Fintechs say, if you can't beat 'em, join 'em

In fall 2016, Ricart Automotive Group President Rick Ricart received an out-of-the-blue email from an old college fraternity brother asking whether he was interested in speaking with executives at a fledgling software company that had a new-car retailing platform.

In his call with AutoFi, which develops and markets software to automate online vehicle sales and financing, Ricart heard about a new end-to-end process the company had created. It facilitated auto financing offers from a single partnered lender to customers, performed automated underwriting and decisioning and could even orchestrate the signing of finance documents.

Ricart was impressed. But it wasn't going to work out.

"It was very consumer-friendly," Ricart told Automotive News. "But I told them, 'It's gotta be dealer-friendly, OEM-friendly, lender-friendly,' or it would never be viable as a long-term solution."

Bob Tasca III, the first dealer approached by AutoFi, remembers a similar pitch.

"They had a vision of the product that I did not like at the time. It was very predatorial to the dealer, almost like it was going to compete against it," Tasca said. "I told them, 'I'm not interested. However, I love the concept of what you want to do.' "

Customer demand for faster processes of securing vehicle financing, and a dearth of progress in the space, persuaded a number of financial technology companies to develop platforms to challenge and disrupt the traditional auto finance space. But despite their goals of turning the auto lending industry on its ear, few achieved it.

In fact, those that found success in the auto finance industry are those that ended up partnering with the very companies they initially aimed to topple — auto lenders and auto dealers. But it wasn't an easy marriage at the start. While dealers and lenders recognized the need to innovate the auto financing process, many were hesitant to partner with solutions that initially aimed to circumvent the dealer system.

The AutoFi-Ford Credit relationship is part of a growing trend of captive lenders partnering with financial technology companies to expedite the finance process and expand the availability of digital retailing tools to consumers. After calibrating the platform with additional input from Ford Motor Credit Co., the relationship that AutoFi formed with dealerships such as Ricart Automotive and Tasca Automotive Group in Cranston, R.I., would rapidly blossom across the Ford Motor Co. dealership network.

Today, about 500 Ford dealerships work with AutoFi, according to Ford Credit CEO Marion Harris. Working with the fintech allows the captive to aid dealership processes, not undermine them, he said.

"Ultimately, it is the dealer's responsibility to finish that sale," Harris said. "We're not looking to circumvent our dealer body in any way. They are our arms and legs."

Fintech partnerships aren't forged overnight. Much like any area of an automaker's supply chain, these relationships are approached carefully. Harris said contemplating a fintech partnership mirrors the types of decisions made across every vertical of the automaker's businesses.

"Whether we're in mobility or in financial services, we look at these new and emerging technologies and ask, 'Is this something we want to build, buy or partner with?' We have a pretty robust framework for determining that," he said. "In some cases, the elements that you would look at to make that evaluation are around speed, robustness, strategic fit."

Mark Templin, CEO of Toyota Financial Services, said the lender seeks creativity and innovation from a fintech partnership to serve customers and dealers.

"A lot of the fintech companies are small, fast-moving companies who are thinking up really creative ideas they can bring to us," Templin said.

But on the flip side, he added: "A lot of those fintech providers come to us and they do things we can do ourselves, so they don't add value."

In 2018, Toyota Financial Services partnered with Silicon Valley fintech accelerator Plug and Play, which introduced the captive to hundreds of fintech startups through its FinTech Open Innovation Program. After the list was narrowed to 10 startups, the fintechs presented to Toyota Financial Services employees and executives at the company's campus in Plano, Texas. The list was winnowed to three, which Templin says the company still works with today. A spokesman would not confirm the names of the three companies partnered with the captive.

Templin said the most successful fintech partnerships improve a captive's core business, whether that's adding ease of use for customers or mitigating fraud.

Nissan Motor Acceptance Corp. describes its relationship with car-shopping and financing platform Modal, formerly Drive Motors, as mutually beneficial, exposing the startup to a wealth of dealership customers while expediting processes for consumers that result in faster deals. Modal, a San Francisco company that provides white-labeled digital auto retailing platforms to dealerships, also receives the benefits of a dedicated dealer body.

"The OEM captive is one of the biggest winners with digital commerce because it declutters the relationship between the buyer and the brands, it leads to dramatically higher penetration for captive financing and it leads to dramatically higher back-end gross for the captive financer, as well," Modal CEO Aaron Krane said.

"Whether it's a dealer or a car brand, they're going to need to find a solution that can actually transact in real time online, and they're going to have to find a design that fits in with their experience, rather than changes, confuses or competes with it. I think those are the big two puzzle pieces."

Some dealers, however, remain wary of the possibility that these partnerships could cut them out of the finance process altogether.

Some lenders are leveraging more direct financing models through fintech assistance.

Chase Auto launched a partnership with online used-car retailer Vroom to create Vroom Financial Services Powered by Chase. Chase Auto CEO Mark O'Donovan said the partnership would allow the lender to grow its auto portfolio without a specific automaker partnership. Chase has a captivelike relationship with four automakers.

Manufacturer support is critical for fintech partnership success. Without manufacturer incentive data — which customers moving through the AutoFi platform can access — a truly digital retailing process is impossible. Not only could incentives change the price of a vehicle from one day to the next, but, "Those incentive tools, the majority of times, bring someone into the market," Ricart said.

Lenders want to see proof of concept from fintechs, says AutoFi CEO Kevin Singerman. The fastest way to market for the fintech was to partner with one lender and facilitate auto finance transactions. But opening up to other lenders, and working together, ultimately allowed AutoFi to reach its scale.

Singerman said when AutoFi was created, it did everything "soup to nuts" and was built on where it envisioned the auto finance industry needed to get to over the ensuing five to 10 years. And consumers loved it.

But it came with this sobering realization:

"It's going to be very hard for us to be successful in this market if we are the lender and the technology provider," Singerman said. "Because you're not always going to have the best rate on the platform."

Lindsay VanHulle contributed to this report.