Is E-contracting Ready for Mainstream Use?

Welcome to the remarkable business world of the 21st century! Rapid advances in technology are no longer limited to cameras, cell telephones and microwaves, and e-mail is the instant telegram of this era. Sophisticated software programs continue to change the way in which companies produce and file a wide variety of documents. While few dealerships have transitioned to a completely paperless office, the day is likely coming when we will accept this system as a fait accompli. The majority of dealers have taken the required steps to reach potential clients and conduct business through their Web sites. And now you have the opportunity to offer customers quicker car sales through the use of an electronic contract.

E-contracting is knocking at your door. Yes, e-contracting — a new online processing system for transmitting validated vehicle purchase contracts. Dealers and finance companies that endorse it quote a litany of benefits. Their mantra is: Faster and more accurate contracts at a lower cost. They also cite a limited paper trail, fewer re-contracts, reduced liability, decreased courier costs, minimized funding delays, reduced chargebacks due to errors in contract and product submission, increased customer satisfaction, reduced printing and distribution costs and greatly improved customer service. The list goes on and on, but do the accolades have merit? Is it worth the time and expense to set up the system sooner, rather than later? There are as many reasons to be cautious as there are to embrace the system.

How it Works

First, you need to have a basic understanding of how the system works. Simply stated, F&I mangers input the customer information and pertinent buying information into their DMS providers, such as ADP or Reynolds and Reynolds.

Once the sale is negotiated and disclosed, the F&I manager presents the e-contract to the customer, the customer reviews it for accuracy and signs the electronic retail installment contract via an e-pad. Once the e-pad has been signed, the manager submits the e-contract through the dealership’s designated platform; such as DealerTrack or RouteOne. This portal company verifies the signature, using digital certification, and then transfers the information to the bank source of choice from a list of participating institutions.

The bank source is provided with a creation of authenticity, a record of ownership and permission to have complete access to the records for comprehensive auditing and servicing capability. The portal company validates the structure of the transaction for specific bank guideline requirements, such as the correct term and interest rate, and the amount to finance based on advance, product options and potential errors in submission. The e-contract is not approved by this bank source unless all areas of the contract have been solidified. Within minutes, the customer’s loan contract is usually validated and the sale is finalized.

But what about liability concerns? Proponents say that liability on the part of the dealer is reduced significantly when utilizing e-contracting, e-signature and e-verification standards. In addition, they say it is almost impossible to alter a contract that has been electronically submitted and e-verified for signature authenticity by an AAA-rated insurance provider. “Almost” is an important word to keep in mind.

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Legal Considerations

Although e-contracting promises a pot of gold at the end of the rainbow, the banking and investment communities — including Wall Street — aren’t quite ready to buy into the system.

According to several panel speakers at the NAF Association’s Non-Prime Conference on e-contracting in June, there are still kinks in the armor. Some industry leaders suggest that e-contracting is simply a marketing hype and will not be used on a large scale anytime soon. Only 2-3 percent of the dealer franchised community utilizes e-contracting today.

Bank sources, such as Chase Auto Finance, CitiFinancial Auto and Wells Fargo Financial Acceptance can more easily modify their standards to use e-contracting because their risk isn’t as high as that of the independent banks. But leaders in the banking and investment community are asking how a pool of businesses can be scrutinized effectively and how contracts can be kept from mischief makers who may use or alter them for malicious activities. How can businesses enforce electronic business transactions that are equivalent to traditional paper contracts?

The bank community would have to rely on AAA-rated entities to insure the risk, as monocline insurance companies did when consumers first bought products on the Internet. What independent bank can take the risk of a multi-million dollar lawsuit by not mandating full securitization of a block of businesses? How is due diligence achieved if the loan is sold to another lender? Until a financial institution survives a court case involving an e-contract, most lenders would rather err on the side of caution. And most dealerships take their cues from their finance sources.

Currently, e-contracting is couched in state law, and it is unlikely that Congress will create a national standard. However, it is highly probable that lawyers will make significant modifications to the existing electronic retail installment contract structure. The issues to be finalized include those concerning the servicing of the loan contract. For example, a customer may need to extend/change the terms of the loan due to repayment problems, divorce, death or bankruptcy.

There are those who are embracing the e-contracting concept with open arms. RouteOne’s captive audience may create a different mindset by encouraging e-contracting for a number of reasons. If a significant number of dealerships see the benefits of e-contracting and if transactions are funded on a timely basis, it may be difficult for a finance source to refuse to endorse the system. The banking community is a competitive marketplace, similar to the car business, and if a lender loses business to its competition, it will soon do whatever it takes to get on board. Currently, the stakes aren’t high enough.

EOriginal, which partners with platform companies such as DealerTrack, RouteOne and Curomax, offers a system called eCore Business Suite (EEBS). It essentially guarantees the provision of a legal, enforceable electronic business transaction that is comparable to a traditional paper-based contract. The system permits the creation of documents that are “unique, identifiable and unalterable, from execution to final disposition,” and an industry standard PKI that provides secure services. Despite these assurances, however, banks are waiting to see who will take the first step, and who can survive a lawsuit.

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Questions to Consider

No new technology can be adopted without first assessing the cost/benefit tradeoff. What are the per-contract fees and the one-time integration fees? What are the recurring and one-time costs? What are the labor and system setup costs? What are the portfolio benefits? What will be their projected impact on dealership profitability? Will e-contracting necessitate a lender change? What assumptions can be made regarding growth, capture rate, utilization rate, penetration rate and other dynamics? In what time frame can this all be expected?

How will the electronic contracting system benefit review, booking and funding? Are the costs of file setup and maintenance imbedded in the cost structure? How will dealership benefits be affected if only the contract itself is involved in the e-contracting system and not complete e-packages, including trailing documents (drivers’ licenses, proof of income, copies of school diplomas and work history)?

How will the use of an e-contracting platform affect dealer procedures? Will the dealer institute more “shopping” for contract lenders? How will the use of e-contracts affect current legal and compliance issues? Will it affect menu selling?

To effectively utilize the e-contracting system, a dealership must have managers and sales staff who are knowledgeable about the system and comfortable with computer use and an e-pad. New skill sets involving customer communication and approaches may be needed, which entails additional and specific training. Dealerships must carefully examine their marketing and selling processes, funding, credit and servicing departments, pricing and loan origination, and general infrastructure readiness to assess the impact electronic contracting implementation will have on the company during changeover. Retraining at all levels is of paramount importance, as is a truthful accounting of management expectations, both short term and long term.

Becky Chernek is president and CEO of Chernek Consulting Inc. dba FYIFI Inc. Chernek has been consulting on menu sales and F&I since 1996 and has been in the auto retail industry since 1985. Visit Chernek Consulting at www.chernekconsulting.com or e-mail [email protected].