If the Great Recession taught dealers one thing, it was how to adjust operations to meet the financial demands. Now, dealers are adjusting business models to address the rise of flat fees as a compensation for arranging loans between their customers and lenders.
The Consumer Financial Protection Bureau wants flat flees to replace dealer compensation in the form of loan-rate add-ons.
Since the early 1990s, we’ve known lending flat fees were coming. While the first reaction might be panic and resistance to this new business model, I encourage you to look at the situation in a different light.
First, consider the most recent news of Warren Buffett intending to buy Van Tuyl, the largest privately owned dealership group in the U.S. If that proposed purchase means anything, it’s that there’s still significant opportunity for profit in automotive retail, even with CFPB oversight.
Second, consider the nature of supply vs demand. Right now, the CFPB is allowing banks to determine what kind of reserve they will allow, so they still have the ability to compete for the spread of business.
As lenders consider how to restructure their loans, they are aware that dealers will demand to make as much as possible on finance reserve. Indirect lenders vying for dealer business will structure their loans to allow as much as possible on the finance reserve. While, it is unlikely that lenders will allow a flat fee as high as 5%, finance reserve will still be a revenue generator for dealerships.
Over time, flat fees across institutions will look similar. In order to make up for any lost reserve, dealerships will place more emphasis on finance and insurance, and demand that lenders accommodate this practice.
Expect lenders to become more agile in how they enable dealers to recoup lost dollars from the finance reserve. Whether you are for or against flat fees, take stock of your business practices and adjust for a potentially very profitable future.
Here are suggestions for doing that.
Ditch the product-presentation script. Have your F&I department approach the conversation from the standpoint of an adviser.
Teach them interviewing skills so they can actively listen to customers and discuss the products from the customer’s perspective. This will increase the value proposition of the F&I products and enhance the customer relationship.
You could have the best F&I products around but without proper training, those products will not move. Send team members to a training class, but also pair seasoned managers with new recruits to provide ongoing mentorship and practice. This will help everyone hone their edge.
Break from the same-old product portfolio. Putting every single available product into your F&I portfolio is a sure way to aggravate consumers and frustrate F&I managers.
Instead, research your client base to ensure you have the best product mix to meet customer needs and to increase penetration. Pull service records from your customer-relationship management system to see which vehicle systems are frequently repaired.
Evaluate the market surrounding your dealership. Demographics have changed since 2008, and statistics like the type of employers, housing prices and income levels can paint a more comprehensive picture of your current and potential customers.
With this data, you can make an educated decision on the best products to include in your portfolio. It sets your F&I managers up for success.
Get out of the box. The discussion around the benefits of your F&I products shouldn’t start in the F&I box.
Empower all departments to increase product penetration. Sales managers can easily discuss the benefits of a service contract for high-mileage vehicles while showing pre-owned cars. Service managers can steer customers to purchase additional vehicle service coverage.
Outside of your F&I department, your sales and service teams should be familiar with your F&I product portfolio. The industry average for service contract penetration is 50%. That could easily be 70% if a dealership’s staff knows how sell those F&I products.
Right way or highway. It’s imperative that your dealership is airtight on compliance. An important step is getting your team certified through the Assn. of Finance and Insurance Professionals so they are fully aware of all applicable state and federal regulations.
Work with your legal team to set up compliance practices. Create regular reviews.
By putting processes and controls in place, your dealership can easily navigate the myriad of regulations that impact your operation.
There still is plenty of opportunity for growth and profit in the auto-retail space. However, there will always be a balance between ensuring complete compliance and building profit margins. That balance lies in the value proposition.
As flat fees gain momentum, you can still increase your value in the market. Structure your F&I products, and train your team to meet customer needs. Your customers will see value in your services. They will not only purchase F&I products, they’ll also remain loyal to your dealership.
John Stephens is senior vice president of Dealer Services at EFG Companies, focusing on optimizing profitability and supporting the use of finance and insurance products and services. He is at 972-445-8910 and [email protected]
