July 26, 2021

Positive signs for the F&I road ahead

Top executives from Ally Auto Finance, Ford Credit, GM Financial and Santander Consumer USA — together for a panel discussion late last month — all shared a positive outlook for auto finance in 2021.

“Business is extremely good,” said Doug Timmerman, president of Ally Auto Finance, at the American Financial Services Association Vehicle Finance Conference, held virtually Feb. 23-25. “I can’t recall a time when the outlook looked any better than it does today.”

Marion Harris, CEO of Ford Motor Credit Co., said he felt 2021 will be a “great year.”

“And I hope we can improve, from even there, and not only would that help our book, but it would be really good for our economy and the people in our great country,” Harris said.

Auto finance should enjoy several advantages in 2021 that carry over from 2020, starting with the fact that auto delinquencies barely rose overall last year, despite high unemployment, the executives said.

“Probably the biggest surprise has been consumer resiliency from a credit standpoint,” Timmerman said. “I would guess all of us, if we went back through our scenario planning, we didn’t anticipate the consumer to be as resilient, for credit performance to be as strong, as it has been. So certainly a surprise, and a surprise to the positive.”

Credit bureau TransUnion reported last month that serious auto delinquencies, defined as 60-plus days overdue, accounted for 1.57 percent of outstanding auto loans and leases in the fourth quarter of 2020, a small increase from 1.5 percent in the year-earlier period.

High consumer demand and relatively low supplies of both new and used inventory are other mostly favorable factors that carry over into 2021, the executives said.

Even though lower inventory means less floorplan income for auto lenders, the trade-off is worth it because low inventories also are driving higher new- and used-car prices and higher dealer profitability, they said.

“I think on balance, it’s been positive for the industry,” Harris said. “It’s helped out with vehicle pricing pretty significantly.”

Harris said while wholesale has been down dramatically because of the pandemic and now the chip shortage — affecting Ford Credit’s overall receivables level — the flip side of that is dealer profitability is up significantly.

“And I think they would tell you, if you talked to the average dealer, they would tell you a big contributor to the improved profitability would be lower floorplan balances,” he said. “So that’s been really positive, while there are certainly many challenges coming from lower dealer stocks.”

Dan Berce, CEO of GM Financial, said one note of caution for this year is that federal regulation is likely to become a bigger factor compared with the more hands-off Trump administration. But he said it’s hard to predict what practical effect that might have.

“Obviously, the new administration is going to have a regulatory rewind after what happened under the last administration, but it’s fair to say we didn’t change a thing over the last four years in terms of our approach to compliance and regulation,” Berce said. “We have maintained very steadfast rules in terms of Fair Lending, in terms of privacy, and I don’t see us doing anything different in the next few years, even as the new administration rewinds regulation.”

Mahesh Aditya, CEO of Santander Consumer USA, agreed that it’s hard to see what more lenders could do in response to the new administration.

“I’m hard-pressed to think of what exactly it is that we are still exposed to, that a new administration would come and sort of jump all over,” he said.

Working from home will be a lasting takeaway from the coronavirus pandemic, the panelists said. So will the shift of customers using digital tools to complete transactions.

“Like most companies in auto finance, we got all of our employees home safely, and they have been working in a home environment now almost a year,” Berce said. “And I would say our productivity has been just as good; our employee engagement, which we check in on frequently, is exceptional. So our employees are both productive and enjoying their work-from-home environment.

“I think that’s going to stick with us.”

Aditya agreed, saying Santander Consumer employees “generally feel good about the way they got treated through the crisis.”

“Management sort of held it together and allowed folks to work from home, and we did that transition really well,” he said.

However, Berce said all employees won’t work from home full time forever. He said the plan is for GM Financial employees to return to the office this year.

“But it’s fair to say we’re going to have a flexible arrangement with our employees, where they’re going to be working partly in the office, partly from home,” he said. “I think the collaboration aspect is important in an office environment.”

Auto lender employees aren’t the only ones working and conducting business from home. Many consumers are likely to continue to demand faster and more convenient ways to transact business remotely even after the pandemic passes.

“I think consumers prefer transparency and having the ability to do more and more of the shopping experience online,” Ford Credit’s Harris said. “That is something I don’t think is going to go back the way it was.”

Aditya thinks e-commerce “is going to be the big pivotal learning coming out of this” pandemic experience.

“I think a lot of us are going to have to understand that loan fulfillment, credit fulfillment, is going to have to happen remotely,” he said. “A lot of the buying purchase is going to have to move online. If you don’t have a good, efficient e-commerce fulfillment and dealer engagement platform, you’re going to be left behind.”

But the shift to digital interactions has its risks. Cybersecurity, especially the threat of ransomware, continues to be a concern, Aditya said.

“That’s the thing that, essentially — I don’t want to say keeps me up at night; there’s a lot of other stuff that keeps me up at night — but this is definitely a risk,” he said. “As you move more and more online, your data, your customer interaction and your dealer interaction, as a natural consequence, there’s more data out there and more data at stake.”

There are a lot of unknowns regarding electric vehicles — and specifically, the nuances of financing them.

Aditya said EVs are coming and nothing can change that.

“But the question now becomes, how is the market going to change?” he said.

One of his concerns is mass-market EVs ushering in a new era of shared use and what that means for vehicle ownership and auto lending.

“Is it going to continue to be the same thing and a linear progression?” Aditya said. “Only instead of owning an internal combustion engine, you now own an electric car? Or is the landscape going to change as far as vehicle ownership is concerned?

“I think that’s the critical thing which we are watching.”

The three other panelists professed less concern about financing EVs or about shared ownership.

“I think the indirect lending model is going to continue, and I’m not concerned with figuring out depreciation curves and residual values, so I don’t see much impact on the financing side,” Ally’s Timmerman said.

Harris said there’s “a lot of discussion about batteries and how that’s going to residualize over the years” at Ford Credit.

“We’re not afraid of it, and we’re really excited about it,” he said. “We see electrification as the future. So we’re all-in.”

GM Financial’s Berce said his company also is “all-in” on EVs. He said he expects EV share to increase in the U.S. market to as much as 10 percent by 2025, from almost 3 percent in December.

“We’re prepared for it. We’re spending a lot of time at GM Financial in terms of the products we’re going to have in an electrification environment,” he said. “What do we bundle into the loan or lease? All the way from charging, to battery replacement, etc.

“So it’s something we spend a lot of time on.”