Charles Darwin said it is “not the strongest that survives; but that the species that survives is the one that is able to adapt to and to adjust best to the changing environment in which it finds itself.” The COVID-19 pandemic has changed how people interact and how society functions, forcing auto lenders and dealerships to adapt. When the pandemic reached the U.S. in March, dealerships closed for more than a month, heightening concerns about cash flow as car sales struggled. Changes during the past few months have accelerated the evolution of dealer-lender relationships and highlighted the adaptations needed to strengthen their bond.
Lenders helped keep delinquency rates on auto loans low through payment assistance programs at the beginning of the coronavirus crisis, and they continue to support dealers in a variety of ways as repossessions are sure to increase once deferral programs end. Captives have shown their value to dealers during the pandemic by continuing to provide funding and support, accelerating the adoption of digital processes, such as e-signatures, to keep business moving and maintaining consistent communication — even as workforces became remote.
‘Cash is king’
Fear set in when dealerships closed in April, setting a course of actions that would strengthen the dealer-captive relationship even beyond the pandemic. Toyota Financial Services, along with Mazda Financial Services, joined other lenders in prioritizing the cash flow dealers needed to continue their operations, Group VP of Sales Alec Hagey told Auto Finance News.
In March, TFS announced relief options for customers affected by the COVID-19 economic fallout, which included reducing rates on floorplan lines of credit for its dealer partners. “We always talk about the value story with a strong captive relationship. It’s probably never been clearer than what we’ve just gone through and all the things that we did to support them,” Hagey said. “Our No. 1 priority was the partnerships we have with our dealers to make sure they can weather the storm.”
Maintaining a relationship with dealers was particularly important and challenging for Mazda Financial. Established in April as the financing arm for Mazda North America, the lender is a subsidiary of Toyota Financial Services, Hagey said. “It’s really posed a challenge to them because, as that’s new business for us with the Mazda dealers, those dealer relationships haven’t been established yet,” he added.
Minimizing cash outflow was also a priority for Ford Credit, which supported dealers with long deferral programs and quick payments, EVP of U.S. and International Markets Jim Drotman told AFN. “Dealers were closed in various states for an extended period, so the importance of providing the cash flow support was evident,” he added. “For the dealers, I think it’s been business as usual for them. They’re still sending their applications to us.”
Ford Credit propped up Ford Motor Co.’s second-quarter performance, generating $543 million in earnings before taxes, a 1,710% increase from last quarter, results that were better than expected amid low vehicle sales due to the pandemic, according to the earnings report. “Ford Credit delivered a strong, profitable quarter, demonstrating its uniquely compelling value for customers and competitive advantage,” Chief Financial Officer Tim Stone said during the earnings call.
Supporting dealers was also critical for Nissan Motor Acceptance Corp., which responded to the crisis by rolling out a cash flow assistance program, deferring interest on dealers’ floorplan financing and suspending curtailment payments for eligible dealers, VP of Sales and Marketing Jim DeTrude told AFN.
Captive support during COVID also came in the form of programs designed to limit harm to dealers. GM Financial, for one, assisted dealers by deferring interest on floorplan financing and helping them join digital programs such as e-contracting, proving that captive assistance is available even in harsh economic cycles, North America Chief Operating Officer Jonas Hollandsworth told AFN. “Cash is king right now,” he said. “We provided a degree of certainty within an environment that was kind of rocked with uncertainty.”
GM Financial’s originations clocked in at $12 billion in the second quarter, a decrease of 9% YoY driven largely by a dip in leasing originations while dealerships were closed. GM Financial has a total outstanding portfolio of $94 billion, with leases accounting for about $40 billion, according to the company’s earnings report.
By providing support in unprecedented circumstances, GM Financial now has some of General Motors’ largest dealers looking to use the lender as their floorplan provider. “The crown jewel of being a captive is to have a dealer’s floorplan. We’re seeing dealers knock on our doors, coming to us and say, let’s talk floorplan,” Hollandsworth said.
Along with captives, banks also assisted auto dealers. BBVA Bank, which has $3.7 billion in outstandings as reported in Big Wheels Auto Finance Data, made sure the sales team helped dealers meet their objectives, SVP Reggie Branch told AFN. “Many of our dealers praised us for helping them with fast underwriting and, more specifically, with fast funding,” he said. “During times like this, managing your cash flow becomes more critical and we were able to gain or improve relationships through the positive experiences our dealers had with us.”
The digital (re)volution
Evolution is a consequence of time, and survivors are the ones who make the changes necessary to live. Many lenders were quick to adjust to pandemic-spurred realities, embracing digital processes and shifting their workforces to remote — all while keeping dealers happy.
GM Financial embraced the change by increasing dealer adoption of existing digital programs, including the captive’s approval center, a self-service platform which dealers use to submit credit applications for automatic review. During the pandemic, the number of dealers using the platform has tripled, Hollandsworth said. “The approval center allows the dealer, if they choose to conduct the business virtually, to do that,” he added. “It really puts the dealers in the driver’s seat. The approval center gives them the opportunity to work the deals themselves.”
E-contracting also grew in popularity as General Motors’ dealers needed to conduct business remotely, prompting GM Financial to pay the startup fees for dealers who joined e-contracting services during the pandemic, Hollandsworth said. The captive also assisted dealers by digitizing the paperwork required for a customer to return a leased vehicle to a dealership. “This environment has provided us an even greater opportunity to kind of project why these [digital] initiatives are so important,” he noted.
TFS also emphasized remote e-sign due to the pandemic, Hagey said. “It’s something that the dealers had been asking for, but it wasn’t really a high priority,” he said. “We did a pilot, then we rolled it out nationwide, which was a huge help for all of our dealers.”
