Grand Theft Auto Finance

As Internet-based lenders capture a growing share of the auto financing marketplace, traditional players fight back with online offerings of their own

Online lenders have started to hijack the auto financing process, much to the chagrin of auto manufacturers and dealers. Indeed, savvy shoppers can now easily line up credit in advance and act as a cash buyer during a negotiation for a new car, effectively freezing the dealership out of earning lucrative auto finance fees from their customers.

In response, auto dealerships have begun to forge closer ties with banks through direct connections and dealer-to-lender exchanges. Furthermore, a consortium of several major manufacturers is planning to launch their own dealer-to-lender exchange that might do for the auto finance industry what Orbitz has done for airline travel.

Which business models will succeed? Only time-and traffic-will tell.

SHOOTING BLANKS

The traditional dealership business model earns a profit in at least one of four ways: the sale of the auto; extras and maintenance; trade-ins; and financing. This range of options gives the dealership tremendous flexibility in a negotiation. For instance, when someone can't bear to part with an old clunker for less than $10,000, the dealer will accept with pleasure, as long as there's still the ability to make an overall profit through line items such as rust-proofing, an extended dealer service option, and a favorable financing deal.

But the dealer has less flexibility when an Internet shopper walks onto the lot with pre-arranged financing. While that's still a relatively uncommon event, the secret's out. For example, Capital One subsidiary PeopleFirst, based in San Diego, Calif., writes "Blank Checks" to its Internet customers. Offers are valid up to a given amount for auto purchases within 45 days at an agreed-upon interest rate. Also, PeopleFirst promises to match competitors' rates and has an automated process for approving higher loan amounts. It's an effort to enable customers to walk into the dealership, choose a vehicle, and bypass the dealer's finance & insurance (F&I) desk entirely.

PeopleFirst also refinances loans for dissatisfied borrowers. "They get the car back in their driveway, look at their contract, and say, 'Wow, I paid too high of a rate'," said Brian Reed, president of PeopleFirst. "We end up financing a lot of recently-new car purchases and recently-used car purchases, and refinance those within the first 90 days."

Although the company lacks a branch presence, PeopleFirst has the ability to make itself known by advertising on the Internet sites where people shop for cars. "We link up with consumers as they go through their car research period," said Reed. Consumers also discover PeopleFirst via point-of-sale displays and "take-one" brochures at venues such as Costco and the American Automobile Association, and through cross-selling to Capital One customers.

E*TRADE Bank, Menlo Park, Calif., also seeks a competitive advantage through cross-selling. Internal credit models incorporate all of the activities within E*TRADE's direct purview, thus contributing to a better understanding of the credit risk involved with an auto loan. "We have an unique, laser-like focus on credit," said Arlen Gelbard, president of E*TRADE Bank. "We make sure that we're not playing in the sub-prime market. We are very comfortable with our borrowers."

Similarly, Internet portals have the potential to support informed decisions about their users' credit quality and propensity to buy. As marquee locations on the Web, the three major portals-AOL, MSN and Yahoo!-have emerged as important avenues for attracting the online auto shopper. Through the portals, people can request new car quotes from local dealers using services such as AutoNation and AutoWeb, used car information from Edmunds and Kelley Blue Book, and up-front financing from online lenders such as E-LOAN and PeopleFirst.

One prominent online presence in financial services is LendingTree, now a premier provider on MSN. "Microsoft is not a financial institution-we're not going to be one," said Chris Jolley, director of product management for the Financial Products Group at Microsoft. "But we're certainly going to partner, because we recognize that our customers see value in getting that type of information at the same place where they're managing their finances."

The LendingTree exchange matches consumers with up to four lenders randomly selected out of a larger pool of appropriate institutions. "Lenders only see consumers from the geographies, credit ranges, loan-to-value ratios, etcetera, that meet their specific lending criteria," said Tom Reddin, president and COO of LendingTree, Charlotte, N.C. "Once the consumer is matched with up to four offers, the lenders will attempt to contact the consumer, either by telephone or e-mail."

After that, it's the lender's job to close the deal and follow through with the transaction. LendingTree gets a small referral fee for each prospect sent to a lender, and a larger fee upon each closing. "LendingTree is deeply aligned with the success of the lenders," said Reddin. "We want to make sure that whatever customers we are sending to our lenders are committed customers."

TIPPING THE DEALER

No doubt, consumers benefit by rate shopping on the Web before buying a vehicle. However, lenders have good reason to be wary of cutting the dealership out of the equation. "We can choose who we want to sell cars to," said an Internet business manager at a luxury auto dealer in Pennsylvania. He described the funding and documentation process for electronic loans as "a nightmare," especially compared to the process of working with his usual factory bank.

Citing these concerns, some dealerships resist accepting electronic loans when the situation arises, by either pitching a competitive offer or turning down the business entirely. To be sure, a determined customer can still make the purchase. "The dealers, at the end of the day, need to turn their inventory," said E*TRADE's Gelbard. "As much as they may like to put up a front ... ultimately they turn around and they accept it."

