Enhanced customer focus sparks flurry of new captives

In what might be a record for the auto finance sector, plans for three new captives were unveiled in the span of six weeks. OEMs Stellantis and General Motors introduced Stellantis Financial Services U.S. Corp. and Cadillac Financial , respectively, while online retailer Vroom announced its intention to establish a captive built on its newly announced acquisition of United Auto Credit Corp . Historically, companies angling for a competitive edge have formed captives to offer special rates and deliver high service levels that bolster customer loyalty. With vehicle sales volume stifled these days, the time seems ripe for the creation of new captives. Among the three captive newcomers, GM is following the most traditional path with Cadillac Financial, developing a luxury-badged financing arm for one segment of its customer base. The captive, which will operate under the GM Financial umbrella, will offer dedicated concierge service, a new website and a Cadillac-branded customer experience team. Presumably, Cadillac Financial will be to GM what Lexus Financial Services is to Toyota or Genesis Finance is to Hyundai . GM’s move to carve out a luxury captive comes at a time when the automaker is starting to transition the Cadillac brand to an all-electric vehicle portfolio. It will be interesting to see how GM uses its deep-rooted knowledge of captive financing to shape the EV-focused finance unit. Vroom and Stellantis, on the other hand, are creating their captives via acquisition of longtime lenders. In mid-October, publicly traded online retailer Vroom agreed to shell out $300 million to purchase 25-year-old United Auto Credit. Two weeks later, OEM Stellantis bought 32-year-old First Investors Financial Services Group for $285 million. For Stellantis, creation of a captive enables the OEM to supplant Santander Consumer USA -operated Chrysler Capital , which has for years provided captive-like services for Chrysler car buyers and dealers. Stellantis, formed earlier this year when Fiat Chrysler Automobiles and PSA Group merged, was the only major OEM in the U.S. without its own captive. Stellantis views the transaction as a strategic opportunity to boost earnings and improve customer loyalty. Specifically, the OEM expects its financing unit to enhance the ownership experience and digital connectivity for customers who purchase Jeep , Ram , Dodge , Chrysler , Fiat and Alfa Romeo vehicles. Stellantis Financial Services will offer retail loans, leases and floorplan financing. The First Investors executive management team, headed by Chief Executive Tommy Moore Jr., is expected to remain in place to run the captive. Meanwhile, Vroom will retain UACC CEO Jim Vagim and CFO Ravi Gandhi to execute its captive strategy. The plan is to add a prime lending component to UACC’s existing nonprime operation to create a more transparent customer shopping experience and enable significant conversion gains by attracting consumers across the credit spectrum. Integration of UACC’s operation into Vroom’s platform is expected to begin once the transaction closes, either later this quarter or early next year. In the first half of 2022, the combined company will integrate back-end systems and processes. UACC will likely start originating nonprime loans as the Vroom captive in the second half of 2022. Prime loan originations will come a little later. In the meantime, Vroom will rely on its current third-party lenders — Ally Financial , Capital One Auto Finance , Chase Auto , Santander, TD Bank and Truist Bank — to originate loans in the prime space. “Beyond Phase One, we plan to transition UACC into a fully integrated, 100%, in-house captive lender,” said Bob Krakowiak, who joined Vroom as CFO in September, on a call with investors last month to discuss the acquisition. “Concurrently, we will be concentrating our efforts on advancing the automation of underwriting tasks and optimizing our credit-scoring and verification algorithms.” Though Vroom expects that its average vehicle selling price will decline into the low- and mid-$20,000 range post-acquisition, the retailer anticipates improvement in the economics of its overall loan originations, which would result in an opportunity for “material” improvement in gross profit per unit, CEO Paul Hennessy said on the investor call. This captive scenario might put Vroom on more even footing with companies like Carvana and CarMax , which offer their own financing. Who knows, more Vroom-like retailers might join the captive scene in 2022.

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