Biweekly payment programs have been thrust into the spotlight in recent years, beginning with a memo the National Automobile Dealers Association (NADA) issued to members in May 2014. It warned that the Federal Trade Commission (FTC) was investigating whether dealers were “improperly” presenting the product to car buyers — a revelation confirmed this past July when the regulator took action against a former provider and one of its dealer clients. But federal regulators aren’t the only ones scrutinizing biweekly payment services.
Executives from four providers, including David Engelman of SMART Payment Plan and US Equity Advantage’s Robert Steenbergh, responded to the NADA’s guidance with a strongly worded open letter to the association. They agreed that no F&I product should be oversold and said the FTC’s investigation centered on a provider that had exited the business years ago. Their issue was how the association called into question the value and utility of biweekly payment services, listing convenience, payday matching and avoidance of late fees among their benefits.
At September’s Industry Summit, F&I and Showroom’s editorial director, Gregory Arroyo, joined Engelman and Steenbergh for a panel discussion. “The Biweekly Scare” included an inside look at the three-way dust-up between the FTC, the NADA and providers, as well as a closer look at the benefits of biweekly payment plans.
Didn’t You Get the Memo?
Engelman and Steenbergh were quick to point out that it wasn’t the NADA’s memo itself that frustrated them. They said it was the fact that the NADA didn’t request input from biweekly payment providers before issuing it. If they had, Engelman said, they could have defused the situation by acknowledging the FTC’s complaint and changing the conversation.
“I would point out that there’s a perception that savings is the reason people sign up. But we know that’s not true,” he said. “We surveyed over 120,000 clients in 2014, and had over 6,000 responses. Almost 77% of the customers who responded said ‘convenience’ was their No. 1 reason. … It wasn’t until the fifth benefit — reducing interest charges — that it was even mentioned.”
“At the end of the day, what’s the old saying? No press is bad press,” Steenbergh said. “And it did get people talking about the product, and allowed us to publicly separate ourselves from the companies that hadn’t done things the right way. … The problem was, in my opinion, [the memo] was written entirely prematurely. The FTC was focusing on an investigation of a false, deceptive sales practice and somehow the NADA got that turned around to ‘I don’t think there’s enough value in this product.’ That perpetuated the misconception that the only value of the product was interest savings.”
The memo also said dealers should stress that the programs are optional, and even suggested that car buyers could elect to create their own payment schedule and reap the same benefits. Not so, said the experts, noting that the process is complicated by limitations, restrictions and other obstacles, all of which vary by bank and finance company.
“In reality, you can’t do what we provide on your own,” Engelman said. “I challenge any of you to go home and match your car payment to your payday in a manner that is automated … and do that in the time it takes to have the program explained and the contract signed. In reality, you can’t do it.”
Some finance sources, he added, will allow electronic payments several times a month. Others sources will allow them once a month, requiring a paper check for any additional payments made. Others lenders don’t allow electronic payments at all. Then you get to the problem of how those payments are applied: Most finance sources won’t automatically apply additional payments to the principal of the loan, but will instead apply them to the next payment unless expressly told otherwise.
And even when lenders are told, Engelman said, many will still misapply those funds to future payments. Some finance sources even have separate addresses where additional principal payments can be mailed. And even when everything is done right, lenders will still often apply funds incorrectly, requiring consumers to spend hours on the phone to correct the mistake.
The Regulatory Slog
Another false perception Engelman and Steenbergh sought to dispel is that biweekly programs are funded by shady sources, including drug cartels, money-laundering or offshore-banking schemes. Nothing could be further from the truth, they said, noting their companies are essentially regulated the same way as banks.
Most alarmingly, states have reclassified biweekly payment providers as “money transfer” services, adding a host of additional regulations and licensing requirements. A loophole that allowed biweekly providers to “borrow” a partner’s license has been closed, forcing biweekly providers to obtain their own licenses in every state in which they operate.
The licensing process itself is an arduous one. Bonding, audits that go back several years, extensive background checks of every executive, and anti-money laundering policies that can be demonstrated on demand are just some of the requirements providers must fulfill to obtain a license.
“It’s a slog. It’s very challenging,” said Engelman. “It’s a steep mountain and there is no way around it.”
Added to that burden is the fact that some states have an inherent distrust of the service right off the bat. “Texas has a history with a biweekly company there, where they did an audit and found out it was a Ponzi scheme,” Steenbergh said, noting that the provider operated in the mortgage arena. “The company was keeping the extra payments. So when we went in, there were already strikes against us because that was their perception. They thought we were all the same, no matter what we showed them.”
Ultimately, he said, his company decided not to do business in Texas. It’s one of 16 states in which a daunting list of arduous processes and strict restrictions have caused numerous biweekly payment providers to at least consider pulling out.
“Everyone is going to have to play ball with the state regulators, and they all have different rules and different personalities,” Steenbergh said. “It’s a very expensive and time-consuming process.”
It doesn’t end there. Swayed or perhaps spooked by the attention biweekly payment programs have received, many of the banks and finance companies that worked in partnership with service providers have abandoned the segment. Steenbergh said those that have remained have, in some cases, tripled their fees, knowing the providers had no recourse.
“There has been an evolution in the regulatory framework that started with Dodd-Frank,” Engelman noted. “Regulations geared toward bans have trickled their way down toward the financial services banks are serving. What we’re really suffering from is the crackdown on payday lenders who went offshore so the U.S. government couldn’t reach them. To try to minimize that business, regulators tightened their approach to money transmitters.”
Pump Up the Volume
Engelman said the same negative press that threatened to derail the biweekly segment could buoy it in the long run. The more dealers and car buyers learn about biweekly programs, he says, the more they will like them, and the more likely they will enter the “mainstream” category of F&I products, alongside such stalwarts as vehicle service contracts and GAP coverage.
Better yet, he added, dealers will see an improvement in their bottom lines. He cited internal research showing penetration rates for service contracts and GAP increasing by as much as 60% on deals that include a biweekly program.
“Don’t forget that 77% of Americans are living paycheck to paycheck,” said Steenbergh. “That is the math they’re doing. If the car is $400 and that’s all they can afford, when you offer them a service contract, they say they can only afford $400, so it’s out of their budget. … It’s not that they don’t understand math, it’s just their entire psyche is wrapped around ‘I get this amount of money and I need to cover these bills.’”
Engelman noted that the average American gets two $2,000 paychecks per month, with the government taking $500 off the top. The average rent or mortgage payment is $1,000, and it’s usually due at the beginning of the month. That leaves just $500 out of that paycheck for other bills. If their car payment is $400, that leaves them with just $100 to pay for anything else — including food, gas and other necessities — until the next paycheck. That leads to what he calls “Ramen noodle weeks,” followed by a spending spree when the mid-month paycheck arrives.
Biweekly payment plans can help eliminate that “feast or famine mentality,” Engelman added, allowing those same consumers, on that same income, to balance the load and see a steady amount of free income throughout the entire month.
Steenbergh agreed. Budgeting, he said, is the key factor, and better budgeting is what makes biweekly payments so attractive to car buyers.
“Everyone wants the newer, more expensive car, and if you push it out 12 more months, they can afford that payment,” Steenbergh said. “A lot of people will tell you that guy shouldn’t be buying that car if he doesn’t make that much money, but he’s going to be in the dealership, and he’s going to make that emotional decision, and he’s going to want what he wants. … If you employ a service like ours, you can help that customer get out of a longer term loan fast and get in a better position for themselves down the road.”
Tariq Kamal is the managing editor of Auto Dealer Today. Contact him at [email protected].