In July 2015, BB&T Dealer Financial Services announced the launch of flat fees as the Consumer Financial Protection Bureau (CFPB) announced the expansion of oversight to larger non-bank auto finance companies. BB&T became the third auto finance lender to change their dealer participation practices, after Chrysler Capital and Santander USA. A domino effect quickly took place, with American Honda Finance Corporation, Fifth Third Bank, and Toyota Motor Credit joined the growing number of lending institutions either reducing their cap on dealer participation, or implementing flat fees.
In February, BB&T became the first auto finance company to reverse the trend, stating in an interview with Subprime Auto Finance News that the bank would be abandoning its flat-fee dealer compensation program and introduce a more traditional auto pricing program mid-March.
While BB&T plans to eliminate flat fees, we can still expect them to be more circumspect on the dealer participation cap than in previous years. In fact, Brian Davis, BB&T’s director of corporate communications stated, “BB&T remains firmly committed to the auto finance industry and to the fair and equal treatment of all consumers.”
The fact of the matter is that it is highly unlikely that the auto finance industry as a whole will raise their dealer participation caps back to pre-CFPB levels. After all, the concept of treating customers fairly isn’t go away. However, lenders do need to keep in mind that dealers are still focusing on increasing back-end profitability. Therefore, mark-up caps do need to be competitive. In the extreme example, dealers will pass by a lender with a quarter-point mark-up cap.
As more lenders move from flat fees to the more traditional mark-up on dealer participation, the competition on providing dealers with the most compelling mark-up cap could be just as competitive as providing the best APR. Strategic lenders could differentiate themselves with dealerships by thinking beyond APR and mark-ups.
For example, going forward the focus on selling F&I products to increase dealership profitability will only increase. Therefore, lenders will need to compete on how much they lend over the vehicle price. In addition, good, old-fashioned engagement and customer service can go a long way towards cementing dealer relationships.
The key to consistently pull through loans is to concentrate on your efficiencies:
- How quickly does your institution respond to an application?
- Are your loan officers courteous and respectful when speaking with dealership personnel?
- Do you instill the value of providing superior service across your institution?
The Value Proposition
- Does your loan make it easier for the F&I manager to upsell consumer protection products to boost dealer margin?
- Does your loan offering provide consumers with value beyond interest rate that insulates them from significant impacts to their savings?
The good news with the compliance changes that occurred over the last few years is that they opened the door for lenders to compete on more than just APR. Good customer service can go a long way, and excellent customer service can go even further. Focus on your efficiencies in providing swift loan approvals, your availability during dealership hours, and in educating dealers on your loan terms to reduce wasted time submitting loans that won’t be approved.
Beyond customer service, providing tangible value to both your audiences puts you miles ahead of the competition. How do you do this? One of the best ways is with complimentary consumer protection products, such as a limited powertrain warranty or vehicle return.
Financing options offering complimentary F&I products with upgrade opportunities provide significant benefits to all parties involved.
Benefits to F&I Managers: Starting the F&I process with a loan paired with complimentary consumer protection products puts the F&I Manager in a positive position with their customers, enabling them to explain the benefits of the complimentary products and then ask if the customer would like to extend the protection to the entire loan term.
Benefits to Consumers: Consumer protection products allow consumers to avoid unexpected expenses that may inhibit their ability to make their car payment.
Benefits to Lenders: Upgrade options provide increased potential for profit opportunity for lenders, and by protecting the customer, mitigate loss exposure.
Remember, your dealership partners are in the same business you are, to make money. The more you help them, the more you help yourself. With more than 40 years of developing and delivering profitability strategies for dealerships, EFG Companies knows how to give your institution the edge in the marketplace. Contact us today to put our knowledge, expertise and product innovation to work for you.