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Pete MacInnis

Pete MacInnis Founder and CEO

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Digital Finance SOS – Is Digital Retailing the Answer?

Part 1: Is the Strong Preference for Dealership Financing Shifting?

We recently took a deep dive into some key industry numbers around digital retailing (DR), including proprietary data from a survey eLEND conducted earlier this year. Our goal is to assess online auto financing trends, investigate DR’s potential impact on auto finance and understand dealer perceptions and attitudes towards it. 

In part one of this three-part series, we set the stage by asking: Is the Strong Preference for Dealership Finance Shifting?

The numbers tell a story of a marked shift away from dealership financing: According to FICO's 2019 Consumer Survey of Vehicle Financing, most U.S. car buyers (63%) opted for dealer-arranged financing in 2018. BUT, that's down from 73% a year earlier. And, even more concerning, is that for their next purchase, only 40% said dealership financing would be their first choice.

Compounding the shift away from dealership arranged financing, is the growing consumer appetite for online financing options.  The same 2019 FICO study shows the number of consumers acquiring vehicle financing online more than doubled in 2018 to 13%, up from 5% in 2017 – and 28% say online financing will be their first choice next time round.   While dealer-arranged financing continues to be the epicenter for auto loan originations, these trends are, and should be, concerning to dealers.

So, let’s look at why this shift is happening and what can be done about it.

First of all, we need to acknowledge the problem rather than hide from it! It’s not going away. Consumers, and especially millennials, demand control over every single experience - they demand ease, convenience, transparency and instant gratification. Nothing could offer less control and transparency  - and at the same time create more consumer anxiety and skepticism -  than what has been the typically hours-long in-dealership car buying experience.

The data tells the story: satisfaction scores among customers who secured direct financing outside the dealership were 34 points higher than those selecting an indirect financing option offered by the dealership. And, though it may be conventional wisdom to think that an online finance customer can be easily flipped, 43% of dealers in our survey reported that they are unable to flip the majority of pre-financed customers into a dealership financing option.

Acknowledging the three primary reasons that customers are willing to leave the dealership for financing are the first three steps on the road to solving this challenge:

(1) Empowered, convenience-driven consumers want more control over where and with who and how they do business.

(2) New business models and digital finance technologies introduced by lenders and some of the disruptors are attractive to buyers.

(3) Consumers are reporting much higher satisfaction when securing direct financing outside the dealership.

So what can dealers do to confront these trends and preferences? The numbers tell us that it all starts with thinking about what the consumer wants, not what the dealership wants them to do. You know the adage: give the customer what they want, or the competition will.  It’s worth noting that nearly half of U.S. customers consider just one lending source before they make a decision. So if dealers continue to be reluctant to make financing information available on their websites, are they eliminating the opportunity to be part of the consumers short list of financing considerations?

Understanding how consumers prefer to shop for vehicle financing options and adjusting your technology investments is key. Investing in digital retailing solutions to satisfy the 90% of shoppers to complete some of the ‘buying’ steps online is one way dealers are protecting and growing finance penetration.  Think of it like this.  With website based DR tools, transparency becomes a two-way street, forcing the consumer to be more transparent, giving up more of their personal information earlier in the process and shifting the online information advantage back towards the dealer.  

By changing when and how the shopper is introduced to payment information and dealership financing options, the combination of technology and data enable the dealer and the consumer to come together much faster.  The two-way transparency is a trust multiplier.  Deal transparency 1) increases finance penetration; 2) protects and even grows PVR; and 3) the accelerated transaction times directly correlate to a more positive customer experience.

But are dealerships adopting these tools? What are those tools? Are they right for the job? What are the barriers to adoption and what are the results?

In part two, of Digital Finance SOS – Is Digital Retailing the Answer? we will look into dealership adoption of DR. For a summary of today’s numbers, click here.

Martins Ville

Carvana loses $2500 per unit with this strategy. They are the best at it. Sounds like a not so clever idea. If your dealership offers such a service and you can't close the customer online and deliver the vehicle to their house, this is a pipe dream. I'm not into pipes.

Martins Ville

The only ones making money with this type of strategy are the vendors that are selling the dream. We can do better.

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