The past 12 months have shown few signs of slowing for auto dealers or the industry partners who support them. In 2018, new-vehicle sales topped the 17 million-unit mark for the fourth straight year, joining a long line of positive economic indicators. To get a sense of what to expect over the next 12 months, P&A reached out to 18 leaders in the providers and administrators segment to learn about their plans and predictions for 2019.
The U.S. economy remains healthy through a protracted boom, at least as far as the automotive industry is concerned. New-vehicle sales closed at 17.33 million units on a strong December in 2018, despite the reintroduction of federal interest-rate hikes that could threaten affordability and drive more buyers to the used-car side, which remains flush with inventory.
As attorney and compliance expert Jim Ganther noted, the National Automobile Dealers Association forecasted sales of 16.7 million new units in 2018. NADA has predicted 16.8 million new vehicles will be sold this year, and Ganther believes they will be surprised again. Why?
“First, the Trump tax cuts will not be repealed, despite some rhetoric, suggesting a Congressional effort to do so. The fact is, those lower tax rates are putting more money into consumers’ pockets while at the same time increasing our total income tax revenue. People with more money buy more cars,” said Ganther, the president and CEO of Mosaic Compliance Services. “Second, the job creation numbers we saw in December surprised everybody. That means even more people with more money buying more cars — and paying those lower taxes.”
Oil prices are down as well, Ganther pointed out, encouraging more customers to opt for larger, less efficient SUVs and trucks. However, he warned, consumer confidence could easily be shaken by further activity at the Federal Reserve and a recently volatile stock market.
“I see no reason for the Fed’s recent rate increases. Inflation? What inflation? But every increase makes financing a vehicle more expensive. That will create a needless drag on demand,” Ganther said. “Bottom line: annual sales in 2019 of 17 million-plus. Unless the Fed screws it up.”
Jim Maxim Jr., president of MaximTrak Technologies and chief digital officer for RouteOne, noted the Fed indicated that interest rate increases will “taper off” this year. He believes such restraint will be imperative for sales volume and production, which he predicted will be similar to 2018.
Maxim has been tracking trade negotiations with China and the government shutdown, which was more than 30 days old at press time, as well as the performance of the stock market.
“The stock market is key, now that we have had a major rebound in early 2019, and if the economy continues to grow, we will have a good year,” he said.
“The economy is very strong and has a positive outlook,” said Scott Craigmile, vice president of sales and marketing for SouthwestRe. “Many industries are achieving elevated financial results, including banking, technology, and my favorite, automotive.”
Craigmile credits tax cuts, cheap gas, and low unemployment as the chief contributors to a successful 2018. If the job and stock markets remain strong, so will the industry.
“Consumer spending, which contributes to 70% of the GDP, will continue to funnel profit into the automotive industry, indicating a strong sales forecast and a positive year for the automotive industry as a whole,” Craigmile said.
Glen Tuscan, president of Dealer Commitment Services, predicted a 5% compression in 2019. He noted that fleet sales and a spike in Tesla sales — which delivered more than 180,000 new units in 2018 after selling fewer than 50,000 the year before — may have artificially inflated last year’s numbers. Tuscan also worries slowing interest in some bellwether vehicles could spell trouble for sales in general.
“What concerns me at the early stage of 2019 is the slowing of popular models in the SUV segment, such as FCA’s Wranglers and other popular models,” Tuscan said. “Affordability due to rising interest rates will be a big part of the departure from the retail numbers that we have enjoyed the past few years. Rising rates will also impact affordability of F&I products.”
To maintain product levels in the business office, agents and dealers may need to look at the F&I presentation from a new perspective, according to Greg Kasprzycki, COO of PCMI Corp.
“The younger generation is definitely open to the idea of extended warranty and ‘worry-free’ ownership of the car. However, the selling process will need to change. They will be looking for a total monthly payment, which will give them peace of mind that will include the mechanical coverage as well as appearance protection products,” Kasprzycki said.
“Research shows that F&I is going to be a prime growth area in 2019 — if dealerships can adjust to rising interest rates, sell more product, and connect with millennial buyers like never before,” concluded Neil Brennan, vice president of sales and marketing for Vanguard Dealer Services.
