Category: Auto Finance

Flexible Organizations for Finance Startups

I was asked recently to describe the role of Bank One as a service provider for the startup BMW Finance.  Having served as CIO for BMW Finance, my glib response was that we supplied the systems and they supplied the users.  This was an unusual arrangement, and key to Bank One winning the business.  Our systems had to meet their standards before the bank would commit to service levels.

Outsourced servicing can be an important first step for a new finance company, as it was for BMW, and I have seen it done various ways.  A more typical arrangement was our earlier one with GE Capital.  They did all the servicing using their own facilities, and BMW did the sales and marketing.

I once observed that you could start a finance company using only a checkbook and some business cards.  This was at the Consumer Banking Expo, where one could easily find an outsourced credit department, collections agency, call center, etc.  This opens up the possibility of departmental outsourcing.

Manufacturers have captive finance companies, and so do dealer groups.  During my tenure at AutoNation Financial Services, we had our own credit department, sales, e-commerce, and staff functions.  World Omni handled discounting, collections, and customer service.  The plan was to migrate the operation in-house, one function at a time.

Depending on their objectives, a finance company may choose various servicing options, from hybrid arrangements to full autonomy.  I would also recommend a permanent core team at the executive level, regardless of which functions are outsourced.

Ford Credit Steps Up

My first senior management job was CIO for the startup BMW Finance.  This was an education in why auto makers need captive finance.  I fondly recall Vic Doolan wrapping himself in the Bavarian flag (figuratively) and demanding we raise our residuals on the X5.

Captive finance converts the ups and downs of auto retail into a steady stream of finance payments.  This creates the illusion that the finance arm is somehow a better business, and managers lose sight of the special relationship.  The finance arm also develops a better-looking balance sheet.  Without proper discipline, the finance arm will wander off and start writing mortgages.  Meanwhile, the parent company turns to deals with banks.  Sound familiar?

This is the background against which I observed the recent travails of GMAC.  I had the privilege of working at GMAC in autumn 2008, when things started to go bad.

“The stability that Ford Credit has provided us through this turn has been huge,” said dealer Skip Davenport “It’s so important for the manufacturer to have a captive finance arm.”

Ford Credit, by contrast, stepped into the breach and did exactly what a captive lender should do. They supported their dealers, of course, with wholesale and retail finance – but they did some non-obvious things, too.  They provided consulting support, to help dealers review their finances, and they helped with advertising.  They also pulled back on lending for non-Ford vehicles.

Ford dealers observed that financing brought in customers new to the brand, which means new customers – and potentially repeat customers – for both entities.  Now, that’s teamwork.