A blossoming partnership: An inside look at Santander’s deal with FCA

From the October feature: Since revising their financing alliance this summer, Santander Consumer USA and Fiat Chrysler Automobiles appear to have smoothed the speed bumps that had hindered the Chrysler Capital partnership for years.

The original partnership had consistently been weighed down by missed penetration rate targets. Quarter after quarter, Santander would cite “the competitive landscape” and incentives that weren’t “materially more attractive than other lenders’ offers” as reasons for the unmet goals, according to Securities and Exchange Commission filings.

But in late June, two months into Year 7 of their 10-year contract, FCA and Santander amended the agreement. SCUSA paid FCA $60 million — a 40% premium to the original contract, amortized over the remaining life of the agreement — in exchange for adjusted performance metrics, exclusivity commitments and payment provisions, according to an SEC filing. Since then, a spirit of collaboration between the two companies has prevailed, and Chrysler Capital originations are on the rise.

“The best way to think about the new agreement would be to say that it allows FCA to structure incentives that are beneficial to them, and for us to originate those incentives in a way that is beneficial to us,” Shawn Allgood, head of Chrysler Capital and auto relationships for Santander, told Auto Finance News.

There’s always been collaboration between Santander and FCA, but the latest negotiation “took it to a new level,” Allgood pointed out, “a higher level of transparency and a higher level of collaboration, where we’re vocal about what we want to do and the direction we want to go, and they do the same.”

In the earlier years of the agreement, though, the path appeared rocky. “At times, it sounded like that relationship wasn’t all that healthy,” said Chris Donat, a managing director at Sandler O’Neill.

A lagging penetration rate had long been a sore point. Though Chrysler Capital came in one percentage point below the 31% goal in the first year of the contract, the gap widened over time. By Year 3, the target was 54%, and Chrysler Capital’s actual penetration was 26%. In Year 5, the goal was 65% — and Chrysler Capital’s rate came in at 18%.

By mid-2018, FCA started to look elsewhere for a captive. And earlier this year, talk of a tie-up between Groupe Renault and FCA sparked rumblings that Santander’s Chrysler Capital era might come to an end. But in in a first-quarter earnings call, FCA announced that it would no longer pursue its own captive in the U.S.; instead, it would focus on the current contract with SCUSA.

Incentives spur originations 

The more cooperative approach with FCA has led to an increase in incentivized loans rates that have, in turn, bumped up origination volume.

Practically speaking, meetings between Chrysler Capital and FCA are happening more frequently, and conversations are more “fluid” and “productive,” Allgood said. For instance, FCA might ask Allgood’s team for help putting a certain incentive into the market, he explained. Another outcome of the negotiation is a quarterly meeting “at the most senior levels” of both companies, he added.

“It seems like Santander might have gotten closer to exclusivity on some of these products,” said one industry analyst on background.

In fact, starting in April, FCA put Chrysler Capital bonus cash on a “high percentage” of vehicles, Allgood said, “which means the only way a consumer can get those incentives is if they finance with us.”

“We’ve always had a level of Chrysler Capital bonus cash, but not to the extent that we have it today,” he added.

Specifically, FCA added incentives this year on the Challenger, Charger, Durango, Grand Caravan and Pacifica Hybrid, according to data generated by Jato for AFN. Through September, FCA had 242 incentives on the Grand Cherokee and 230 on the Journey, compared with 195 and 176, respectively, on those vehicles last year.

Chrysler Capital’s penetration rate has since headed north again, hitting 36% in the second quarter — its highest level since 2014. And the special loan rates have triggered increased origination volume.

Through midyear, Chrysler Capital originated $15.4 billion of loans and leases, up 7.5% year over year. Compared with first-quarter volume, originations shot up 41.3% for loans and 28.4% for leases. “Our originations were up quite a bit,” Allgood said. Some of the increase could be attributable to seasonality — second-quarter tax refunds — but “a lot of that” volume stemmed from FCA’s incentives, he added.

Looking ahead, Allgood expects Chrysler Capital originations to increase 15% to 20% in the coming year.

And while Chrysler Capital incentives have risen, Ally Financial loans for Chrysler vehicles have declined. Ally’s Chrysler originations clocked in at 25% in the second quarter, compared with 28% at midyear 2018 and 30% at midyear 2017, according to the company’s earnings.

On a dollar basis, Ally originated $2.4 billion of loans and leases for Chrysler vehicles in the second quarter, down from $2.7 billion and $2.9 billion in the same quarter of 2018 and 2017, respectively.

Meanwhile, Chrysler Capital has been ramping up its prime business. “We’ve made some strategic pricing moves in the prime space that have made us far more competitive,” Allgood said. “And if you look at our prime originations, year over year, they’re up more than 50%. A lot of the growth that you’re seeing on the retail side of our portfolio is growth in prime business.”

Flourishing growth

With the relationship moving smoothly, Chrysler Capital plans to expand.

“Our primary focus is continued growth across all the business segments — lease, the prime retail business and nonprime,” Allgood said. “We grew a lot in 2018, and we’re growing again in 2019. Candidly, the goal is incremental, smart growth — that’s probably the No. 1 priority.”

Within that growth goal is the idea of helping FCA acquire new customers and retain existing ones — “using our bandwidth to help bring customers back to them,” Allgood said.

To that end, Chrysler Capital is increasingly focused on customer loyalty. The company’s in-house marketing team starts reaching out to customers 30 to 35 months into their loan or lease term. “Before a customer starts thinking about it, we are already communicating with them about offers on vehicles like the one they have, highlighting new vehicles from FCA, and hitting them with offers that exists in the market,” Allgood said. “All of this is designed to do two things: one, get them back in an FCA vehicle and, two, send them back to the dealer they originally purchased it from.”

In addition, Chrysler Capital is honing its processes to enhance the dealer and customer experience. For one, the lender has staffed up call centers for peak hours. “In the last couple of months, we’ve made some changes so that we create a greater level of bandwidth inside that organization, so that as call volume spikes, we can shift resources and make sure our service levels never drop,” Allgood said.

With the changes in the works and on the horizon, might the FCA agreement extend beyond 2023? “I could only speculate,” Allgood hedged.

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