Anyone with a TV or radio has heard some variation of these offers: “Zero percent financing for well-qualified buyers!” “$199 a month leasing for well-qualified lessees!” and “Additional bonus cash for financing with Auto Motor Credit!” They serve as a great drivers of showrooom traffic, but they are also designed to drive buyers to finance through the captive finance company. For F&I professionals, this can be a double-edged sword.

Yes, more traffic equals more sales, and more sales mean more opportunities for F&I producers to sell product. Zero percent financing and “finance with us” bonus cash offers  also serve as great cash-conversion tools, as there’s no way a credit union can beat such offers.

And the more the F&I department can capture these finance deals, the higher its production levels rise. There are other benefits, too. Customers are more receptive to captive-branded F&I products, and they will be eligible for other products on the F&I menu.

Captive Audience
Establishing a strong captive relationship opens up other ways for F&I departments to get more vehicles over the curb. Some captives will stretch a lot further on vehicles or make bigger tier concessions on rate if a dealership sends them enough volume. The result is car buyers get better rates, or they can get financed on deals other lenders may not approve.

Some captives also run programs for special finance customers. These programs can help shoppers get into brand new vehicles at subvented rates that are sometimes half the rate they’d otherwise qualify for. At the very least, such programs could mean getting an approval for a high-risk credit customer, which results in an easier close and another car over the curb. These subvented deals also come with significantly lower fees, which means more front-end gross.

Dealers who floorplan with their captives benefit even more. They can get approvals other dealers can’t, and some captives will even specify what benefits they get on each deal. Ally even allows an additional $1,000 for the financing of F&I products above the “line five” call on approvals issued to its floorplan dealers. This can be the difference between having a deal that makes sense for the dealership and one that doesn’t.

Not all the captives operate that way, though. “We offer no [additional] incentive for floorplan dealers,” says Kyle Birch, COO of GM Financial/AmeriCredit, which also administers subvention programs for Kia and Mitsubishi. “They are free to finance … with anyone who offers the best financing solution for the customer.”

Then there are lease incentives, which are designed to get consumers back into the buying pool faster than retail buyers. The added benefit for dealers is they have the opportunity to purchase a fantastic unit for their used-car inventory when the customer returns at lease end.

Leased vehicles, as we know, are also ideal for manufacturer certified pre-owned programs. And as we also know, there are some consumers who simply won’t purchase a used car if it isn’t certified. Captives frequently offer finance incentives on CPO vehicles that are significantly better than their standard rates. And what these rate specials do is help shoppers compare other offers so they can make a more informed purchase decision.

The F&I Conundrum
Counterbalancing all of these positives are two enormous factors: money and time. Yes, dealers strive to maintain good relations with their captives for all of the reasons previously stated, but finance managers have been trained and are paid to fight for every possible dollar.

The problem with subvented rates and lease specials is dealerships are typically forced to give up reserve profit because such offers — with some notable exceptions (e.g., GM subprime subvention) — come with a small flat to the dealer. This creates a conflict of interest for finance professionals and their pay plans, which pay on profit-per-retail-unit (PRU) “escalators.”

Specials geared toward customers with subprime credit also conflict with F&I pay plans. Such offers come with max line five callbacks, which hurt producers who are paid on penetration escalators. The problem is the dealer has his or her goals, but the pay plan the dealer constructed for his or her F&I department incentivizes producers to not work for that business.  

Offers like these are designed to drive buyers to finance their vehicle purchase through captive finance companies, which can be a double-edged sword for the F&I office.

Offers like these are designed to drive buyers to finance their vehicle purchase through captive finance companies, which can be a double-edged sword for the F&I office.

There are also situations where subvented rates may not be the best option for the customer. For instance, the offer may not allow the buyer to take advantage of rebates available on the vehicle, causing him or her to finance at a higher balance. And customers with a history of trading frequently or paying off their vehicles early would be better served taking their discounts upfront and allowing the finance department to secure a competitive rate with a noncaptive finance source.
More often than not, though, securing a competitive rate rules out the captive if its subvented rate isn’t being used. And noncaptive finance sources that offer buy rates well below a captive’s standard rates aren’t shy about paying dealers more reserve to earn the business. Some noncaptives offer enhanced flats on deals written at retention or low buy rates with maximum participation — either offer paying more than any captive’s subvented contract.

As for time, some captives are known for reacting slowly to deal submissions. And having to wait a long time for a callback could mean losing the deal. In these situations, the business manager is forced to go with another source just to get the customer on his or her way. Banks are sensitive to this issue.

“Our goal is to provide an answer to a contract submission as quickly and effectively as possible, knowing that a dealership’s customer satisfaction depends, in part, on our ability to meet their needs quickly,” read a statement Ally issued to F&I and Showroom.

Funding is another critical factor. Some captives are notoriously slow to fund deals, which leads finance professionals to seek out a bank he or she thinks will offer a smoother path to a funded deal. This is an issue GM Financial’s Birch is keenly aware of. “We do business with more than 11,000 dealers, and we have a lot of money on the books out there,” he says. “And more than 70% of our business on the subprime side funds in two days or less.”

Squeeze Play
But under the pressure of their captives for market share, dealer principals are forced to push their finance departments to send more deals their way. Naturally, the finance department will try to buck this as much as possible, because sending deals to the captives for subvented financing simply doesn’t play well with their pay plans. And the captive’s nonsubvented deals aren’t an option, either, as they typically charge customers more and are just as unrewarding for F&I producers.

This turns into a delicate balancing act for many finance departments. Not only are they under pressure to keep their dealers and, in turn, their captives happy, they have pay plans that tell them to act otherwise. But if the dealer principal isn’t happy, the business manager may find himself or herself out of job.

Aligning pay plans closer to the dealer’s objectives would seem like an obvious solution. All a dealer would have to do is make a lender’s market share part of their F&I compensation plans. Problem is, F&I pay plans are already complex, and adding one more layer could negatively impact an otherwise fantastic finance professional.

Unfortunately, there is no easy answer. Current pay plans have been shaped by market forces and dealer perceptions. Bottom line, business managers will always have to fight for every dollar on a deal-by-deal basis, while dealers will continually strive to appease the needs of their captives.

In reality, this conundrum is what drives the business forward. And the mark of a true F&I professional is someone who can strike the fine balance between his or her need to make a living and the needs of the dealer and his or her captive.

Mick Warshaw is a veteran F&I pro from Culpeper, Va., where he serves in the finance department at Battlefield Toyota Chevrolet. Email him at [email protected].