Michael Tuno will track a number of trends affecting the auto retail and finance industry this year, starting with the effect changing consumer tastes will have on dealer inventories and factory support.
“The trends to be watching are likely to be in the areas of how manufacturers deal with the shift away from cars to trucks and SUVs when the retailers have car inventory sitting on the lots and consumers know that these will be obsoleted. The profit margins for this segment of the industry will likely be under extreme pressure for profit margins,” said Tuno, the president of ARMD Resource Group.
The U.S.-China “tariff wars” also bear close monitoring, as do class-action suits against DMS providers, Tuno added. Specific to F&I, growing consumer demand for a transparent, technology-driven experience will in turn increase demand among agents and dealers for advanced compliance technology.
“There will likely be an increasing requirement for the F&I distribution system to deliver products to the retailer that bring compliance resources and solutions to the table. This added requirement is likely to be central for the entire distribution system to remain viable in the industry,” Tuno said. “This compliance solution may be supported by the administration side of the industry, as the legal system is sure to drag them into the compliance world, either willingly or unwillingly.”
“The F&I industry in the U.S. will continue to move forward, making the F&I process more consumer-driven. How that plays out towards the traditional F&I process is still is in question,” said Brian Reed, president of F&I Express and Intersection Technologies Inc. (div. Cox Automotive). “One thing I feel is for certain is F&I will remain a key component of dealer profitability. Consumers want transparency. Dealers who have consumer-driven processes will continue to be successful, while dealers who rely on smoke and mirrors will have a much tougher time and ultimately will be not in the consumer’s consideration set.”
SouthwestRe’s Craigmile pointed to consolidation as an ongoing trend affecting multiple industry segments, led by many of the nation’s largest retailers.
“We’ve seen publicly traded companies like AutoNation, the Asbury Automotive Group, and Berkshire Hathaway Automotive acquire many companies over the past few years, and there are also larger private groups gaining acquisitions. It’s not unusual for dealers who only owned two stores just five years ago to now own 12 to 15 stores,” Craigmile said, noting that his company was acquired by iA Financial Group in January 2018, and four months later, the Minneapolis-based Automotive Development Group was purchased by Brown & Brown. “It’s a trend affecting every aspect of the business, and I expect it to remain a game-changer throughout 2019.”
Asked which trends he would be watching in 2019, John Braganini, principal of Great Lakes Companies, offered “Continued consolidation at the dealership, product provider, and insurance carrier level. Improved customer service at all levels, stemming from continued advances in technology performance. Reduced profit margins in all channels driving value to the user.”
Mickey Quinn, general manager of Vanguard Dealer Services, also listed consolidation as a top-of-mind trend. He also predicted further advancements in the pursuit of a fully online transaction.
“As the digital arm of the industry continues to grow, the customer will continue to have more control of the deal process while sitting on their sofa at home,” Quinn said.
Returning to instore processes, compliance expert Gil Van Over warned that a downturn in sales can sometimes cause dealership personnel to cut corners.
“Some managers who have been compliant in their sales and F&I processes start taking compliance shortcuts or return to kinky deceptive practices,” said Van Over, who serves as executive director of Automotive Compliance Education (ACE). “If the industry does face a slowdown as some predict, I fear that the gains we have made in the compliance arena will also backslide.”
Line\5 CEO Justin Lane said he will be monitoring interest rates, sales reports, and new rules and regulations throughout 2019. “But one thing we’ll definitely be keeping a close watch on is the trend of vendor integration, especially as it pertains to dealership management. That could prove to be very beneficial for both F&I and the dealerships,” he added.
“I will be watching all of the new players in the technology space,” said Joel Kansanback, executive vice president of ADG/Brown & Brown Dealer Services. “Digital retailing is a reality. There will be winners and losers in the race to meet customer demand for speed and transparency in every part of the car-buying process.”
MaximTrak’s Maxim said adoption of digital retail by new-car buyers could finally begin to accelerate in 2019. He also suggested industry members keep a close eye on fintech providers, not all of which are likely to survive an increasingly fierce competition.
