In the world of auto financing, we can always say there is a challenge being faced. There was the subprime fallout of the early 1990s, the leasing problems that plagued the industry later that decade and into early the next decade, taking out a few players. More recently, the Detroit captives have been under great duress, having the dual responsibility of being the main financial contributor to their owners’ bottom lines while having to look good when held up for sale. Then there’s the subprime mortgage problems, which are looming over the nonprime auto financing industry like a dark cloud.
Despite these challenges, it is easy to point to the positive impact automotive financing has had on the automotive industry. Consumers can buy a car or truck today more easily and faster than ever. Special lease payments and zero-percent financing programs have helped bolster sales for manufacturers and build showroom traffic for dealers. The availability of financing to credit-challenged buyers has also provided a better opportunity for dealers to close the deal.
What’s clear is that auto financing sources and products are keys to building the strength of the auto industry. While the competition is quite intense and pressure on margins continues to mount, auto financing sources remain persistent as they continue to find ways to grow their businesses profitably for their dealer base and for their shareholders. The more solid the auto financing bank or company is, the more confident dealers can be in placing their trust in these industry partners.
There are a number of strategy options financing sources can employ to grow business: place, products, pricing and promotions. We’ll also throw in procurement and partnership. Let’s look at each growth strategy in more detail.
Place: Lenders Look to Expand Through Deeper Dealer Penetration
“Place”can mean geographic or market expansion. Auto financing sources can choose to broaden their reach by offering financing in new cities, metropolitan areas, states or even countries. Auto financing companies will typically expand into a new territory as they grow confident in their ability to meet the needs of their dealers and owners.
Auto financing has even gone global. Automotive captives and several U.S. auto financing companies are doing business in Canada. Names include AmeriCredit and Wells Fargo Auto Finance. A number of the automotive captives have international operations with offices in North and South America, Europe and Asia, supporting their manufacturers and dealers in these markets. We must keep in mind that it goes both ways, as several foreign financing companies have taken an interest in the U.S. auto financing market — the Bank of Scotland owns Citizens Bank of Rhode Island and HSBC’s global base is in London. Banco Santander of Spain recently bought Drive Financial. And Aozora Bank of Japan is part of the investment firm Cerberus, which currently owns 51 percent of GMAC Financial Services and now owns 81 percent of Chrysler Financial.
Place can also mean deeper sales penetration among dealers, the “place” where the retail contracts or leases are originated. Dealer penetration includes increasing volume from current and active dealers, as well as those with signed but dormant dealer agreements. Of course, signing on a completely new set of dealers is always a growth option. More recently, independent dealers have become a target of auto financing sources. While independent dealers are almost always looking for additional financing sources, auto financing sources are looking for the best candidates among the 44,000-plus independent dealers with which to partner.
Products: Full-Spectrum Lending Only Part of Trend
Offering new “Products” to dealers or customers can also allow an auto financing company to grow. Dealers arrange retail installment, lease and balloon contracts on behalf of auto financing sources. In the past, it has been generally clear as to what type of paper an auto financing source would purchase. More recently, auto financing banks and companies have chosen to extend criteria either up or down the credit spectrum or have become a full-spectrum financing source by moving in both directions simultaneously. There is much to learn from dealers and auto finance companies on how successful this strategy will be with originations and servicing processes varying both ends of the spectrum greatly.
New technology and processes are also allowing auto financing sources to differentiate themselves in a Product-like fashion. For example, the implementation of e-contracting and e-processing has already become a means to gain a competitive advantage against other financing sources. It has also become a way to improve dealer satisfaction. Decisioning and funding times have become a race on the originations side. There will likely be other ways in the future in which technology will allow financing sources to gain an edge with their dealers. While dealers will not judge a financing source on the amount of technology it has implemented, they certainly will evaluate their financing sources on what that new technology can do for them. That’s why auto financing companies must be alert to how they can meet customer needs.
Direct financing product offerings allow an auto financing source to build brand equity and consumer relationships. While these products do not provide a revenue stream to the dealer and may even be viewed as a competitive product to the dealer, more full-spectrum and nonprime auto financing companies are introducing these products. Some are doing so in defense of their own territory, others as a full-out growth strategy.
Finally, additional dealer financing products can strengthen dealer-customer relations. These dealer financing products may include floor plan financing, capital loans, equipment loans, cash management services and wealth management and planning. While captives tend to have a deeper penetration of floor plan accounts, banks can often provide a more-rounded offering of financial services.
