When I talk to dealers and lenders about consumer-direct auto financing, it reminds me of that old Dire Straits song, but without the “chicks.” Many dealers and indirect lenders oppose it, but for different reasons. What both sides have in common is that their opposition misses the most important constituent of all.

Dealers are concerned about yet another assault on their profitability, while indirect lenders often fear the dreaded “channel conflict” will harm relations with their dealers. What’s missing from the equation is the most powerful force of all — the consumer. So, rather than arguing about direct vs. indirect, we should get to work on the only winning long-term strategy that exists: the one built around the consumer.

The impact of changing consumer behavior is already evident in our finance business. As they do when shopping for a vehicle, consumers are turning to the Internet to make their auto financing decisions. Supporting this migration is a recent study conducted by Kelley Blue Book, which found that 57 percent of survey respondents intended to research vehicle financing options online.

Even more telling is the fact that 50 percent of survey respondents said they planned to obtain pre-approval through a bank or credit union, while only 34 percent said they planned to wait and arrange financing through their dealer. Given that about two-thirds of vehicles purchased today at franchised dealers are indirectly financed, the disparity is clear.

Google search traffic provides further signs of this migration. Combining the keyword “auto” “car” or “vehicle” with “loans,” “credit,” “finance,” “financing,” “refinance,” “leasing,” “payment,” “rates” or “calculator” yields more than 5.5 million results. Adding the term “bad credit” raises that number to more than 6 million results.

So what do consumers want when it comes to auto finance? Given the fact that every car buyer’s situation is unique, there’s no easy answer. However, after reviewing how consumers research this topic, five attributes stand out: control, transparency, speed, convenience and rates. The ramifications in the F&I office are profound. For a successful consumer-driven model to work, dealers and lenders must understand this and organize their people, processes and IT capabilities differently than they do today.

Lenders Responding, Opportunities Arising

A number of lenders have responded by building and operating a consumer-direct channel. In fact, a Google search for “car loans” returned at least four national indirect lenders on the first page. The fact is, many indirect lenders I’ve talked to have either built a channel or are considering building one in the near future. But it’s not just consumers who are pushing them to do so.

In the name of increased income and profits, Wall Street and lending executives have become proponents as well. Competitive forces also are at work, as indicated by the share growth of credit unions and the proliferation of Internet-only auto finance sites. So, for a variety of reasons, lenders are being compelled to offer direct products.


But there is opportunity to be had for dealers. Remember that successful operators are able to leverage their scale, expertise and resources to identify consumers who fit their profile and are in the market for an auto loan. That means all assets are being employed, from company Websites, call centers and branch networks to extensive internal databases, business partners and third-party data sources. Sorting through the massive amounts of data they collect are sophisticated computer models that no dealer could ever hope to create.

“Event triggers” also are particularly useful when developing leads. That includes the submission of an online credit application by a consumer, payoff requests or a total vehicle loss or lease termination, as well as a referral from a partner Website or a response to a targeted solicitation. As you might expect, the techniques and technology used to generate leads are expensive and intricate to produce. The fact remains that the expertise and resources they employ are beyond what most dealers can do on their own. This forms the basis for a winning partnership between the dealer and the direct lender.   

Yes, dealers will have to get used to the fact that bank checks aren’t going away. In fact, they’ll most likely become more commonplace in the future. Of course, some dealers will continue to earn reserve by flipping the customer into an indirect loan, which can be a win-win situation for the dealer and the lender if the flipping results in a lower interest rate for the consumer. Long-term, however, this behavior will erode the lender-dealer partnership.

A forward-thinking dealer may instead acknowledge the incremental business the blank check provides, as well as the additional value that can be delivered to the consumer.
In fact, dealers who have embraced the direct-to-consumer push point
to the following benefits of this business model:

• Increased showroom traffic from lender referrals and preferred dealer programs

• Improved closing rates from pre-approved customers, increasing dealership productivity

• Improved CSI by getting the customer in the car and out the door faster

• Greater dealership brand awareness from lender-driven marketing programs

• Reduced advertising costs

• Higher transaction prices by selling up to the blank check amount

• Ability to add on products and fees beyond the face value of the blank check  

• Reduced regulatory compliance burden on the dealership

In a consumer-driven auto finance model, direct lending has an important role to play. Rather than harming or replacing the indirect model, the direct channel is a necessary market reaction to evolving consumer expectations and demands. When executed properly, the direct channel can be a valuable element of a successful and profitable dealer-lender partnership.

Rich Apicella is managing director of F&I Consult, a subsidiary of Intersection Technologies Inc. E-mail him at [email protected]