Auto sales were at record levels in 1999 and were topped by even better sales in 2000. But while the numbers probably won’t be beat this coming year, experts predict that sales will contribute to the best three-year period in auto sale origination in recent memory.
But while that is good news for the industry, banking and finance companies are faced with auto company leasing and finance options they simply can’t beat – even if they present their deals at point-of-sale, the critical decision time.
While the number of car sales is up, the amount of auto loan dollars originated was just 7.2 percent in 1999, down from the 31.2 percent growth in 1998, according to the 2000 Automobile Finance Study by the Consumer Bankers Association.
The study also revealed a marked increase in leasing from 5.7 percent in 1998 to 11.5 percent the following year.
“In the past year, there have been some noteworthy developments as far as major lenders getting out of this business, mostly on the lease side,” said Fritz Elmendorf, vice president of communications for CBA.
“So it’s been a tough business. On the lending side, the margins are pretty narrow. Some banks do well in it, but a lot of banks have decided they don’t have enough scale per business to be in the game,” he said.
That’s true of at least one large bank in the area that made a strategic decision to not pursue the leasing side of the auto business.
“Even though we’re a large bank in the scheme of things, I don’t feel as though I want to be in a position to be predicting value on, say, a brand new Nissan Pathfinder [at the end of the lease term]. It’s a difficult thing to do … A lot of the banks are getting out of the [leasing] business because they are suffering some losses on the sale of off-lease units,” said William D. Rigby, senior vice president of the $2.7 billion-asset CompassBank in New Bedford
Just over 25 percent of CompassBank’s loan portfolio is made up of auto financing, he said. The bank has benefited from establishing relationships with 200 auto dealers from Eastern Massachusetts to Rhode Island. Because of this, they are able to compete with other banks at the critical point-of-sale in the car-buying process.
“I think we have to prove to the dealers and to the customers that we’re their best choice. If we can do that, and if we can price our product competitively, I think we’ll get the business. That’s what we try to do,” Rigby said.
But for others, not having that presence in the dealership – which offers not only financing, but attractive leasing options as well – can present a problem that must be overcome.
“It is very hard to compete with the lease that is offered at point-of-sale and induce the member to come back to the credit union, or any other institution to initiate a lease in a competitive environment,” said Massachusetts Credit Union League Senior Vice President for Public Relations and Marketing Robert B. Kimmett.
Only about 11 percent of credit unions nationally offer leasing options. Therefore, getting the client to purchase, rather than lease, is the goal.
“It’s not so much the deal as the convenience. The consumer’s there, the car’s there, the pen’s there. The lease is always sold on payment so the dealer can structure a deal that sounds very appealing,” he said.
A Good Deal
One way to solve the problem of point-of-sale leases – which, according to the CBA study, have nearly doubled from 1998 to 1999 – is to get people away from the dealerships. Many credit unions offer occasional used car sales during which area dealers will bring cars to the credit union lot and the financing can occur there and then.
“That is a very effective technique that credit unions have used for a number of years. It turns the whole idea around of putting the financing with the car … People have a special relationship with their credit union; they trust them. The credit union goes to great lengths to find a quality partner to offer good cars,” he said.
Subvention by automaker finance companies also causes trouble for banks, said Elmendorf. Because they own the product, they are able to offer much lower rates to consumers than other financial institutions and make it up the money in other ways.
“I think a lot of consumers take advantage of it and rightly so. It’s hard for CompassBank to compete with a General Motors … Does it affect us? Yes. I think it’s a good deal for the customer, and it certainly affects us. In 2000, our mix of new to used went from 55-percent new to 50-percent new. We saw an up-tick of volume of used vehicles, and I think it’s a direct result of the fact that the factories have been offering low-rate financing to consumers,” said Rigby.
Turning its focus to used car sales instead of new cars is one way to combat the pressure of the significantly low interest rates offered by the automakers.
Credit union financing for used cars has increased from about 10 percent in 1992 to 20 percent today, said Kimmett.
Customer loyalty is also a factor, said Anthony C. Terrizzi, president of the $27 million-asset Medical Area Federal Credit Union in Boston. About 60 percent of its loan portfolio is in auto lending. “As new employees are hired, they talk to other employees and it helps our loan portfolio grow,” he said. “The entire credit union industry benefits from the coldness the banking industry shows toward the everyday person … It’s a big deal for a member to buy a new car, and we want to make sure it’s a pleasant one,” he said.
Another realm of competition expected to increase in importance is the Internet, according to Rigby. “It’s not a big part of the market today, but as time goes on, it will be,” he said. Currently, only 2 percent of new car buyers actually submit an application online, said Kimmett, while only 0.8 percent get loans online.
