The discussion opened with reaction to a keynote address delivered by a former official with the Consumer Financial Protection Bureau (CFPB). It ended with executives from four F&I product companies and one technology firm offering their take on why F&I departments are realizing some of the highest per-copy averages in the last seven years.
That was the scene inside the Paris Las Vegas’ Concorde A, where GSFSGroup’s Alan Bond, National Auto Care (NAC)’s Tony Wanderon, OptionSoft’s Ken Tomaro, Protective Asset Protection’s Tim Blochowiak and The Warranty Group’s Joe Amendola took part in Industry Summit’s annual Executive Panel discussion.
Two hours before they took the stage, Hudson Cook partner and former CFPB official Rick Hackett warned the industry of the bureau’s interest in F&I product sales despite dealers not being subject to its enforcement, supervision or rulemaking.
“I do know that when I talk to my former friends, they are still very interested in this stuff,” Hackett said. “I do know the people I talk to on the policy level … they’re scratching their heads trying to figure out how to get into this stuff, because they know they have this story in their heads.”
The bureau’s story revolves around pricing; Hackett noting that the regulator can’t connect how dealers price F&I protections with the value they provide consumers. And it believes that lack of transparency puts consumers at a disadvantage and raises the risk of deceptive acts and practices, he added.
The former regulator offered several scenarios as to how the bureau might proceed. One of them involved the data the bureau collected from the tens of millions of transactions it reviewed during its investigation of dealer participation. If the bureau comes up with its own determination on how F&I protections should be priced, it could say that anything above that price is a finance charge. The bureau could then say a finance source provided “reckless substantial assistance” for financing a product with an artificially inflated price.
“So there’s the question,” he said. “Will the bureau try to make finance companies a cop for dealers’ pricing of ancillary products?”
The former regulator offered several suggestions on how the industry can protect itself. Menu selling, consistent product pricing and adherence to the 300% rule (offer 100% of your products to 100% of your customers 100% of the time) were three of his recommendations. He also urged F&I managers to make sure customers understand what they’re buying and that the product does provide value.
“Consider the suitability of the product,” he warned. “Consider it as part of why you want to do right by your customer.”
Executives acknowledged that product pricing isn’t perfect, but they noted that underwriters are the ones who take the hit when products are mispriced. They also argued that consumers play a role in how products are priced, as dealers risk a chargeback or losing out on a sale if their markups are too high.
Products are also more regulated than ever before, executives added, and finance sources provide pricing discipline through caps on loan amounts and product markups. That’s why Wanderon remained unconvinced that a move to a fixed price would satisfy the concerns of regulators.
“If you look at the fines that have been levied against a lot of the organizations and companies, it’s been about what the product really provides and does it benefit the consumers,” he said. “So we need to be very careful how we explain the benefit to the customer. It’s not going to be the same for everyone, and I don’t know how we can go to fixed pricing for our products.
“We know our product take care of customers, because we pay a lot of claims in this business,” he added. “But I don’t think we do a good enough job of telling [regulators] how we really do take care of the customer.”
The Warranty Group’s Amendola added: “At the end of the day, sometimes we don’t give consumers enough credit for making their own decision in terms of affordability or the product they would like. … When I look at the claims that we as a company pay out in terms of service contracts, GAP, maintenance and so on, I think those products bring tremendous value to customers. And it’s up to the customer to decide if they want to go ahead and purchase that product.”
F&I and the Internet
The panel also took on today’s Internet shopper, offering their reactions to studies like the one DMEautomotive issued this past June. The Daytona Beach, Fla.-based firm surveyed 2,000 car buyers and found that one in six of them skipped the test drive, while nearly half visited one or no dealership prior to making the purchase. Asked if that meant consumers are ready to complete vehicle transactions online, OptionSoft’s Tomaro responded with findings from a study his firm conducted.
“… When asked if they wanted to complete the entire purchase online, a very small number of those folks wanted to do that. It was 17% of a segment that represented 23% of the overall,” he said. “It was very eye-opening for us, because everybody is saying the whole purchase is going to be done online.
“But when you drill down and ask the people what they want, they really want to be able to get their information online, research so they’re prepared when they go to the dealership,” he added. “But almost every one of them wanted to test drive the vehicle before they purchased.”
The other issue is trust, with GSFSGroup’s Bond noting that attacks on computer servers at major corporations like JPMorgan Chase, Home Depot and Target provide constant reminders to consumers about the dangers of putting their personal information online. Amendola offered one other reason consumers aren’t ready to complete transactions online.
“Maybe I’m looking at it simplistically, but let me think this through. If I make $50,000 a year and I’m going to buy a vehicle for $32,000, that’s a significant part of my annual income,” he noted. “For that reason, I don’t think the customer is ready to complete the transaction entirely online.”
Wanderon had a different take. While he agreed customers may not be ready, he said dealers need to secure their place in this ecommerce environment before they are. “Dealers still need to break down barriers with consumers to make them feel as comfortable with them as the retail installment seller as they do with the lender,” he said. “If we do that, ultimately we can do transactions online, we can generate revenue with those transactions and we can be the point through our websites or our retail locations.”
