At the 2018 P&A Leadership Summit, held Oct. 9–10 in Orlando, Fla., a panel of experts convened to offer “The Inside Scoop” on the opportunities and challenges they faced throughout the year. Moderator Kristen Gruber, president of Dealers Assurance Company, was joined by Arden Hetland, president of American Financial & Automotive Services, Dave Duncan, president of Safe-Guard Products International, and Stan Starnes, COO of Nobilis Group.
The Elephant in the Room
The first and most pressing topic the panel tackled was GAP. The product has been part of at least one PALS discussion panel for three years in a row, and for good reason: Mounting losses are threatening the viability of a critical F&I product type.
Hetland said the string of natural disasters that hit the U.S. in the 12 months leading up to the event had presented yet another threat to GAP. If the industry is going to continue to sell it, he said, it has to figure out how to protect insurers. “We think there’s a very good opportunity to rate GAP basically the way you rate a service contract to control some of those losses.”
Duncan noted that, despite the challenges, Safe-Guard’s GAP penetration rates have never been higher. “If you go against all care delivered, it’s 30% to 40%. If you go against finance deals, it’s better than 50%, and in some stores, it could be as high as 70% to 75% of true retail finance deals.”
He added that his company is seeing a higher percentage of collisions that result in a total loss. In his experience, four out of every seven collisions now results in a replacement vehicle; in the past, two out of seven was the standard. And when advanced systems are present, even if it’s not a total loss, the cost to repair is greatly enhanced.
“The insurance companies have gotten very savvy at undercutting the claims for the customer, which drives up the severity for the GAP company, especially when they know GAP is on the loan,” Duncan said. “Typically, the first question they ask a customer is, ‘Hey, did you buy GAP?’ ‘Yes, I did.’ And I think it puts something in motion on the insurance company side to lower that appraisal.”
The Evolving Retail Experience
The next topic the panel addressed was the digital marketplace. Gruber said the topic is starting to get a lot more airtime among providers as digital sales and F&I platforms proliferate. The panel agreed, predicting less of a tidal wave and more of a gradual evolution. By some estimates, as few as 1% of new-vehicle deals will be fully completed online this year.
But as Duncan pointed out, next year, that number could double, to 2%, then double again to 4% the following year.
“If we don’t pay attention to it, when we put our head in the sand — and I’m talking about your dealers as well — they’re going to wake up one day and it’s going to be 10% or 20% of the deliveries and they’re going to be behind the eight ball,” Duncan said.
Starnes told the story of his 77-year-old father-in-law, a retired finance professor, who resolved to buy a vehicle online. He found the car he wanted and had Starnes call the dealership to negotiate the deal. The car was then delivered to his house. Starnes was impressed, having witnessed firsthand earlier attempts at digital sales that failed to deliver a fluid online-to-instore experience.
“I think our job is to look at it as someone who is used to staring at a screen. They’re living in that world. How do you translate that experience when they step onto a car lot and who they run into? It’s our job to help manage that,” Starnes said.
Hetland noted that digital retail, for better or worse, is here to stay, and that it will likely only get more aggressive. He said that younger car buyers, in particular, want to go online, push a few buttons, and have a car delivered to them. Incorporating F&I into that process through training will be a critical step to success as the platform continues to grow.
What role will the F&I professionals today play in the auto finance world of the future? The panel agreed the advent of a dedicated “virtual” F&I manager — who works offsite and can connect with customers who are purchasing
through unconventional channels — is very nearly a sure bet. Dealers just have to figure out how to ensure transparency and properly compensate finance personnel.
Hetland predicted that, in stores that get it right, transparency could even be enhanced.
“I do think that as a whole — especially for dealerships with underperforming F&I departments — their penetrations will go up with digital retailing,” he said. “Consumers will know what they want, what they need. And if the information is out there for them to understand what is open for them to buy, they’re going to buy without the pressure.”
The Bigger Tech Picture
Digital retail sales and virtual F&I managers aren’t the only technology changes impacting the industry. Starnes said he feels the pressure to make Nobilis’ platform more efficient, faster, accurate, and automated. He noted that his company had the choice between building a custom solution or taking a pre-existing option and adapting it to fit their needs.
“We chose the build,” he said. “I don’t know if that was the right idea. I mean, we’re getting closer to the right idea, but it’s been a long road. It’s a long and winding road.”