Indirect lenders helped dealers connect with customers in a contactless environment through online car buying backed by e-contracting, Ford Credit’s Drotman said. “The industry was clearly moving in that direction. We’ve been doing some of that work for quite some time, but we saw increased levels of penetration in those channels than we’ve seen previously,” he added.
Dealers were always going to have to adopt e-signature platforms and embrace digital car buying as consumer habits are changing, but the pandemic made that reality arrive much faster.
“Auto is typically the second-largest purchase anybody ever makes, so it’s a little different than clicking through on a $20 item,” Drotman said. “But we did see in the height of the pandemic a much greater willingness to shop online, and we saw dealers transition to support that online capability at a quicker rate than we’d seen in the past,” he added. “The lesson is: It can be done and there are people who want to do it, so it’s important for dealers to continue that transition along with us.”
Dealers and lenders must adapt together to survive in the digital age. General Motors, for example, supports online car buying through its Shop, Click and Drive platform, which allows consumers to select a vehicle, estimate trade-in values and choose finance or lease options, then schedule delivery of the car to their home or a showroom. GM Financial reviews customers’ credit applications received through the program and passes that information to the dealer, Hollandsworth said. “Because it’s not a direct loan or direct transaction, that credit decision would go back to the dealership and the dealer has the option to introduce other credit providers if they choose to do so,” he added.
Toyota Motor also launched its online shopping tool, SmartPath, earlier this year, allowing customers to search inventory, apply for TFS financing and calculate payments before finishing the purchase at the dealership. “We really need to be focused on what consumers want and how they want to shop — and not just as a result of the pandemic,” Hagey said. “I think, frankly, if we had moved a little bit faster, we would have been in better shape, but we did react quickly.”
Let’s meet! (Virtually)
No one said evolution was an easy process. While lenders found ways to support their dealer partners in a time of change and crisis, they had to overcome hurdles along the way. GM Financial, for one, had to close the Seattle Credit Center and move about 40 team members to working remotely, Hollandsworth said. The true challenge, however, came in moving the sales force away from in-person sales. “From a sales standing, that’s really scary. Dealers are going to interact with your credit team out of necessity. Our sales team, on the other hand, had to transition into a telemarketing team,” he said. “I view my sales team on the GM Financial side as an extension of the dealership and therefore they need to be seen and be present.”
However, GM Finanical’s sales force also found less travel meant more time to communicate with dealers and address their needs, Hollandsworth said.
By March 19, Ford Credit’s staff had moved to a work-from-home environment, bringing a set of logistical challenges, Drotman said. “We took thousands of people and made them virtual in an area that we had never done so before,” he added. “The great thing is we did not miss a beat. I hesitate to say ‘business as usual,’ but it’s been pretty close to that for the last five months now.”
TFS had to move call centers and field employees to remote positions while in the middle of a restructure of the field organization slated for completion in 2021. This challenge made relationships with dealers stronger, Hagey said. “Typically, if a field traveler would show up at a dealer, they may bounce around a dealership a little bit trying to see the people that they need to talk to in their normal contact. But because it’s a phone call now, everything is more scheduled. And I think, frankly, it’s probably easier for the dealers and it’s easier for the field traffic, but I think there are some dealers that would like to see our field travelers in person,” he noted.
According to CU Direct SVP of Dealer Sales Ken Potter, the shift away from face-to-face interaction was a challenge. Such interactions have always been a core aspect of dealership business, and captives had to help dealers navigate a reality turned virtual. “I think the biggest change for auto dealers was the shift to, OK, how do we process online, how do we transform the old experience into a digital retail experience and how do we still deliver the same levels of service without face-to-face with the customer,” Potter told AFN. CU Direct offers auto lending through a partnership with 1,100 credit unions, connecting lenders to 15,000 auto dealers across the nation.
The answer lies in evolving available offerings, like using video chats to interact with customers, for example, Potter said. “We saw a big dip in volume in April, but in May and in June, we’ve actually had a bigger comeback than we thought,” he added. “Given everyone’s readiness and ability to do new things, the industry has come back pretty quickly.”
‘Do whatever it takes’
Adaptation is the key to making it through any transitional period, a lesson dealerships and lenders were forced to learn as the traditional way of selling cars was thrown upside down during the pandemic. Successful lenders were ones who quickly adapted processes to include virtual interaction and digital paperwork. By doing so, captives strengthened their relationships with dealer partners in ways that are likely to last beyond the current crisis.
“We had a great partnership pre-pandemic, and looking at things post-pandemic, it’s only going to be stronger,” Ford Credit’s Drotman said. “Never before have we seen an environment where literally businesses were shut for 30 [to] 60 days, in some cases without any revenue. So that gave us a different lens, which only makes us a better partner for the dealers as we come out of this.”
While Toyota Financial’s teams are looking forward to the day face-to-face business returns, the future looks bright, Hagey said. “I’ve been with the company for 30 years and our commitment to dealer success for TFS, and now MFS, is unwavering. I think we’ll only get better,” he noted. “We don’t exist without them, and I think we showed them that we’re willing to do whatever it takes [to support dealers].”
There’s another group that benefits from the dealer-lender evolution spurred by the COVID-19 crisis. “I think the consumer will win in this,” said CU Direct’s Potter. “Dealers have figured out a way to elevate their experience.”
Auto Finance Summit, the premier industry event, returns October 20-22, 2020, as a virtual experience. The virtual experience will offer the quality networking and education of past events, all through an online platform. To learn more about the 2020 event and register, visit www.AutoFinanceSummit.com.
