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Risky Business

Industry insider issues a warning to finance sources that restrict a dealer’s freedom to choose which F&I products are offered to car buyers.

December 2013, F&I and Showroom - Feature

by David Robertson

Evidence is mounting that finance sources that pressure dealers into selling their proprietary aftermarket products by either not funding or restricting the amount advanced on independently administered products will ultimately be judged “naughty” by all parties.

The franchised automobile dealer ranks among the last remnants of sole proprietor merchants in the United States. Whether it’s a single-point store on a country road or a marquee multi-rooftop group, the person who signs the checks owes his or her success to making the right choices. There are few things the dealer principal holds more sacred than the freedom of choice.

Still, car dealers fall into two categories: dealers who operate with the “If it doesn’t have a factory logo on it, I won’t sell it” mantra, and those who in certain business situations exercise their freedom of choice — opportunities which, in today’s business environment, have been whittled down to a precious few. Of those dealers remaining, one freedom they hold dearly is their ability to select which aftermarket product provider best meets the needs of his or her store.

Within this context, “best” identifies the aftermarket program that most fully satisfies four criteria: that the program be actuarially sound, offers bona fide customer benefits, provides acceptable claims servicing, and, lastly, maximizes the revenue potential for the selling dealer.

Which lender gets the dealer’s business? The short answer is the one most likely to buy the paper. However, once beyond the get-me-done buyers, the second factor that comes into play is the funding source that allows the dealer to optimize F&I department revenue.

So, the lender that gets the deal is the one that accepts a request for credit with unrestricted advances on the agreed-to, independently administered products selected. The proprietary lender that doesn’t, however, not only risks losing the aftermarket product sale, but the finance deal as well.

It isn’t likely that the independent administrators will allow themselves to be gerrymandered out of business, either. Granted, they lack the girth of a captive or institutional lender, but more than one is a subset of a major insurance underwriter.

There is evidence that the urgency for a formal challenge to the growing encroachment of restrictive practices is becoming a coalescing force industrywide. And given the ability of independent providers and their agent distribution networks to identify unique product features and dealer support niches, additional competitive challenges will come into play.

Without question, the proprietary aftermarket products finance sources market are on par with those offered by independent providers. And in the case of the captive programs, the presence of the corporate logo is a powerful consumer incentive. Also worthy of mention is the dealer incentive when high levels of proprietary aftermarket product penetrations yield favorable treatment in other areas, such as increased inventory of the fastest selling models.

But let’s take a step back. If the products bearing the corporate crest of finance sources are so top rate, why don’t they dominate the market? In my view, there are two inhibiting factors: The first stems from the fact that some independent providers offer features and pricing — as well as high levels of in-store support — captive and institutional lender programs can’t, in many instances, match.

The second is more fundamental. From a marketing standpoint, the leverage inherent in the proprietary programs is being exerted to the point where it has become counterproductive. And you don’t need to know a lot of car dealers to understand that not funding one or more of the independent aftermarket products they’ve been selling for years is counterproductive. And if the dealer doesn’t redirect the lender selection, you can bet the F&I practitioner will.

While many dealers chafe under the independent product restrictions imposed by their captive lenders, they take a much darker view when the inhibitor is an institutional lender. As odd as it sounds, if the proprietary lenders do away with their discriminatory restrictions and allow for free choice and free enterprise, they may be pleasantly surprised by the results.

Comment

  1. 1. David Engelman [ January 21, 2014 @ 05:17AM ]

    David, great article. In addition to limiting dealer income and dealers' ability to satisfy buyers' demands, lenders who attempt to restrict after-market products are also attempting to manipulate consumer freedom and consumer choices. Smart dealers know that happy, satisfied customers are significantly more important than satisfied lenders - especially when other non-restrictive lenders are available to fund deals.
    Thanks again for contributing a smart and well-written article on a relevant topic in the marketplace.

 

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