Nonprime auto financing sources face diverse challenges competing in the U.S. marketplace. The four keys to the game are usually the same: grow share, manage losses, streamline operations, and improve dealer and customer satisfaction. Arguably, growing share is the most important for a finance source. It is also the most difficult goal to achieve. To win, nonprime players need to take maximum advantage of their core competencies and unique market characteristics, as well as evaluate and adopt leading practices and supporting technologies consistent with their business strategy.

From BenchMark’s ongoing experience with nonprime auto financing through its 2006 Nonprime Automotive Financing Benchmark Study (NPAFBM), annual National Auto Finance (NAF) Association surveys and numerous consulting engagements, it’s clear that sales performance and capture rates remain high priorities.

The primary effectiveness measure for the dealer relations process is capture rate, which refers to the number of booked contracts as a percentage of total applications received (book-to-look). For the 2006 NPAFBM, capture rates ranged from a low of 3.3 percent to a high of 10.8 percent, with an average of 7.1 percent. This is comparable to the 9-percent average realized in the 2006 NAF Association survey, but significantly lower than the averages for prime and captive auto finance providers.

In order to maximize application volume and funded contracts, nonprime finance sources are executing against unique strategies with various tactical approaches to organizational structure, account management and performance.

Generally, nonprime financing providers want their sales force aligned with their internal credit and funding functions. Their specific strategies are a mix of market offering, branding, sourcing and pricing. Based on the approach to these factors, each provider tries to present a unique value proposition to differentiate itself in the market. Capture rate is certainly vital to success, but the ultimate goal is producing expected earnings from the business generated.

The key strategic and tactical attributes that drive capture rate are: credit quality mix, pricing/negotiation, dealer coverage and penetration, organizational alignment, sourcing channels and salesperson incentives. Let’s review each one.

1. Credit Quality Mix

The most significant strategic characteristic of credit operations is the level and depth of customer risk being targeted. Higher-risk credit applications are more complex and require more underwriting effort. Those financing sources targeting the higher-risk segments find that maximizing capture rate becomes even more challenging.

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2. Pricing and Negotiation

Within comparable credit-risk bands, the primary capture-rate driver is pricing. The tremendously competitive environment for nonprime auto finance rate has a direct impact on the sales model companies deploy. The model often requires sales managers and credit buyers to engage their dealer finance representatives on virtually every approved transaction in an attempt to capture business. Response time becomes even more important due to the pervasive use of dealer application entry portals (DAEP). Approval calls to dealers become essentially negotiations on price that will include a comparative offer from at least one other source. The willingness of the auto finance provider to adjust pricing is typically determined by pricing exception guidelines that consider dealer volume and profitability, as well as the impact on portfolio yield.

3. Dealer Coverage and Penetration

Coverage and penetration of the dealer community by the company’s sales organization are fundamental components of generating business and increasing capture rates. The distribution of coverage ratios ranges from roughly 30 to more than 200 dealers per sales representative. Based on this range of account loads and corresponding capture rates, it is clear that coverage alone does not drive capture rate. However, it does remain an important component of relationship management, business development and process support.

Penetration measures the effectiveness of the sales organization in generating business from the dealer portfolio. The penetration ratio compares the number of dealers submitting applications to the total number of dealers with active financing agreements. Penetration rates ranged from 65 percent to 97 percent, with an average of approximately 80 percent. Adequate penetration of the targeted dealer base is certainly critical to generating application volume and ultimately funded contracts. Strategy and pricing, however, eventually determine the level of capture once sales representatives establish effective relationships with their dealers.

4. Organizational Alignment

Nonprime auto finance providers often align their sales organizations geographically, assigning representatives to specific states with the responsibility of managing a portfolio of dealers and developing new business. Most companies also aligned their credit and funding functions with these sales regions in order to establish close-knit dealer relationship teams. With regard to originations structure, regionalized buying and funding and localized buying and funding are evolving to centralized buying and funding.

Although some experience indicates that capture rate can improve based on the relationship benefits of physical operational presence, nimbleness seems to be a more important driver. The providers that respond quickly to competitor actions in the marketplace with new programs, and are less burdened by inflexible IT platforms and rigid organizations, will usually be more successful. At this point, there is no data suggesting that the more-local origination organizations deliver a significant capture rate benefit.

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5. Sourcing Channels

In addition to the traditional franchised-dealer and indirect-lending model, some nonprime financing providers are building multi-channel sourcing capabilities. This is being done to increase application volumes and to reach new markets. The independent dealership market, long a stronghold of the nonprime players, is now viewed as a growth engine, even by prime sources. The availability of DAEPs and specialized service providers, which help to monitor dealership practices and secure collateral, facilitate new entries. Flow arrangements, which are where declined applications are received from lower-risk providers, are another common nonprime source.

Additionally, many successful nonprime sources generate significant direct-to-consumer volume through partnership arrangements, as well as sophisticated Web search engine marketing and advertising methods. Clearly, a multi-channel sourcing strategy allows nonprime sources to reach more markets and customers.

6. Salesperson Incentives

There is no substitute for experienced and motivated front-line dealer salespeople. A key aspect of driving sales performance is using effective incentives aligned with organizational strategy to motivate the sales force. While capture rate is an important overall company metric, the most appropriate salesperson incentives are tied to booked and funded contract volume. Capture rate, coverage and penetration are important analytical factors in the quest to maximize individual sales effectiveness. Metrics that ensure alignment with company strategy are required as well.

Strategy Execution

Every nonprime auto finance provider is executing against its own strategy with various approaches to risk, pricing, organizational structure, sourcing channels, dealer relations and performance incentives. Overall, there are consistent patterns in how finance sources have organized their sales teams and aligned them with the rest of their organization. Additionally, there is similarity in the measures used as the basis for the incentives that are designed to support sales objectives. There are also clear indications that a well-defined, well-communicated dealer value proposition impacts performance heavily. Important value proposition and strategy components include:

Market Offering: Full-spectrum vs. niche financing sources to drive breadth and depth of volume

Brand: Differentiated pricing and service levels based on marketplace recognition and dealer appeal

Sourcing: Flow partnerships, portfolio purchases, direct and indirect channels, and independent segment to drive application volumes

Pricing: Multi-tier linked with segment and product strategies

Nimbleness: Awareness of competition with the ability to respond quickly and effectively.

Based on individual approaches to all these factors, companies strive to present unique value propositions in order to differentiate themselves. Marketplace vigilance, competitor awareness and benchmarking, as well as responsiveness, are essential in today’s competitive, hi-tech, fast-paced market. Although capture rate is certainly vital to success, the ultimate goal remains producing expected earnings from the business generated.

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