Web Exclusive: Capital One Exec Discusses Market Competition, Budding Lender Strategy
The auto finance industry exited 2013 on a high note, with outstanding loan balances rising 11% from a year ago to a record $798.5 billion in the fourth quarter, according to Experian Automotive. And it’s doing so under a budding strategy that finance sources like Capital One began employing during the Great Recession.
The strategy was the focus of a white paper J.D. Power and Associates released this past December. The firm referred to it as a “preferred dealer arrangement.” Under this approach, finance sources are forging deeper connections with dealers they want to work with instead of fighting for market share on price alone.
And under these programs, dealers are rewarded with volume-based discounts on retail or floorplan deals, fast-tracking for approvals and funding, dedicated buyer relationships, and more flexibility in buying policies.
“Preferred programs are not new to the market, but are certainly a growing trend,” J.D. Power stated in its white paper, in part. “This is not unexpected given the competitive nature of the market. More finance providers are considering [these] programs to help limit transactional discussions and to develop deeper relationships with their dealers that lead to smoother ongoing transactions, deeper penetration, and longer term partnerships.”
In the firm’s 2012 Dealer Financing Satisfaction Study, 87% of dealers who said they send more than 50% of their prime business to a lender reported being in a preferred relationship. That same study also showed that overall satisfaction among these dealers was higher than dealers without a preferred arrangement (919 vs. 845 on a 1,000-point scale.).
J.D. Power’s 2013 study didn’t mention preferred dealer arrangements, but the report listed several offerings under such programs as reasons for the five-point increase in satisfaction with prime retail credit lender and retail leasing.
In February, Chase said it was cutting its dealer count to 1,800 outlets to focus on high-volume stores. The announcement came after TD Bank revealed this past December that it was trimming its dealer network, which, at the time, counted 9,000 dealers.
Capital One Auto Finance adopted the preferred arrangement strategy in 2010 with the launch of its Diamond Dealer Program. F&I and Showroom’s Brittany-Marie Swanson caught up with Sanjiv Yajnik, president of the firm’s financial service division, to find out how the strategy has changed the finance source’s approach to the market.
F&I: What did you think about TD Banka and Chase announcing they were cutting their dealer count to focus on high-volume stores?
Yajnik: I think the industry is seeing the success of our program, and, as they often say, imitation is the best form of flattery. Much of the industry is launching incentive programs that focus on a certain number of dealers, so we are watching with interest. I think it's a good thing; quality is a good thing and trying to make sure we don't fall into some of the problems of the past is a really good thing for the industry. So I take it as a good sign.
We, of course, are still focused on our own game. We've got a great set of customers, and every day we try to figure out how we can improve our program and help them sell more cars.
F&I: So how has business been?
Yajnik: We have been growing our auto business quite nicely, and we've been doing it in two ways: The predominant way is we continue to focus on our Diamond dealers, which is a subset of dealers across the country. We chose them, and they chose us. So we work very hard on creating great relationships and also creating great products for their customers. So it is a win for consumers, a great win for the dealers, and a great win for us.
The other way we are growing is we continue to find new dealers who fall into the Diamond Dealer category.
F&I: How many dealers are currently in that program?
Yajnik: We have more than 3,000 dealers we work with.
F&I: For dealers who aren’t familiar with your program, how does it work?
Yajnik: It’s is a very straightforward program, but behind the scenes it requires a whole bunch of work to make it happen. We look for dealers who have great customer satisfaction and are successful in the market in which they operate. We feel like we can make them more successful because our program offers full-spectrum financing. It’s kind of a one-stop shop.
So we have dedicated salespeople who focus on our Diamond dealers and their customers. And if one of our Diamond dealers is having trouble getting a deal through, our sales team will help clear some of the red tape. So it's very intense kind of focus on our dealer customers.
F&I: And there are different tiers to this program, correct?
Yajnik: There are. The way we put it is, if a dealer is in our Diamond Dealer program, we want them to beat their competition. So we’ll do a variety of things to help do that. They get the service, they get the flexibility.
The next tier is what we call the Preferred Diamond dealer. This highest tier is what we call Executive Diamond. Dealers can move to the next tier by doing quality volume with us. It has to be quality, it has to be good volume, and we always look at customer satisfaction.
Now, for dealers who qualify for our Premier group, they will get better service and more flexibility. For our Executive Diamond dealers, they have access to anyone at Capital One, including my office. It truly is white-glove service.
F&I: What data are you looking at to determine if a dealership is qualified for the program?
Yajnik: We look at customer satisfaction metrics. We also look at transaction data we collect. But, again, we’re looking for dealers who deliver quality deals to us. And what I’ve found is that good things go together and bad things go together. So it's rare that we find a high-quality operation with poor customer satisfaction, or a disorganized dealer with great customer satisfaction. We just generally find all these things go together, so we separated our way into the dealers that are professional, want to be there for the long term and want to provide great service for a fair return. Those are the dealers we want.
Look, Capital One is a company founded through innovation and through focus on customers. And we've become the sixth largest bank because of that. So when it comes to auto finance, I am out in the field a lot, and I am very close to some of our key dealers. Our senior management is also in the field meeting with our customers.
F&I: The economy is strengthening and auto lending is back. But is there anything you’re seeing in the market today that concerns you?
Yajnik: The economy is coming back and we are already starting to see some bad habits forming in the industry that we are not happy with. And we’re being very vocal about those bad habits. For example, we don’t think there’s ever a good reason for finance sources to not do their due diligence when it comes to documentation. But we’re seeing is some folks waiving requirements like income verification. We just think it is a bad idea in the long term.
And some of the new entrants in our market are starting to charge inordinate fees to customers, including hidden fees. Folks get hooked on practices like that, then they start bringing the industry down.
I’m also concerned with the stretching of terms. Cars do last longer, so longer terms, to some extent, may make sense, but there's a limit to it. And as you know, the attractiveness of long terms for customers is their monthly payments become more affordable. The downside is there’s less equity being generated in the car, which could cause problems down the road.
At Capital One, we would rather give up volume than go beyond the limits we have set. Now, the good news is the key dealerships we work with also want to be around for the long term, so they tend to be very careful about the amount of business they do with some of these finance companies with relaxed policies. Yes, those companies are going to take some market share, but we at Capital One are happy to let them do that.
F&I: So where is Capital One’s comfort zone when it comes to loan terms?
Yajnik: Our center of gravity is on the lower terms, but we look at each deal on a case-by-case basis. It’s about the individual customer, the kind of vehicle they’re trying to buy, and the dealership they're buying it at. There are so many variables that go into it. But what we are not doing is taking the path of least resistance and using longer terms to drive volume.
F&I: What is your take on the Consumer Financial Protection Bureau’s investigation of auto finance? Do you think the industry will be forced to move to flat fees?
Yajnik: I don't have a crystal ball, so I can’t say. Here's what I will tell you: I think the industry is looking for a solution so we can settle the problem. And we are right there with them looking for a solution. We are very sympathetic to all parties involved, but our opinion is the industry and the regulators need to come to a consensus on how customers can gain access to their products. And that solution also needs to allow businesses to cater to customers while also getting their costs met and so on and so forth. That's my overall opinion, but we don't have any particular position on this other than I'd love to get it resolved.
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