"I think the model may change," said Andrew Stuart, CEO of Volkswagen Credit Inc., in a panel discussion at the American Financial Services Association's Vehicle Finance Conference in Las Vegas earlier this month. "I don't think it's going to stay the same way forever."
Internet loan applications
Stuart and other lenders said they are seeing more consumers use the Internet to apply for auto loans instead of applying at a dealership.
Ultimately, many of the same borrowers will probably end up getting an indirect loan at a dealership. But already, more shoppers are seriously exploring financing before they ever walk into a dealership, and that's a significant change from business as usual, auto lenders said.
Tom Gilman, CEO of TD Auto Finance, said that his company's research on Gen Y consumers found that "82 percent want nothing to do with the F&I department." TD Auto Finance is the former Chrysler Financial, which now belongs to TD Bank of Toronto. Gen Y encompasses individuals aged roughly 18 to 35.
"When you look at the next generation of car buyers, you know you've got to be looking at other channels, and we are looking at direct for that," he said.
Direct loans are where the customer gets a loan directly from a bank or a credit union, instead of negotiating a loan at a dealership.
At a separate auto finance conference last fall, subprime lender Santander Consumer USA said it was beefing up its direct-lending channel, even though direct loans account for less than 10 percent of Santander's loan volume.
In place of dealer participation in interest-rate profits, also called finance reserves, Stuart said dealers in the future might earn a flat fee. Stuart didn't say so in so many words, but the implication is dealers would probably earn less in flat fees per vehicle than they can potentially earn now in finance reserves.
"Consumers -- particularly the younger ones, like the 70 million members of Gen Y -- don't really see why dealers are being compensated. I see us moving more towards flats," Stuart said.
"Today, I can't go there because nobody else is. If and when it ever happens, it's going to have to be an industry move," he said.
It's anybody's guess where flat fees would settle in the future, but experts have said in earlier interviews that flat fees in use now tend to be a couple of hundred dollars.
For instance, captive finance companies may pay a flat fee in lieu of finance reserve when the customer pays a subvented 0 percent rate and no dealer markup is possible. Some credit unions also pay dealers a flat fee for handling customers who have direct loans.
What the market will bear
The important distinction is that while a flat fee is fixed, the dealer reserve theoretically can be whatever the market will bear, within fairly generous limits on dealer markup imposed by most auto lenders.
Lithia Motors Inc. reported that its average finance reserve per vehicle was $395 in the third quarter. Lithia is unusual among publicly traded dealership groups in breaking out specific components of its F&I profits per vehicle.
John Hyatt, president of Bank of America Dealer Financial Services and another AFSA panelist in Las Vegas, said dealer profits should be able to survive greater transparency.
"If you look at the work the dealer does in the value chain of creating a loan, it's right for us to compensate the dealer for the work they've done, within the caps we've agreed to," Hyatt said. "All the dealers are fine with full disclosure, but we are going to need the consensus of the industry to do that.… We can't do that ourselves."