Changes are Coming to Automotive Retail…Credits Unions Must Prepare

by Maryann Keller

The past few years have been quite remarkable for both dealers and lenders. But the past is not prologue…new car sales have already plateaued, and most forecasters now see 2017 flat with last year – at best – for new car sales. It’s more likely that we will see declines in new car sales, exactly how much remains to be determined. However, this will bring changes to the industry.

For dealers, one can expect even greater manufacturer pressure to keep inventory levels high. Yet against a super-competitive market as “inventory chases buyers,” dealers’ new car margins will compress even further.  To augment falling new car profit margins, smart dealers will seek new and improved pathways to profitability.  Among them will be greater sales efficiencies, such as e-commerce and digital retailing initiatives, which aim to allow seamless online transactions and therefore lower operating expenses for the dealer.  This may in part eliminate the traditional finance office that permits F&I manager discretion as to where to place deals for approval and funding.  Second, backend F&I grosses will be further emphasized – with dealers being pressured to send new and used loans to their favored lenders – for a price, of course.  Third, used car sales will become a more important and high turnover profit center for dealers, with CPO sales at franchised dealers further accelerating in light of expected manufacturer incentives and rate subvention from captive finance lenders.

How do these changes affect non-captive auto lenders?

  • Auto lenders must improve the speed of their operations. Ranging from auto-approvals to quicker funding, lenders must improve the pace of transaction times for both their frontend and backend transactions.
  • Auto lenders must embrace technology (and transparency). In-dealership e-commerce platforms and mobile apps will become more common, and lenders must provide compatible technology solutions to assist their dealer partners. The role of lender-based automotive shopping sites and data-based direct marketing initiatives will bring change to the auto shopper funnel and related lender loyalty. Further, transparency in auto lending will not only grow, but also be expected.
  • Auto lenders must prepare for increased subvention to meet record supply. Captives will be more active in used cars by using subvented programs to help dealers dispose of certified pre-owned cars. Non-captive lenders will be forced to be more aggressive with used cars loans, experimenting with extended loan terms and additional dealer incentives. Some lenders will adjust their risk appetite too and reduce or withdraw exposure from certain credit segments of the market. This may end up increasing competition in other credit segments or even provide additional opportunities for some lenders.

Can credit unions remain competitive in indirect auto lending?

Credit unions can no longer rely on discounted APRs and dealer compensation flats to remain competitive. The key to remaining competitive in indirect auto lending is the dealer value proposition – or the enhanced value a credit union provides to its participating dealers. To this end, I’ve researched value providing techniques with CU Direct’s leadership, and the MK&A team prepared an insightful analysis that I will share at DRIVE ‘17.

Providing insights and forecasts at DRIVE ‘17 …

During my DRIVE ‘17 keynote, I’ll apply my 40+ year auto industry analysis experience to explain how rising rates, used cars inventories, technology, and other trends will bring change to the already cyclical automotive industry. I will discuss the current states of both the automotive finance and automotive retail markets, and my economic forecast of what’s likely ahead. As for enhancing the ‘dealer value proposition,’ my team will release a white paper appropriately named “The Dealer Value Proposition” that will explain our analysis of the automotive dealer’s future needs with our insights on how credit unions can fulfill these need gaps. It will be an informative 45 minutes.

See you in Vegas!

About the Author

Maryann Keller
Maryann Keller founded Maryann Keller & Associates, LLC in 2001, after 28 years of automotive expertise as a Wall Street analyst. She became a sought-for analyst thanks to her strong understanding of the financial markets. Ms. Keller has served as a Director(Board Member) of several companies over the last ten years. Currently, she serves on the Boards of Lee Automotive Group (privately held multi-line dealership group in Maine), DriveTime Group (the largest BHPH [buy here, pay here] automotive retailer in the USA based in Phoenix, AZ), and AutoCanada (the only public auto retailer in Canada, TSE - ACQ).