“We will see who has the funding and fortitude to hang on — especially given that digital retail is not taking hold in terms of real deal volume yet. There is a lot to still be proven out and whether the economic model will gain traction and whether their innovations are profitable,” Maxim said. “An interesting trend to watch is that fintechs are now starting to devolve; in other words, fintechs are starting to engineer what was meant to be online and consumer-driven into dealer systems and tools for the showroom. This means that the harsh realities of the new-car dealer franchise model has started to hit home with a few starry-eyed startups.”
For 2019, Line\5’s Lane predicted an uptick in F&I products designed to enhance “convenience” for the customer. “Things like windshield protection, dent-and-ding protection, and roadside assistance are all offerings that help make a driver’s life easier. In the event that something goes wrong with their vehicle, people want a solution that is both convenient and affordable.
“F&I is unique in that it’s able to offer both of these,” Lane added.
“If, as everyone seems to agree, customer convenience and experience are going to become increasingly important, then F&I product providers will increasingly tailor their products towards convenience and a better customer experience,” said Kumar Kathinokkula, COO of F&I Administration Solutions LLC. “This will likely lead to fewer products with more comprehensive coverage such as complete protection packages that include tire-and-wheel, appearance protection, and service contracts, that are offered as subscription services with perhaps even the ability to add or remove coverage on a monthly basis. There is still the thicket of pesky state legislation that might make this a complicated process to structure, but providers are already figuring out ways to do so effectively.”
“I believe any product that keeps the consumer ‘dependent’ on our dealers will be a large focus for 2019,” said Tuscan of Dealer Commitment Services. “Planned maintenance products provide the most immediate benefit for the consumer and our dealers while creating dependency throughout their customers’ ownership experience.”
Tuscan also believes bundled products for lease deals will provide value for customers and high penetration rates for dealers in 2019. Lee Bowron, a partner with John Kerper in the actuarial firm of Kerper and Bowron, anticipates increased adoption of “embedded” products purchased by dealers and provided to every customer.
Vanguard’s Quinn noted that sales of lease products could benefit from ongoing OEM initiatives to get lease customers back in the store before their term expires. “Pull-ahead programs will be very prevalent, which is a mirror of the factory program that was very successful when it was first introduced.”
Bowron noted that the proliferation of “choose-your-warranty” options offered by factories — exemplified by General Motors 2018 introduction of an “extended bumper-to-bumper warranty” — could hurt sales of aftermarket service contracts.
Vehicle appearance protection and all ancillary coverages will prove popular in 2019, said Braganini of Great Lakes Companies.
“The cost of repairing wheels, replacing key fobs, dents, and windshields continue to skyrocket. Add the cost of repairing interior and exterior environmental and lifestyle damage and you have a fertile opportunity for sales,” Braganini said.
Finally, “I’m expecting that GAP will see declines,” said ADG/Brown & Brown’s Kansanback. “With rising pricing, high chargebacks, and little-to-no underwriting profit, it’s likely that many dealers will begin to put more focus on tire-and-wheel and combo products. They represent a tremendous value to the consumer and should move up on the menu for greater penetrations.”
F&I Admin’s Kathinokkula believes that the predicted consumer buying shift to a wholly online car buying experience has encountered the wall of reality: A major purchase such as a car is hard to shift completely online.
“Case in point: There was a lot of hype about physical mattress stores dying because of the launch of online-only sales models. The tables have truly turned with nearly all online mattress retailers now launching physical stores. If most customers can’t even be persuaded to buy a mattress online, how can we expect cars to be bought fully online?” Kathinokkula asked. “Another example is that of Amazon opening book stores. The technology shift is in providing a seamless customer experience between online and the showroom. Dealers and technology providers who enable that seamless experience will see a lot of success in 2019 and beyond. Technology that enables F&I providers and dealers to provide such an experience — not just in upfront selling, but also in post-sale relationship management — will see a big uptick.”
Braganini said electronic rating, contracting, and remittance will separate the players from the pretenders in the race to F&I profitability. “Paper checks will be replaced with ACH and the claim process will move to a mobile app. Providers that can deliver in all areas will continue to increase market share.”
“2019 will take off where 2018 left us, with lots of dealers trying to understand what exactly digital retailing means and how to provide the consumer a better online experience prior to going into the dealership,” said F&I Express’ Reed, who sees reduced customer wait times as a key benefit. “The online experience will include sale and presentation of F&I products, with the sale happening at the dealership.”