F&I managers are already seeing their performance numbers taking hits from consumers entering showrooms preapproved for vehicle financing. The main culprit is the credit union segment, which increased its share of the total auto finance market by 9.1% in the third quarter — the largest increase among all finance segments. And according to Tomaro, that’s not all they’re after.
“Credit unions are waking up to the idea that not only can they fund these loans for buyers before they get to the dealership, they also have the opportunity to sell service contracts, GAP policies and some of the other ancillary products,” he said, noting that his firm has been approached by credit unions regarding F&I menu systems and other sales tools. “They’re in the space, and they want their slice of the pie.”
GSFSGroup’s Bond said the trend pushed his company to launch an initiative to help F&I offices stay in the Internet game. “Dealers have to provide that full shopping experience for the consumer online, because that’s where they’re making their decision to buy the vehicle,” he said. “So we’re trying to make sure dealers understand that and are willing to reach out to those customers, whether it’s emailing a menu to them, whether it’s utilizing webcam technology to interact with the customer.”
The conversation then turned to the used-car segment and the flood of off-lease vehicles expected to return to the market this year and beyond. According to Manheim, 2.1 million off-lease vehicles will return this year. In 2016, the auction company said that number could reach 3.1 million, a prediction that has raised concerns that dealers may be overwhelmed by the volume of returns.
As it turns out, F&I product providers and their dealer clients are taking a page out of Hyundai’s playbook and are using limited warranties as a marketing tool to differentiate used inventories. And because of improved vehicle quality and lender receptiveness to financing high-mileage vehicles, executives said they’ve been able to extend vehicle eligibility and the coverage of these complimentary programs.
“Keeping in mind that there are so many more customers buying pre-driven vehicles today than there were in the past, we felt the No. 1 concern they had was the quality of the vehicle,” The Warranty Group’s Amendola said. “So we thought, ‘Can we do something like what Hyundai did, which had a quality issue?’ That’s partly why they came out with the 10/100.
“So our team started looking at long-term limited warranties, two-year/100,000-mile, five-year/100,000-mile warranties, not just one-year/1,000-mile or three-year/3,000-mile, which really don’t do anything to differentiate the dealer’s pre-driven vehicles,” he added. “So we came out with programs like that, along with marketing materials.”
Vehicle quality, Bond said, has allowed GSFSGroup to expand the coverage of its limited powertrain warranty to items like air conditioning without impacting the program’s price point. Wanderon, however, wondered just how much providers could push the envelope.
“So we’ve taken our warranties out to 156,000 miles of eligibility and added longer terms,” he noted. “So you’ve got to modify coverages and watch them, but the dealer still wants it and the lenders have been much more receptive to [these high-mileage vehicles] than they have in the past.
“I don’t know how long it will go, but we’ve been in the sweet spot over the last couple of years.”
Offering complimentary coverage has also had a positive effect on F&I product sales; Amendola noting that his company’s dealer clients are realizing an 8% lift in service-con tract penetration as a result of such programs. Bond said his company, which offers a limited lifetime warranty, has seen a similar effect.
“We used to have the mentality in the dealership that we don’t want to give anything away,” Bond said. “Now I think we’ve started to understand we’re not actually giving anything away. What we’re doing is giving a little bit away upfront to gain a whole lot later on down the road.”
Watch Your Step
Blochowiak said Protective is enjoying similar results with its limited warranties, but he revealed that the company is currently in the throes of shaking up its F&I product lineup. And it’s seeking out the advice of both dealers and F&I offices to not only figure out what coverage levels are needed, but to uncover the “sweet spot a customer is willing to pay.”
“Once you get into those 100-, 125- and 150,000-mile vehicles, if the consumer is financing that car, it gets tight on the finance call,” he said. “So we have to be able to find really good value in the coverage at a price point the consumer can handle and the lender will finance.”
Executives said the engagement they have with their dealers is one of the reasons the industry has seen F&I per-copy averages among public dealer groups approaching that $1,400 mark this year.
“I’ve been with our company for 20 years, and I remember 15 years ago we’d sit with the dealer and talk about F&I. He’d look at us and say, ‘Eh, if I make some money in F&I, that’s OK. I make a lot of money in front-end gross, so I’m good,’” Amendola said. “Nowadays, nobody says that.
“If you’re an F&I provider or a general agent, you’re being held accountable for driving [profit per vehicle retailed],” he added. “And if we don’t, we get fired.”
Panelists also listed dedication to training and process as other reasons for the PVR gains; Blochowiak throwing in the availability of more F&I protections as another driver. But not everyone was thrilled about major dealer groups pounding their chests over their F&I successes.
“As an industry, we need to stop telling people we’re making $1,300 a car and then getting upset because a regulator says you’re making too much money,” he said. “… We bring the wolves to the door because we throw the meat out there. So think about it before you share your quarterly results with the industry and the world.”