Joe St. John, senior vice president of business development at StoneEagle F&I, describes COVID-19 as a candle that lit a fire that transformed the auto industry.

He says the pandemic was the “line of demarcation of before digital and after digital.” Before the pandemic, fewer than 5% of dealerships offered detailed payment information online, today over 90% do. 

“We saw a massive ramp up and adoption in digital retailing after May 2020,” he says. 

StoneEagle CEO Cindy Allen notes that before 2020, the industry perceived sharing too many details online as a risky move that could cost them money and business. 

“I see the changes as a blessing,” she adds. “Dealers shifted the way they did things to align with what customers have wanted to be able to do for years. The shutdowns gave dealers a real opportunity to transform.”

To see just how dramatic the shift was, St. John and Allen dove into the data. They analyzed 25 million automotive transactions compiled by 6,400 dealerships to reveal how the pandemic changed F&I, emerging trends, and the future. They will present their findings in a session titled, “F&I Transparency and Profitability in a Digital World,” on March 12, at the 2022 NADA Show in Las Vegas.

Their analysis exposed an opportunity for dealers to establish customized F&I processes that meet the unique needs of their dealership and customers. Where the F&I process once looked basically the same from dealership to dealership, now every dealer can do things differently. In some dealerships, this may mean the sales team handles the sale from A to Z, including F&I. In others, F&I sales may happen solely online, with F&I managers presenting the menu in online presentations. Other dealerships may maintain a traditional F&I department. 

“Dealers are trying new ways of doing things,” St. John says. “We are seeing a lot of experimentation. [Whatever they do], dealers must build great partnerships with organizations that add value to the customer experience.”

Performance, Profitability, and Penetration

St. John will share a graph of the variables and performance for F&I departments during his presentation. This graph considers profitability for car retail, service, contract penetration, contract rates, and more. 

“If you graph out these things from January 2019 to December 2021, you see a massive increase in the value of performance variables,” he says. “I’m not saying digital retail did all of that, but it was a contributing factor. We are seeing one of the most radical increases ever in those things since May 2020.”

The pandemic forced dealers to embrace digital retail. During the shutdowns, it was the only way to conduct business. “They feared digital access to information would erode profitability, but this period has been among the most incredible economic growth periods dealers have ever had from a pure profitability perspective,” St. John says. 

Further, Allen reminds this growth occurred amid pent up consumer demand and a massive inventory shortage. Demand grew along with government support as families received COVID stimulus payments and the IRS Earned Income Credit (EIC) at $300 a month instead of once a year. 

“We had pent up demand and buyers with more financial assets,” he says. 

The pandemic also affected the risks consumers will bear. The shutdowns taught people that the unexpected can affect their jobs and incomes. “They started thinking, what happens if I lose my job? Suddenly, gap coverages started to make so much sense,” Allen says. “These products speak volumes in a period of high risk.”

Emerging Trends

Though St. John says readers should come to our presentation to learn more, he shares a few notable trends their research revealed.

• The per vehicle gross profit climbed month over month since May 2020, as did vehicle service contracts and attachment rates.

• The chip shortage had  lower than expected impact on sales volumes, which beat records and only dipped slightly in the fourth quarter.

• Dealers sold more vehicles into the pipeline. 

• There’s been a massive increase in front-end and back-end F&I profit. 

• Loan-to-value ratios are off the charts, making the average amount financed the highest it’s ever been. 

“My assumption was all this would be based on finance reserve,” he adds. “But I was completely incorrect. Since 2019, F&I finance reserve as a percentage of F&I gross has continued to decline while product attachment rate has continued to increase.” 

He adds, “We’re averaging about 1.6 products per deal. A dealer who sells 100 cars per month is now selling 160 F&I products in that same month. They are becoming more of an F&I product selling company than a vehicle selling company. That is an interesting indicator of perceived value. Consumers now see more value in available F&I products and are buying them at a significantly higher rate.” 

He cites many reasons for this shift, but also believes consumers see their vehicles differently than in the past. They see them as more like “electronics” and, as a result, are more willing to pay for a service contract to protect their vehicles, much like they protect their cellphones and smartwatches. 

EV Contracts on the Move

Allen identifies another trend expected to build—electric vehicle service contracts. 

“There is the perception that F&I has nothing for electric vehicles. That is not true,” she says. “More and more brands are introducing great products that support EVs.”

Companies do not have to reinvent the wheel to offer EV service contracts, she adds. Most VSCs cover parts that break on both gasoline-powered and electric vehicles. 

“Seventy-five percent of all claims on vehicle service contracts are things that are not moving parts but parts that are on every electric vehicle too,” she says. “There’s a lot of good movement in the electric vehicle field. We will see great F&I products coming out.” 

Future Evolutions

F&I has changed and will continue to evolve as we race toward the future, adds St. John.

He predicts how F&I managers communicate with customers and the technology they use to communicate will continue to evolve. 

“They need to get their heads around how to have a conversation. This has really stretched many F&I departments. A lot of folks have really risen to the occasion,” he says, noting dealerships need to be ready to collaborate with customers online, a hybrid of online and in person, and in person, and communicate how they want to communicate whether it’s phone calls, text, or emails. 

“We need to learn how to have the same level of communication electronically,” Allen says. “It’s been a real adjustment. It’s also not 100% digital. Consumers may start in a digital channel, then progress to a face-to-face conversation, so it’s more of an omnichannel experience. F&I managers must also know how to pivot sales from digital to in-person.”

And they need to maintain connections across channels for a true omnichannel experience, she adds. Often consumers do their research online, then come into the dealership only to have an F&I manager ask them the same questions they answered online. Instead, they need to ask consumers about the research they’ve already done before entering a discussion.

“This is a terrific opportunity for F&I managers to scale their value and expand their role from the back of the dealership to the front,” St. John says. “We’ve seen dealers move F&I managers to the front where they can better connect with customers and having them connect with customers digitally before they come in. It’s a huge opportunity for F&I managers to increase the perceived value they deliver to the entire value chain of a customer purchase.”

Tech Investments

As dealerships become more transparent about F&I products and pricing, they make investments in technology to aid the transition. Companies, like StoneEagle, have risen to the challenge by developing sophisticated tools that empower the transition. 

“Companies are making it super simple to put a remote F&I presentation in front of customers and an F&I manager,” he says. “F&I managers don’t need an IT degree to do it. They just set it up, hit a button, and connect with the customer.” 

Still, technology is one of the great challenges the auto industry faces, he adds. Many dealerships use disparate technologies that are not interconnected. Tons of data exists, but it’s not available across all systems.

“Fixing these breaks will provide more value to customers and improve performance analytics for dealerships,” he adds. “Delivering solutions that connect these systems will enhance the customer experience.” 

St. John cautions the solution involves more than just technology; the need for a well-defined F&I process remains. “A human being is the buffer between the tech and the consumer who walks in the door,” he concludes.

Ronnie Wendt is an editor at F&I and Showroom magazine.