For all the advances in digital retail and finance, car buyers may not be as eager to leave the dealership as some may think. Cox Automotive’s latest study of car buyers, released in early 2018, found only 11% of respondents wanted to take delivery and sign their paperwork remotely.
“Everyone wants a frictionless transaction process and to be able to provide a track for consumers to run on when buying their car, but the realities are mixed. The bottom line is that consumers are not comfortable yet and they still want a tangible touch on the vehicle,” said Maxim, adding that the human touch remains an “essential” part of the transaction. For that reason, among others, “Dealers will remain strong, and there are a lot of opportunities to enhance the experience and build technology that will serve people seamlessly inside and outside the dealership.”
Maxim described the ongoing advancement and integration of a wide array of dealership systems as “building an ecosystem.” ACE’s Van Over has taken notice as well, and he believes a more fully realized ecosystem could pay dividends during the next downturn.
“Digital solutions have so many benefits that a growing number of dealers and managers are discovering,” Van Over said. “Since efficiency is one of the benefits, if sales slow down, dealers should look at digital solutions to save money.”
Mosaic’s Ganther noted that service contracts, like any other financial commodity, are distinguished by price and face inherent downward pressure.
“Technology can change all this. If a service contract is unique because of technology that supports it or connects it to consumers, it ceases to be a commodity at all. If you want it, you can only get it from the technology’s owner. This supports higher margins,” Ganther said, using EasyCare’s SAVY, a mobile app-based suite of dealer- and customer-facing solutions, as an example. “Will SAVY take off? It’s too early to tell. But if I were in the F&I product business, rather than just watching from the press box, I’d keep an eye on its fortunes. It could be the first ‘cyborg’ F&I product, and a game-changer.”
Kasprzycki noted that, to drive progress forward, “Administration systems need to be able to support all parties and give them real-time access to the information, via computer and, of course, mobile devices.” Kerper and Bowron’s John Kerper agreed that more of the F&I process will take place online in 2019, adding that, “For dealer reinsurance, we see interest in ‘onshore’ domiciles replacing offshore domiciles.”
ARMD’s Tuno said that he will keep an eye out for solutions that introduce car buyers to F&I earlier in the sales process. “‘Earlier’ may mean changing when F&I is introduced to the consumer during the sales process and how it is introduced. I call this a shift from a linear process to a concurrent process. This will likely be one area to observe in 2019 in addressing the trend in F&I, whether through the use of technology or not.”
“Dealerships need to adapt to these changes or risk falling behind,” Lane said. “It’s very important for the finance division and dealership division to be in sync to exceed profit goals and lead to more satisfied customers.”
Those that fail to keep up will face a competitive disadvantage, Kansanback said, and the days of springing F&I on customers only after they’ve picked their vehicle are numbered.
“I believe a few years from now, we will look back at how we handle that information today, and we will be stunned,” he said. “Penetrations will be impacted, so we are going to have to be smart and strategic every step of the way.”
Rules and Regulations
The Trump administration has brought some relief to the heavily regulated automotive industry, including a restructuring of the federal Consumer Financial Protection Bureau. But our experts urged caution. Attorney and accountant David Kaseff pointed to reinsurance as one segment that will continue to face adjustments following the passage of President Donald Trump’s signature tax reform legislation.
“The major changes in tax law are affecting the F&I space and reinsurance and will continue to have an impact — especially when it comes to the structures and participation of dealers in their F&I programs. It’s important for dealers to understand how the changes to the international rules relating to tax deferral will affect them not only in 2019 but beyond as well,” Kaseff said. “As the IRS and Treasury issue more guidance, the landscape will continue to change.”
Tuno said a Democrat-led House of Representatives will make the regulatory landscape more challenging in 2019, as will increased activity among state regulators and class-action attorneys. A national law to follow the European Union’s General Data Protection Rule and stricter Unfair, Deceptive, or Abusive Acts and Practices standards could also be on the horizon.
“The need for transparency and accuracy in the industry will be critical to avoiding this legal issue,” Tuno warned.