Part of the issue is coordinating the pieces that are being developed in different parts around the world. It may be difficult to effectively communicate with far-flung contractors and field staff about how the system works, what the products are, and how to sell them. Add to that the complexity of ensuring the right rates are available at the right time.
Duncan put forth the example of econtracting, a practical process but one that can breed complications and frustration for dealers who are partnered with multiple providers and lead sources. He noted that Safe-Guard has a dedicated team of experts who are sent to dealerships to address this very problem, helping them find the most efficient ways to streamline the process and keep it as simple as possible.
“Basically, it’s like being in this big old room, and there’s eight doors, and we don’t know whether that customer’s coming in through Autotrader — who by the way is going to have a ‘Click to Buy’ button,” Duncan said. “Or they’re coming in through the dealer website over there and they got Roadster and they’re going to click to buy, or they’re coming in through the Ford configurator and, oh, by the way, they’ve got a click-to-buy button over there, or they’re coming in through TrueCar or KBB or Edmunds, and they’re all going to have a click-to-buy button.”
However, Duncan cautioned, locking into one technology for digital retail functions is not the dealer’s best way to go, even if it appears to be the simplest. They should be equipped to make the sale no matter where the customer is coming from, the products they are interested in, or the platform they want to use. It is going to be a mess for a while, Duncan noted, and it’s going to take time and education for things to settle down into a modus operandi everyone can agree on.
DOWCs Are Picking Up Steam
Gruber moved the discussion to dealer-owned warranty companies and non-controlled foreign corporations; the former of which has grown more popular since the Trump administration’s tax reform package went into effect in 2018.
Duncan cautioned that there is no one-size-fits-all approach, with some dealers seeing a benefit to a DOWC, while others would see losses. He expressed concern for dealers who select structures with tax deferments built in, noting that, if the business isn’t actually growing, those tax payments will come due much sooner than anticipated. Succession plans, among other financial concerns, could be adversely affected.
“Do you want to be retired and on a golf course in Naples but still having to operate a business office somewhere because you’ve got 10-year contracts that still have to run out and somebody’s gotta pay the taxes?” Duncan asked. “I just think that, because NCFCs suddenly fell out of favor for tax reasons, DOWCs have gone from a niche business to all of a sudden being the best solution sitting in front of a dealer. And I would tell the dealer, ‘Just take a step back.’ Obviously, [DOWCs] have their own merits. But if they were the greatest solution ever, why weren’t you looking at it the first time around?”
Hetland agreed, noting that, while that structure can certainly work for some dealers, anyone considering moving to a DOWC should think first about whether they are seeking a long- or short-term solution, with particular care paid to the dealer’s estate.
“As providers and administrators, we must always be looking at the liability. If you have sales personnel that are representing you — be it the independent base, employee base, whatever the case might be — and I get calls from our dealers saying, ‘Hey, I’ve been told I can go into this and never have to pay any taxes,’ we know that’s not right,” he said. “We know that there’s got to be something in there to make the dealer understand that there is a day of reckoning where they have to pay taxes.
“But the liability that comes with us through this is, if we’re presenting it and we’re providing it and that representation is out there, you don’t have to pay any taxes,” Hetland added. “My fear as an industry and as providers is they’re going to come back to us and say, ‘Your people represented you and said I’d never have to pay any taxes. Now I’ve got a big tax burden. Now you ante up and pay.’”
A Savvier Approach
During the panel’s question-and-answer session, an attendee returned to the topic of evolving in-vehicle technology. He wondered whether customers who spend more time getting acquainted with advanced infotainment and safety systems would be less likely to have any patience for an F&I presentation.
“That’s where we’ve got to be more savvy,” said Hetland, who pointed out that, as the landscape changes, dealers and providers are going to need to be more creative with how F&I products are presented and explained. Experimenting with the timing of the presentations is one approach, as is playing with such components as the length of demonstration videos.
Hetland also suggested tying the F&I pitch more organically into the process. The customer who opts for a high-tech vehicle and options should know there is a way to protect them from unexpected repair or replacement costs. Duncan said that might require all involved parties to rethink their roles. Springing everything there is to know about protection products on a customer — including the cost — when they have been by their salesperson’s side since they arrived is still typical. It’s also antithetical to a transparent experience. Duncan believes the industry has to commit to making more information available online.
“At what point are we going to let go?” Duncan asked