The BMW Group is getting into consumer banking via its own private bank.
The new bank, BMW Bank of North America, in Salt Lake City, will offer loans on the Internet to BMW and Land Rover buyers in the United States, credit cards and checking and savings accounts.
Loans are expected to start in the next few weeks, and the cards are due late this summer.
'This represents a departure from the way our industry has done business,' said Bob Devine, BMW Financial Services managing director for the U.S. market. The new programs will be introduced first for the BMW brand, then Land Rover and other BMW brands, such as the Mini, as they are introduced.
BMW was awarded a Utah banking charter last year. Technically, BMW Bank is an 'industrial loan corporation,' a category the state created in 1997 to encourage big corporations to start their own banks in Utah. Devine said BMW Bank is federally insured and will comply with all federal requirements for maintaining reserves against deposit accounts.
Devine said it was important for BMW to own its own bank instead of forming a joint venture with a bank and/or a credit card issuer, as some automakers have done.
'By owning the assets, we can drive the customer service process, we can control the level of service,' he said. 'If we own the assets, we own the risk.' Nevertheless, BMW will hire a servicer to handle back-shop operations for the credit card program.
The Net threat
Devine said BMW Bank will encourage customer loyalty and positions BMW to capture a bigger share of its customers' auto-related spending. Similarly, BMW earlier announced it is marketing auto insurance in a joint venture with Chubb Group.
Devine said with BMW Bank, the company also wants to protect its business against outside Internet lenders.
'There is a threat out there that a significant portion of the business will migrate to the Internet. Dealers have asked us to address this,' Devine said in an interview at BMW Group's U.S. headquarters in Woodcliff Lake, N.J.
BMW estimates 60 percent of its customers would prefer to have financing lined up before they arrive at a dealership. And the Internet is the fastest growing way of doing that. Until now, such customers had to go outside BMW Financial Services to get a loan.
'We want to provide BMW dealers with a BMW alternative to the Internet lending threat. The bank will be our platform for that,' Devine said.
Direct vs. Indirect
But if direct lending catches on at the expense of indirect lending, that would threaten a big source of dealer profits. In direct lending, as the name implies, the customer gets a loan direct from the lender. Banks, independent finance companies and credit unions are the usual source of direct loans.
A couple of captive finance companies have begun to make an effort in direct lending via the Internet. Besides BMW, Daimler-Chrysler has a subsidiary that is offering direct loans on all makes on a Web site called GiggoCar.
Most auto loans are indirect. The dealer acts as a middleman and shares in the profit on the loan - in effect, a markup on the interest rate. Such loans are a mainstay of dealer profits, often more profitable than the new-car sale itself.
It is tempting to assume direct loans are cheaper by definition, since there is no middleman - the dealer - involved. But indirect loans are often cheaper to the customer, despite the middleman. That is due to stiff competition, efficiencies generated by big volumes and captive finance companies' status as the biggest indirect lenders. Factory support means the captives can accept margins that others cannot match.
`Flipping' for profit
A couple of competitors say they are skeptical that direct lending could become more popular.
'What we've heard about direct is that the dealers `flip' those customers,' into more profitable, indirect loans, said Brian Nault, manager, eCommerce, for Ford Credit North America, in an interview at the Consumer Bankers Association Automobile Finance Conference in San Francisco this month. Nault said Ford Credit has no plans to push direct lending.
Maryann Keller, president of auto services for Priceline.com, said at the same conference her company does not offer financing.
'We are dealer-friendly,' she said. 'People who get a voucher, like some of the online lenders issue people, are a prime candidate for flipping.'
BMW will pay dealers a flat fee for helping to complete the paperwork on direct loans. Devine acknowledged that will be a lot less than dealers make on indirect loans. But without BMW Bank, BMW dealers have been missing out entirely on income from direct loans from dot-coms, credit unions, banks and home equity loans, he said.
'We feel it's imperative to keep dealers engaged in the process,' Devine said.
He estimated direct loans from BMW Bank could someday account for 20 to 25 percent of BMW's total U.S. volume. That is far from a majority but is a lot higher than zero, where it is now. The point is, he says, customers are demanding the convenience of online finance, whether or not BMW gets on board.
'There's no doubt the potential (dealer profit) is higher for indirect than it would be for direct,' Devine said. 'But we find consumers are driving this process. This is what many consumers want.'