Nevertheless, there are ways for banks to work in concert with the dealers, ensuring that their customers are welcomed with open arms. For instance, when National City Bank refers one of its customers to an auto dealer, it doesn't promise an interest rate in advance. "We want to get them the best deal on the day they walk in the dealership," said Mark Dubis, vice president and product manager for National City Dealer Finance Group. "The dealers like that because they're not stuck. They can provide the current rate and provide a better level of service to the customer."

In return for sending foot traffic to the dealership, National City expects a corresponding amount of lending business to come back its way. It's a simple quid pro quo. Just to be sure that everything's proceeding according to plan, the bank surveys each of its referrals three weeks after loan approval to assess the outcome and reward the dealership appropriately.

Bank One has also reached out to its automotive dealer customers-with software. The bank developed an Internet application with DataScan Technologies, Alpharetta, Ga., that supports dealer requests for funding, payments, reporting and billing. In essence, it's a customized treasury management system for dealerships that also happens to provide a direct lending channel. "The implementation of DAS already has made a significant difference for our dealers, giving them fast and easy access to floorplan accounts," said William C. Ruffin, senior vice president and head of dealer commercial services for Bank One, Chicago. "The Internet speed we have gained through this system will increase productivity and improve efficiency for Bank One and its customers."

Another software offering for the dealership comes from DealerTrack, Melville, N.Y. "We are predominantly a tool for the sales manager and the F&I manager in the dealership," said Mark O'Neil, DealerTrack president and CEO. "DealerTrack allows them to submit a credit application on a customer to multiple banks, and find out which bank will offer the best financing for that particular customer's needs."

With JP Morgan Chase, AmeriCredit, Wells Fargo and over 20 other lenders as participants, the DealerTrack system can identify financing alternatives that customers may not have identified on their own. Nissan Motor Acceptance Corp. and other captive finance companies also plan to participate in the system. "Most of our lenders do the vast majority of their business through the indirect channel, meaning the dealer is initiating the financing on their behalf," said O'Neil. "I'd say 80 percent of the customers rely on the dealership to help them find the best financing alternative for them."

DealerTrack participants reduce their processing costs by having the dealership perform data entry and validation before sending in an application. "It goes right to the lender's decisioning system," said O'Neil. "The decision comes back to the dealer in a matter of seconds, or in the worst case, minutes."

MOTOWN MAGIC

All of these interesting online machinations have not escaped the notice of the largest auto manufacturers. Last year, DaimlerChrysler Services, Ford Motor Credit Company and General Motors Acceptance Corporation formed RouteOne LLC, which plans to launch its Web-based credit application management system for auto dealers by the fourth quarter of 2003. Toyota Financial Services has also taken an equity stake in the joint venture. Covansys Corporation, Zentropy Partners and Cap Gemini Ernst & Young are developing the technology.

Several captive financing companies have already agreed to provide quotes through the system for lending and leasing, both prime and sub-prime. In contrast to banks, captive auto financing companies view the financial part of an auto transaction as secondary in importance. "The captive finance companies are their OEMs' partners in new vehicle sales and leasing," said Mike Webster, COO of RouteOne. "In order to protect our 'captive value equation,' it was really essential for us to build our own credit aggregation system."

But RouteOne is not just for captives-Bank of America has also announced its intention to participate. "The vast majority of the banks and independent lending institutions recognize that our system is in it for the long haul," said Webster. "In point of fact, it's going to provide them a very important source of access to our dealers."

Indeed, RouteOne intends to operate an open-ended system. "We're not out to seek any advantage over their baseline business for our dealers," said Webster. "We're just in it to provide a fair and equitable system, while at the same time providing our dealers with at least a viewpoint towards our total value equation."

"We're more than just rate comparison," added Webster. "And frankly, those banks and independent institutions that are in the automotive lending business, they don't like the prospect of becoming a commodity either; they're in the relationship business as well."

Like other dealer management systems, RouteOne will help to eliminate the fax machine altogether. "We are going to provide a very good reason for dealerships to have a single point of entry," said Webster. "They won't have to duplicate data entry for applications and other things."

The RouteOne system will be provided free to dealerships as an adjunct to existing automotive portals. For instance, a Chrysler dealer would access the RouteOne credit application through DealerCONNECT, a Lotus Domino workflow solution built by Interliant, Purchase, N.Y.

By using the streamlined system, RouteOne expects to reduce the average sales process by 20 to 25 percent (from 3 1/2 to 4 hours, according to the National Auto Dealers Association). That means participating banks should be ready to provide standardized, simplified and speedy quotes.

"We're doing this to enhance the competitive environment and to help our dealers' business process," said Webster. "If the banks were to follow that same position, it would be very much to their benefit."

RouteOne members

(as of 3/2003)

- DaimlerChrysler Services

- Ford Motor Credit Company

- General Motors Acceptance Corporation

- Toyota Financial Services

- Bank of America

- Jaguar Credit

- Land Rover Capital Group

- Lexus Financial Services

- Long Beach Acceptance Corp.

- Mazda America Credit

- Mercedes-Benz Credit

- National Auto Finance Company

- Nuvell Credit Corporation

- Primus Financial Services

- Saab Financial Services Corporation

- Triad Financial Corporation

- Volvo Finance North America