Indirect Auto

February 17, 2003

Financial Services Industry Newsletter

Strategies for Success

Competitive Strategies for Indirect
Auto Lending

A few weeks ago I went to the North American International Auto Show. If there was ever any doubt about America’s love affair with cars it was dispelled by the crowds lined up to sit in the Hummers, or packed 5 deep around GM’s 1,000 hp (no that’s not a typo – one thousand horsepower!) Cadillac concept car, as well as the seemingly endless crowds at the Daimler-Chrysler Mercedes Benz exhibit.

If attendance is any guide – a record 810,000 visitors along with a press corps 6,700 strong braved freezing Detroit weather – then 2003 should be a good year for the auto industry. The Detroit show was all about the metal, but certainly continuation of zero interest deals was very much on the minds of the industry. How should financial institutions compete in the face of aggressive consumer and dealer financing incentives? We have a few thoughts:

	Know your customers. In this case, the customer is the dealer, more specifically the F&I manager. Look for ways to package your product with the manufacturer’s incentives so they compliment each other. For example, show them how the customer wins, and the F&I staff makes more money, by taking the cash alternative and your financing instead of zero interest.
	Pick your niche. There is excellent data available for most markets on units sold by dealership and where they were financed. Look for the opportunities where you can compete – where the captives may not be as strong. And target the right dealerships, where the data indicates they are willing to work more closely with financial institutions like yours.
	Pay greater attention to marketing and sales force management. You need to tell your story, and you need to manage where the sales force is calling and what they are saying. We frequently see examples where sales efforts are not well targeted or not well scripted.
	Avoid adverse selection. This is a business where the “average” can be very misleading, since many dealerships seek opportunities to arbitrage weak spots in buying or pricing criteria. You should have detailed reporting of new loans by dealer, credit score and price to insure against adverse skews in your portfolio.
	Be ever vigilant for the perennial pitfalls: credit quality and pricing. It’s not new news, but it’s still good advice. Often when the environment gets tough we subtly convince ourselves that we can manage higher levels of marginal risk, or live with tighter pricing. Perhaps we can, but history tells us to be cautious. In times like these, it is even more important to use all the information and techniques at your disposal to make good credit and pricing decisions.

We are pleased that P.K. Chatterjee is affiliated with Peak Performance Consulting Group. He is one of the leading experts in dealer financing and managed regional or national programs for U.S. Bank, Comerica and Amsouth. P.K. has long been a member of the Automobile Finance Committee for the Consumer Bankers Association and active in industry affairs. If you would like to discuss some of these issues with P.K., please call us at 616-454-9443.