“One regulation I’d like to see disappear is the Department of Defense’s ‘reinterpretation’ of the Military Lending Act. It restricts military personnel and their dependents from a valuable service for no discernable upside,” Ganther said. “How many military families lost their cars to Hurricane Michael last October? How many were in a negative equity position? Given its unholy genesis and effect, I remain guardedly optimistic that this travesty will be repealed. It’s just that there are so many bigger fish to fry in D.C. this year!”
Van Over also would like the see the MLA reinterpretation rescinded. He doesn’t see any additional regulations on the horizon; however, “I do fear that the Federales will step up their enforcement actions against dealers for bank fraud, misleading advertising, and payment packing. I also see the finance sources continue to aggressively file litigation against dealers for violating the terms of the dealer-lender agreement.”
Excluding the change to MLA rules, Tuscan said, the past few years have provided a “silent period” among regulators, and the industry has regulated itself “remarkably well.”
“The political landscape has changed for 2019, and I believe that we will see an uptick in lending institution regulation due to the bad acts of a few that will have an overall impact on regulation in lending,” Tuscan added. “The CFPB seems to be more consumed with whether or not they should change the name of the institution than imposing their own disparate impact claims.”
Reed noted that, in his home state of Texas, an Austin regulator has stepped up to enforce jurisdiction over the same finance companies once strictly regulated by the CFPB. “Over the past year, auto finance companies governed by the Texas Office of Consumer Credit Commissioner have seen a significant level of additional oversight related to the sale and cancelation of GAP and other credit products.”
“The current administration has less of an appetite to go after dealers, and so lawsuits have subsided,” Maxim said. “But we know that similar restrictions could be imposed on F&I products, regulating margins on profits on products. It has not happened yet, but that could change.”
“We do not see any major changes coming from the trends we are looking at, but it is still a very difficult landscape to navigate,” Quinn said.
The Subscription Economy
As a primary mode of transportation, subscription services still represent only a fraction of the potential car-buying public. But their influence should not be underestimated, Lane said, who urged industry members to “stay tuned.”
“To a certain extent, the subscription economy has put the F&I industry on notice,” Lane said. “That is, there’s a need for new, innovative offerings or else trending new models of vehicle ownership could cause F&I departments some headaches. … We see this as an ongoing challenge — yet a big opportunity — for F&I departments moving forward.”
Kathinokkula noted that autonomous vehicles, increasing adoption of rideshare operators, and the subscription economy are converging with several manufacturers offering subscription services.
“While most of these services are still confined to premium brands and price points, the momentum is towards more of these services launching in the next few months. Inevitably, F&I products must also become subscription products. F&I product providers who tailor their offerings to be subscription products are going to see a competitive advantage. We will see more of these products offered as subscription products in 2019,” Kathinokkula said.
Maxim noted that, as companies such as Fair and Flexdrive gain experience while fighting for market share, OEMs appear to be pulling back. But whatever the source, the P&A segment will be affected.
“Subscription models also threaten to displace the F&I product business, unless you are providing to the subscription companies. With coverage fully baked into the payment, customers will pay a premium so they don’t have to worry about aggravation of maintenance, breakdowns, wear and tear, or insurance,” Maxim said.
Reed agreed, noting that, “As subscription services grow, it will have an impact on the traditional F&I process. Many of the companies that are offering the subscription service will buy their products direct from the administrator, bypassing the dealership, as with Fair.”
Vehicle subscriptions are “not ownership plans,” Craigmile stressed, but more akin to a short-term lease. In 2018, Cadillac closed its “Book” program (purportedly for retooling) and “Care by Volvo” was labeled a payment-packing and unfair-competition scheme by the California New Car Dealers Association. He believes subscriptions will gain more traction when dealers begin to participate in force.
“However, the impact on F&I profitability will be severe,” Craigmile said. “Monthly product subscriptions will provide high acceptance rates but will fall short of the revenue recognized by F&I departments currently.
Braganini said it’s “too early to tell” what impact subscription services will ultimately have, “but the trend is coming for sure. … Ridesharing will continue to replace vehicle ownership and alternate methods of transportation will begin to take shape.”
“We believe the subscription economy will have little impact in 2019, and as the trends show, it could start to have influence in the coming years,” Brennan said.
