The world of dealership finance and insurance is changing along with the rest of auto retailing, and a major change agent is John Pappanastos.

He is president and CEO of EFG Companies, which provides F&I products, services and training to about 2,000 car dealerships. A colleague says his “evangelistic spirit and vision breathe life into the organization every day.”

Pappanastos acts as chief strategist for the company he has led since 2007. He guided it through the financial crisis of 2008 and 2009 which hit the auto industry particularly hard.

In 2009, when U.S. light-vehicle sales had plunged to 10.6 million units, EFG created a program for Hyundai which promised buyers they could get their money back for their vehicles if they lost their jobs.

A big part of Hyundai’s marketing and advertising, the heralded program ran for two years. “It was innovative and successful in the market,” Pappanastos says.

EFG also created Northwood University’s “F&I Innovator of the Year Award.” Now in its second year, the contest pays $25,000 to the student team that comes up with the best new F&I product.

Pappanastos talked with WardsAuto about where F&I is and where it is going as an important dealership profit center.

WardsAuto: What are some of the big changes the F&I industry is seeing?

Pappanastos: You have a lot of (dealers) who are trying to perform the F&I function totally differently. AutoNation says it will be doing entire transactions online by the end of next year.

Depending on which survey you look at, a minimum of 75% of consumers would like to transact online. They also want greater customization. That’s one reason we rolled out a vehicle-service contract that was for mileage only (rather than mileage and a specific number of months, whichever came first).

The first step in process change is describing your F&I products online.

The second step, that we’ve already implemented this year for some of our dealers, is virtual F&I.  We handle their F&I functions remotely and from our offices and close out their loans. That takes the pressure off their F&I people.

Eventually, you will be able to conduct the entire transaction online using AI and chat-bots that do a needs analysis and overcome objections.

There’s also a push to join F&I with the dealership service department to build relationships with customers over the lifetime of their vehicle ownership.

We’re looking at an awful lot of change in front of us. The industry is innovating. There is stuff coming out every year.

WardsAuto: The Consumer Financial Protection Bureau has taken an interest in loan rates and dealer reserve. It makes some people in the industry decry potential overregulation. Is F&I under siege?

Pappanastos: It’s not under siege at all, but there are threats. Think about the (impending) autonomous vehicle. That doesn’t sound like a threat to F&I. But those vehicles will put pressure on car-collision insurance companies. They could push them into the F&I space to make up for profit losses (from lower insurance premiums due to fewer accidents).

Government oversight is a struggle. It causes people to not want to do stuff. For example, why wouldn’t AutoNation and Group 1 buy a bank to handle all of the auto loans they are originating? Why not backward integrate? The answer is they don’t want to deal with the CFPB (which directly oversees lenders, but not dealers).

The biggest challenge from a product standpoint is gap insurance (covering, in an accident claim, the difference between a damaged car’s value and the loan amount still owed).

The entire industry is struggling with higher loss ratios and frequencies (of claims) relating to gap. Gap is a program that is hard to predict. It’s scaring the entire industry.

WardsAuto: Hard to predict in terms of payouts on the claims?

Pappanastos: Gap contracts have a frequency of about 3.5%, which means out of every 100 contracts, you’ll have about 3.5 claims. But people are driving more these days, and we’re seeing the claim frequencies increase significantly. I can’t explain the reason for the increase in driving, other than lower gasoline prices some people are citing. That seems a stretch, but I can’t come up with another reason. Gap is a hard product to control.

WardsAuto: Is F&I in need of all-new products or is it the same stuff repurposed to suit the times?

Pappanastos: We spend a lot of energy and money on product development, and 80% of it is on enhancements to existing products. F&I products basically are about maintaining the value of the asset (vehicle), either the appearance or the engine and offsetting unanticipated repairs. The workhorse is the vehicle-service contract.

WardsAuto: An F&I guy once said one of the toughest jobs is selling service contracts at a Honda dealership because Honda buyers think God made their vehicles and they’ll never break down.

Pappanastos: And those customers tell the F&I manager, “In the showroom they told me this is the best made product, and now you are telling me to watch out?” That’s a hard sell, but consumers still see value in these protection products.

WardsAuto: Why are service-contract penetration rates as high as they are when automakers offer generous factory warranties? Is it the product or the salesmanship or both?

Pappanastos: It’s a lot about the product having value and also the salesmanship. It’s also about the (presentation and sales) process. It helps people understand why certain products are relevant to them.

WardsAuto: What is the process in a nutshell?

Pappanastos: Establishing rapport, doing an appropriate needs’ analysis and understanding how to overcome objections or at least put them in perspective.

F&I products don’t sell themselves. You can just put a “check this box if you like this.” You have to understand customers’ lifestyles and how certain products make sense for them and others don’t.

We also teach a lot about compliance. That has become a major focus of dealers. Twenty-five years ago, F&I was a gold rush because dealers didn’t understand what the right people attributes or processes were. Today, most dealers do understand.

sfinlay@wardsauto.com