Assessing the Competitive Landscape

What does it take to start a successful auto finance operation today?

The first thing is money. Without money to lend to people so they can buy cars or money to pay staff and buy supplies, it would be pretty difficult to get a start-up off the ground.

After money, the only thing that’s really needed is customers. A base of consumers that you can market your products to. Potential customers can be car dealers or Joe Consumer.

I’m dramatically over-simplifying what’s needed because, of course, there are a ton of behind-the-scenes items like loan-origination systems and secondary marketing relationships and remarketing people that are needed to ensure that a startup auto finance business grows up into a profitable auto finance business. But all of that stuff can be bought or hired.

Over the years, a number of retailers have thought about, postulated on, or dipped a toe in the waters of the financial services industry. Some, like Costco, have entered into private-label arrangements with auto lenders to act as a referral source for those lenders. But why shouldn’t a huge retailer, like Wal-Mart, enter the auto finance business?

Wal-Mart has money. And it has customers. And auto finance is less regulated than the banking industry, which has thwarted Wal-Mart’s attempts to open a bank on a number of occasions. Retailers could set up direct lending offices in their stores, right next to the pharmacy, the optical store, the café, the portrait studio, the oil & lube shop, and the bait and tackle store.

Many large retailers already have their own credit departments, which could handle underwriting and collections. Is giving someone an unsecured credit card with a limit of $5,000 that different from giving some a secured auto loan for $5,000?

I imagine this post isn’t going to win me a lot of friends. The point of this exercise is to open a discussion on the merits of retailers entering the auto finance business and to encourage everyone to think outside the box.

I was watching an episode of “Shark Tank” recently and was struck by something that Mark Cuban, entrepreneur, billionaire, owner of the Dallas Mavericks, and shark, said. The premise of the show is this: People with products present their ideas and inventions to a team of “sharks.”

The sharks, wealthy investors, decide if they want to invest in the idea. In this particular episode, Cuban was talking to a pair of entrepreneurs who design custom handbags that they sell to jewelry stores. Jewelry stores are an uncommon category of store to find handbags. And Cuban said to the entrepreneurs that he liked the strategy of “go where they ain’t” as a means of finding new business opportunities. And while Cuban (nor any of the other sharks) chose to invest in this particular business, I was struck by the maxim.

Go where they ain’t. Well, there ain’t no retailers that have their own auto finance operation. What’s stopping them?