEBÄUDE DES VVD IN WOLFSBURG — VVD BUILDING IN WOLFSBURG

GROSSRAUMBÜRO DER VW KREDIT BANK — OPEN-PLAN OFFICES OF VW KREDIT BANK

Unlike the insurance business, car financing had been an in-house operation right from the start. Volkswagen Finanzierungsgesellschaft mbH (VFG), founded on June 30, 1949, gave the Wolfsburg-based manufacturer, at that time still under the administration of the British authorities, a sales promotion instrument at an early stage in its existence which fulfilled an important counterbalancing function given the lack of purchasing power among consumers in Germany. VFG financed 13 percent of all domestic sales on average from 1950 to 1952 through customer loans, while few dealers initially made use of the purchase finance offer. Subsequently, business in competition with the banks progressed generally positively, though with some ups and downs. In 1961, VFG concluded 24,668 contracts with Volkswagen buyers – more than double the figure for 1953. There were 2,152 contracts with dealers, indicating that the need for financing was growing as inventories increased, ref lecting the transition from a seller’s market where demand exceeded supply to a buyer’s market. This trend resulted in a shift in business activities, with VFG financing loans for vehicles in stock from parent company funds from 1963 onwards. Mid-1965, however, saw VFG assuming responsibility for this lucrative business, concluding 345,205 contracts that year. Earnings increased as stocks rose during cyclical downturns, which meant that the company’s commercial success did not follow the same curve as the trend in sales of Volkswagenwerk AG. VFG posted one of its best performances to date in the 1967 recession year, not only reporting a profit of approximately DM 462,000, but also allowing for an equity increase of DM 600,000.

V.A.G BANK IN BRAUNSCHWEIG — V.A.G KREDIT BANK IN BRAUNSCHWEIG

FAHRZEUGFINANZIERUNG IM HANDEL — RETAIL MOTOR FINANCE

VLG enjoyed a competitive edge in these services in the form of some 4,000 Volkswagen, Audi and NSU dealers throughout Germany. Demand was also boosted by rising costs in Germany and the associated liquidity squeeze being felt by companies. The number of leased vehicles rose from 4,151 in 1969 to just under 29,000 in 1975, with profit rising from around DM 500,000 to over DM 20 million during the same period. Only 327 of the approximately 10,000 lessees were bulk customers with fleets of more than 10 vehicles, while the share of small businesses in the number of vehicles delivered had grown to roughly 65 percent. The associated rise in administrative costs was offset by organisational rationalisation, particularly the switch to a computer-based stock control and invoicing system in 1973.

The swift and efficient administration paid off when VLG opened the leasing business to private customers in May 1977. After an intensive advertising campaign, this customer grouping represented roughly 13 percent of all clients by 1980. From 1975, the extended range of products and services included motor vehicle tax and car insurance, advance financing of accident costs and claims handling. The ‘Europa-Service’ set up in 1978 guaranteed all customers a standardised and cashless service in 15 European countries.

With its product offerings specially tailored to the needs of specific customer groups and with variable terms for bulk customers, V.A.G Leasing GmbH, which relocated to Braunschweig in 1982, continued on its successful course. Although competitive pressure increased enormously in the 1980s, the company maintained its leading position on the car leasing market first won in 1968. At the turn of 1992, the company with its workforce of 432 and an inventory of 349,000 vehicles was integrated into the finance holding company. The merger with the bank opened up the prospect of favourable refinancing opportunities.

VWFS became an international company with an extensive range of banking, leasing and insurance services. The economic upswing that followed the 1993 global economic crisis created favourable conditions for the envisaged worldwide growth of VWFS, which in 1996 assumed responsibility for the Group’s financial services in the Asia-Pacific region. By 2003, subsidiaries had been established in China, Japan, Thailand, Australia, Taiwan and Singapore, with the Singapore base responsible for managing regional operations. The representative office in Beijing, which was opened as early as 1996, acquired its licence in 2004 and was the first European financial services provider to begin operating in China. The second path to internationalisation took VWFS into as yet uncharted European growth markets, and was based on the principle that “financial services follow automotive”. VWFS set up a leasing company and a bank in Poland in 1996/97, a financing company in co-operation with the importer in Turkey in 1999, and the Volkswagen Group Finance OOO company in Moscow in 2003. Co-operation agreements linked VWFS to the Volkswagen Group’s financial services providers in North and South America, with VWFS providing strategic consulting.

The Volkswagen Bank also went international, and had become a European bank by 2001, opening branches in Belgium, Ireland, Spain and Italy. With deposits totalling DM 4.5 billion, the bank now held the position of Germany’s second largest direct bank. The introduction of the online current account marked the final step in becoming a general bank offering a comprehensive product portfolio. “AutoCredit” established itself as an attractive alternative to “ClassicCredit” for private clients. This innovative form of car financing, which combined low instalments with the option to purchase, arrange follow-on financing or return the vehicle at a guaranteed price at the end of the contract, became a bestseller. By the end of 2001, the number of contracts under this innovative product had risen to 351,000, or approximately one third of all customer financing.

In the dealer finance sector, V WFS prepared its response to the anticipated abolition of block exemption and made the necessary arrangements to develop new customer potential outside the Volkswagen Group. Established as a branch of Volkswagen Bank, Europcar Bank began in 2003 by offering financial services for mobile home dealers, subsequently expanding its services to cover multi-brand and independent used car dealers. Entry into the independent business – a step also followed by some international subsidiaries – boosted the number of customer financing contracts to 1.312 million by 2003. This meant that contracts had more than trebled in number since 1991.