My brother and I had a lot of chores when we were growing up and, like all kids, we did everything we could to avoid them. At some point however, the polite requests and subtle reminders stopped and my parents would move to enforcement. To my brother’s frustration, I could always recognize the moment right before my parents’ patience was going to give out and then cheerfully jump in and complete the task. I would get extra credit for “volunteering” and look great in comparison to my sibling.
The indirect auto lending market is reaching a similar tipping point.
The CFPB has expressed concerns with the indirect lending model allowing for dealer markups. They have been trying to subtly nudge auto lenders to revamp their pricing and dealer compensation policies for several years now (“subtle nudge” being a relative term of course).
With efforts underway to expand their supervision to include nonbank automobile lenders, it’s clear that the CFPB is losing their patience. They are now telling the industry, in no uncertain or subtle terms, that the current indirect auto lending model needs to change. The opaque, discretionary pricing processes happening in some F&I offices is no longer acceptable.
Time for a Change
So the question is, given the CFPB’s clear intent to disrupt the indirect auto lending space, why not disrupt it yourself?
Speaking from personal experience, I can tell you that being the first to volunteer for a task that will soon become mandatory can be extremely rewarding. In fact, we already have evidence of this thanks to BMO Harris Bank’s decision to pay auto dealers a flat fee for originating indirect auto loans. Unsurprisingly, this decision made Richard Cordray and the CFPB extremely happy.
And it’s not just the CFPB’s approval that banks stand to gain by changing the indirect lending model.
According to a presentation from Scott Painter, founder and CEO of TrueCar, 80% of millennials believe that auto dealers are making a 15-20% profit, despite the fact that the average dealer’s actual profit margin is about 2%. This gap indicates just how little trust consumers have in dealers’ current pricing strategies. It also makes a pretty compelling case for a more transparent approach given that, in the same TrueCar survey, a majority of millennials indicated that they would be willing to pay dealers a 7-10% profit margin in a completely transparent environment.
Embracing Technology
Given the pressure from regulators and consumers for change, it seems likely that the indirect auto experience will evolve. It will almost certainly become more transparent and consistent.
This shift will have enormous competitive implications for auto lenders and dealers. In a more transparent market, discretionary pricing becomes a less effective tool for driving long-term profitability. Controlling costs becomes more important. Technologies that can automate time-intensive processes like loan underwriting take on critical roles. As more and more players in the market embrace these technologies in order to compete, the entire market becomes more efficient. The consumer benefits, not only from the increased transparency, but also from a faster, more seamless shopping experiences enabled by the underlying technology.
Adaptability
Lenders are constantly looking for competitive advantages—ways to become slightly faster, more efficient, more intelligent. However, in today’s rapidly changing market, one of the most sustainable competitive advantages is the ability to adapt.
The indirect auto market is on an unsustainable path. Regulators don’t like the current process and consumers don’t trust it. It is going to change. The lenders that accept this reality and focus on adapting their business processes and technology accordingly will win not only the CFPB’s approval, but the customers’ as well.