“I see product development administrators getting more aggressive in addressing this change in the market,” Craigmile said. “Credit unions, direct lenders, call centers, and dealerships would all benefit from long-term profit opportunities and greater customer relations provided by the subscription model.”
Craigmile noted that the underwriting piece is “still complicated” but will become easier to structure in time. Kerper said the industry may have to break its addiction to single-premium products to make that happen. “There seems to be a lack of suitable products for customers that aren’t financing, so development of these products will expand.”
Kansanback offered a different prospective, challenging the industry to see the subscription model as a new revenue source.
“One of the dealership’s biggest challenges is retaining customers for their service departments. I absolutely believe there is a market for a flat monthly fee program that entitles the customer to all the key services they’d like from the dealership,” Kansanback said. “Why couldn’t we have $19, $29, and $39/month packages that have a variety of services included?”
Ganther noted that, when trying to predict the behavior of the automotive industry, the real challenge is in the “wild cards”: What unforeseen forces could materialize to disrupt or derail auto sales or finance in 2019? Will President Trump exert more control (or complete control) over the Federal Reserve, a “messy” prospect, in Ganther’s words? Is impeachment a realistic possibility, and what effect might that have on the economy?
“House Democrats have vowed to impeach President Trump, but the odds of their getting a two-thirds vote of a Republican-controlled Senate are zero. Reality notwithstanding, an impeachment process will grind D.C. to a halt for the duration,” Ganther said. “By itself, an impeachment effort shouldn’t be a drag on the economy. Other pending investigations, however, might be. What if Spygate generates high-level indictments? Or Uranium One? Or Hillary’s emails? Or Benghazi? Or all of the above? The fallout could impact the economy in unforeseeable ways, none of them good.
“Again, I’m not saying any of this will come to pass,” Ganther added. “But the best way to win March Madness is to predict the upsets. Remember what happened last year when No. 1 seed Virginia met UMBC in the first round? So predicting that politics will negatively impact the economy and with it the retail automobile segment is my long-shot pick.”
Van Over predicted that, if sales slip in 2019, “the efficient, process-driven, compliance-focused dealers will be better-positioned to continue to be profitable with a lesser number of vehicles out the door.”
Brennan said dealers will push back against the “strong arm” of the factory, noting that “The manufacturer participation programs are designed to make the manufacturer the lion’s share of the money.”
“I think the consumer buying process will remain the continued focus and the area where we will see the most changes, especially in technology, said Craigmile, who believes the industry is a “long, long way” from a shared goal of delivering a sold vehicle within an hour. “Many changes being made in F&I and in the dealerships are to address that challenge and to get more and more of the process done online ahead of time, or to make better use of the customer’s time while they are physically in the dealership waiting to go into the F&I office.
“That brings us to the subtopic of how we profitably sell F&I products online and do it consistently,” Craigmile added. “We’re getting there.”
Kathinokkula predicted that 2019 will see more dealers take the steps toward ultimately becoming fleet operators.
“They no longer want to sell vehicles. They will allow consumers to subscribe to worry-free subscription vehicle experiences,” he said. “Inevitably, there will be winners and losers, but we will definitely see a winning formula take shape by the end of the year. Menu selling will start to become obsolete as we know it, because the focus will shift to offering just enough products to the customer from the start of their online journey and end with the actual purchase at the dealership.
“To be clear, this will actually empower the new generation of F&I managers, not — as some would fear or predict — remove them from the equation,” Kathinokkula added.
Nagelvoort predicted increasingly high expectations for accessing and processing agreements in real time. “This includes agent commissions, consumers wanting streamlined processes, and dealers requiring real-time reporting. There are more products to manage and bundles are expected. People want to access this at home or on their phones in addition to the computer at their office. With over 250 million registered vehicles in the United States, we see a lot of opportunity as long you have the right technology.”
“The longer-term trends are away from retail and towards online, towards electric, towards autonomous vehicles, and towards less ownership,” Bowron said. “While it is doubtful any of these will be significant in 2018, strategic thinkers need to be considering the long-term impact of these shifts on the F&I market.”
In conclusion, Quinn said, “F&I istantamount to a dealership’s success and profitability. If F&I is not performing at a very high level, every other department in the entire dealership is adverselyaffected.”