Retail Banking Strategies

Chrysler and Ford announced they are exiting the auto leasing business. Some are gloating that the automaker’s captive finance companies are finally getting their comeuppance — The End of the Auto Financing Scam – and while we agree this may open opportunities for banks to re-enter a more rational marketplace, there are signs that the captives will simply shift their aggressive incentives to loans where risk is more contained. Chrysler has already indicated it will begin offering zero-percent financing for 72 months on more vehicles. Are there opportunities for banks? Yes, if they focus on 5 key strategies where they can make a difference.

The most critical risk component in leases is management of residual value. Simply put, the lessee is renting the vehicle with an option to buy at the end of the lease. For years, the captives set artificially high residual values which lowered monthly lease payments and therefore propped up sales. But when the value of the vehicle plummeted, as most Chrysler, Ford, and GM cars certainly have over the past few years, then the fiction of high residuals collapsed and the leasing companies were left holding the bag with an overvalued asset that had to be written down.

For dealers, this announcement is bad news. At some dealerships up to 90% of sales are leased. To get the same monthly payments as a lease, many buyers would have to take out loans with 60 or 72 month terms. This will likely result in buyers holding their cars longer, turning them in less often. But manufacturers still need to “move the metal”, and most dealers are hoping the vehicle companies will simply provide financial incentives they can use any way they want. For banks, that would be good news.

The indirect auto business has always been a difficult area for banks to gain a foothold against the captives. It will remain tough, but here are a few strategies that can help

1. Know your customers. As in any indirect business, the primary customer is the person who is sending customers to you – the dealership, more specifically the F&I manager. Look for ways to package your product with the manufacturer’s incentives so they complement each other. For example, show how the customer wins, and the F&I staff makes more money, by taking the cash alternative and your financing instead of zero interest.

2. Pick your niche. There is excellent data available for most markets on units sold by dealership and where they were financed. Look for the opportunities where you can compete – where the captives may not be as strong. And target the right dealerships, where the data indicates they are willing to work more closely with financial institutions like yours.

3. Pick the right cars. Yes, the manufacturers are offering incentives, but not on every model. You can compete if you focus your efforts on specific vehicles where you can be competitive.

4. Pay attention to marketing and sales force management. You need to tell your story, and you need to manage where the sales force is calling and what they are saying. We frequently see examples where sales efforts are not well targeted or not well scripted.

5. Avoid adverse selection. This is a business where the “average” can be very misleading. Many dealerships seek opportunities to arbitrage weak spots in buying or pricing criteria, and have sophisticated software to help them. You should have detailed reporting of new loans by dealer, credit score and price to insure against adverse skews in your portfolio.

This entry was posted on Wednesday, July 30th, 2008 at 2:13 pm and is filed under Lending. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.