Pricing and Promotions: Competition Leading to Changes
Pricing and policies can be modified to promote an auto financing source’s portfolio volume and growth. Often this is done in reaction to competitive activity. However, pricing and policy changes must be made carefully for a number of reasons. First, dealers are looking for consistency and dependability from their financing sources. Constant changes in pricing and policies can quickly work against this desire. Also, in order for auto financing companies to be reliable, they must remain profitable.
As the concept of a non-profit, auto-financing source has yet to emerge, auto financing sources must look for ways in which to offer the best product pricing within their own limits of survivability and profit. New tools have emerged to help auto financing companies measure this (see side bar on page 60).
Dealers often ask for consistency and buying depth from their auto financing sources. One area in which auto financing sources can improve consistency is with pricing. In fact, in a recent pricing survey of the top 21 auto finance executives, 81 percent plan to improve pricing processes in the next year.
What might fuel this change is an emerging pricing software tool. It is designed specifically for the auto financing industry. It is a game-changing approach that creates a competitive advantage for auto financing sources and dealers by revealing valuable insights about the impact of price on customers and performance. It also enables pricing executives to make decisions within a strong compliance framework.
Based on an analysis of historical data and an understanding of current pricing and performance, the software can review a series of peak performance objectives and how these objectives compare to baseline performance. It provides visibility into the impact of each objective and helps determine which objective to pursue for the portfolio, product or particular segment. Auto financing sources can basically combine their art with science in changing prices. This enables a more targeted dealer/customer-centric approach to pricing.
Auto financing sources must also make decisions on policies and “financeable” products as part of their financing package for dealers. These policies, including those relating to reserve, advance amounts, terms, etc., will impact the banks and auto financing companies’ level of competitiveness. This also applies to the exception policies granted. Moreover, the number and type of “financeable” products allowed can also help or hurt an auto financing source when it is looking to build volume. While one policy cannot grow or shrink volume tremendously, all policies and procedures can have some effect on business.
Financing Promotions can also be offered by auto financing companies. The most common and visible are the subvention programs offered through captives. Volume-based incentives and retail-wholesale incentive programs are often available. Other consumer-focused programs include financing offers designed for specific groups, such as college grads.
Procurement: Mergers, Acquisitions and Portfolio Purchases
“Procurement” could represent several new growth strategies — mergers and acquisitions (which are almost always acquisitions), intra-company divisional integration and portfolio purchases. Mergers and acquisitions often lead to an expanded footprint, sometimes not.
Capital One Auto Finance grew by design with its purchases of Summit Acceptance, Onyx Acceptance, PeopleFirst, followed by Hibernia Bank and North Fork Bank. When Wachovia bought WFS Financial, it did so with the intention of growing the auto financing portfolio. However, when it bought SouthTrust Bank, the bank exited the auto leasing industry. Then there’s Wells Fargo Bank, which merged with Wells Fargo Financial Acceptance to create a new Wells Fargo Auto Finance division.
Portfolio purchases have become more common, with the Key Bank portfolio being sold to Capital One and Bank of America being among the largest and most visible. Additionally, whole loan sales are becoming less rare with the largest sold between GMAC and Bank of America. Many smaller deals are being sold on a frequent basis with a variety of “packaging options” available.
Partnership: Dealer Relations and Financing Partners
Lastly, growth can be gained through “Partnerships.” The most obvious partnership for an auto financing source is with its dealers. It is certain that dealers would say they are looking for buying consistency, long-term commitment, reliability and dependability. They are also looking for auto financing sources to understand their business needs. In reality, dealers with a short-term strategy (and memory) look only for the lowest price. Dealers with a longer-term viewpoint are looking for financing “Partners.”
With the consolidation of lender operations, the evolution of dealer financing platforms, auto decisioning and other technologies, the direct relationship a bank or company has with its dealers has changed dramatically. The number of touch points with dealers has decreased over the last several years. Some financing sources see this as an opportunity to grow by allowing more direct contact with the bank or company. Not all financing sources see it this way, but there are those who view dealer relations as their No. 1 competitive advantage.
“Partnerships” created with other financing companies also represent business. Pass-through and private-label programs allow a bank or company to provide a wider range of financing to dealers with an adequate amount of transparency. The awareness of these partnerships with the dealers will vary by type of program and by execution. The goal of these partnerships is to allow finance companies to move toward full-spectrum lending without having to build the infrastructure to support it.