For those of you who didn’t make it to the 2017 P&A Leadership Summit, you missed a good panel discussion about what keeps industry leaders awake at night. We had four terrific panelists, candid conversation, and many insights into current F&I challenges.
A big thanks to Dave Duncan, president of Safeguard Products International; Arden Hetland, president of American Financial & Automotive Services; Lance LaCoe, president and CEO of CARS Protection Plus;, and Kelly Price, founder and CEO founder of National Automotive Experts (NAE)/NWAN, for their participation. Here are some key takeaways from the discussion.
The Digital Disruption
The No. 1 thing our panelists lose sleep over is digital retailing and the disruption it presents to the traditional retail model. Price said, “The key is to work with technology and adapt to the changing environment. The absolute wrong approach is to deny what’s coming, because chances are you’ll be left behind.”
“It’s scary to read the headlines about all the money being funneled into digital marketing, but I take comfort from something Dave Robertson said at a conference many years ago about the changing F&I market: ‘As long as you have a value-added service and you’re good at it, you’ll have a place in the market,’” said Hetland. He shared an example of how he has embraced change by working with some computer programmers who wanted to get into the car sales business. The developers had humble beginnings, but through the use of technology and income development, they are currently selling 2,000 cars a month with an average income per retail unit of $1,800.
Duncan walked us down memory lane to the 1995 NADA, where 75% of the booths were internet companies and the big mantra was that you would eventually be able to buy a car online. Most of those companies are no longer around, but online car sales have become a reality. He recalled that customers used to walk into a Best Buy or Circuit City to buy a television and 78% of them bought a service contract. Today, customers look at the television in a store to check the picture quality and then go home and buy the same product through Amazon, where only 18% of customers purchase a service contract.
Introducing F&I late in the sales process is not going to work with the advent of online sales. Duncan notes that many dealers still try to provide the least amount of information online as possible with the goal of getting the customer into the showroom, but he shared a story of how this can change: A friend who recently retired from owning a Ford store was beaten down by a customer one day in the showroom. The customer said that if the dealer had been more forthcoming, he would have paid more money for the service contract.
The dealer changed his business model that day. They began providing customers with as much information as they requested through their internet department, and sales increased 30% in three months. Dave wants to help dealers protect the sanctity of F&I income by introducing products early in the digital sales cycle.
LaCoe reiterated concerns mentioned by others and suggested that change might have to come from external sources. Industry leaders who have been operating in this space for years tend to be biased toward the status quo because it has worked successfully. He is looking at technology companies to help pave the way through this digital transformation.
The GAP Spiral
All of the panelists agreed that, instead of counting sheep, they are often counting reasons to be concerned about GAP. Hetland is worried that agents, marketers, providers, and administrators are all fighting over $10 that is incapable of making the difference between a profitable and unprofitable product, and he would like to see the industry come together quickly to redesign what he refers to as an “outdated” structure.
Newly introduced geographic GAP rating makes sense to Hetland, but he is concerned that it is not enough to turn the product around. He expects further deterioration of results based on increasing negative equity, especially in certain vehicle makes.
LaCoe expressed similar concerns. His primary market is independent dealers who have slightly different challenges; terms are shorter but GAP results are negatively impacted by higher interest rates, which were already high in this segment and are now on the rise due to the tightening of credit. He says that GAP has great appeal to customers and is better understood than service contracts, so he would like to see the industry create a sustainable product.
Duncan expressed concern over rising trends in the loss drivers of GAP, including negative equity, longer terms, increasing APRs and distracted driving. For the first time in 25 years, highway fatalities rose in spite of vehicle safety gains, and he thinks this is tied to an increase in total losses.
Duncan sees another shoe that is about to drop in 2018, when the supply of off-lease vehicles is expected to drive down used-car values, thereby increasing the average GAP claim. His biggest concern, however, is the rate at which repair costs are rising due to the increased costs of technology that are now found throughout the car. He cited an example of a $14,000 Ford F-150 that was struck by a deer and sustained a dent on a side door. The truck was totaled because all the airbags deployed.
Price worries about GAP cancelations, which have historically run about 17% but are expected to double once lenders automate customer cancelation requests following pressure from the CFPB. She is already seeing lender requests to retroactively refund contracts as far back as 18 months, resulting in big chargeback spikes.
The effect of increasing cancelation rates is exacerbated by longer terms where there are more opportunities to cancel, and a required refund method that is slower than the actual loss emergence pattern. In other words, GAP claims are front end-loaded but reserves are refunded on a pro rata basis due to lender or state requirements. In a perfect world, refunds would be calculated on a “Rule 78” basis to match the underlying exposure.
The panelists agreed that an opportunity exists for the industry to make this change or adopt a truncated product where the GAP coverage is shorter than the loan term, thereby mitigating the refund risk. The only good news on this topic was that franchise GAP dealer margins are large enough to support meaningful rate increases that could address rising frequency and severity trends. Until that happens, Duncan advises making sure the company you do business with is going to be around long enough to pay the claims!
Legal and compliance issues continue to be an area of concern for the panelists simply because there is so much out of the providers’ control. Price has been working with her E&O insurance provider, who confirmed that class-action lawsuits are becoming more prevalent in our industry. When lawyers file class actions, the providers and administrators typically get pulled in along with the dealer. She said that legal fees will run between $50,000 and $75,000 to defend against these class-action claims, regardless of wrongdoing.
LaCoe was a little envious of the compliance tools and certification programs that exist for franchise dealers through knowledgeable general agents and administrators who understand the risk. He wished more was available in the independent market, where there is higher turnover and fewer refined processes. He noted that, if customers understand what they are buying, they’ll typically have a good experience.
Duncan agreed, saying, “The best way to mitigate compliance risk is to consistently present products in a transparent manner using menus, certifications and word-tracks.” He thinks it’s possible to keep it simple by training dealers to do the right thing: The more transparent you are, the more products you sell; and the more products you sell, the more money you make.
Hetland believes it is the responsibility of providers, agents and administrators to ensure that their dealers are compliant. Although he feels fortunate that the CFPB hasn’t been able to penetrate into the dealer F&I space, he is committed to instore training, workshops and courses, so that dealers conduct business legally and ethically during the sales process and in the F&I office. If you call him at 3:00 a.m., he’s likely to be awake and thinking about these issues!