Buy-here, pay-here. In-house financing. Whatever you want to call it, the uptake of this business model in the Canadian automotive market has been nowhere near as prolific as it has in its neighboring country to the south. But the adoption of BHPH providers appears to be increasing.
We at Auto Remarketing Canada, whose sister publications delve into the U.S. BHPH market quite a bit, were curious about the current condition of the in-house financing and leasing market in Canada. So we reached out to Mark Dubois, the president of Dealer Performance and Consulting, to get his unique view on the situation.
Dubois, a Canadian citizen that started his own BHPH business in the U.S. before going into consulting, amongst many other endeavors, organizes an up-and-coming Performance Group for in-house finance providers in Canada, with representation in several of Canada’s southernmost provinces. At the time of our interview, the group had 9 dealer members spread throughout Ontario, Manitoba, Saskatchewan and Alberta, with a potential new member joining from Quebec.
Even though there are a few dealers who have offered in-house financing in Canada for decades, there aren’t nearly as many as there could be. We asked Dubois why he thinks this is the case, and he says it has nothing to do with a lack of demand from buyers.
“The biggest difference between dealers in the U.S. and dealers in Canada, from what I’ve seen, is that dealers in Canada tend to be a lot more risk averse,” he said.
Although it’s true that the in-house financing market does lend itself to higher financial risks, so too are the potential rewards.
“More and more dealers are realizing the profit potential of in-house financing,” Dubois said. “The other thing is the opportunity to reach a market that currently isn’t being well served.”
This market, according to Dubois, includes the host of Canadians that don’t fall into a “box” of certain financial parameters that many financial institutions require as conditions for lending. Some of them have damaged credit. Some of them have none at all. Many have experienced job loss, business failure, divorce, or are recent immigrants to the country.
“In many cases they make decent money,” he said. “But they can’t get traditional financing because they don’t qualify. So where do they go? What do they do?”
Where many institutions see a risk not worth taking, Dubois sees in-house financing as an opportunity for mutual gain.
“You can put more emphasis on the person’s future and not their past,” he said. “Their ability to pay and their stability is more important than just using their credit score.”
Dwayne Middlebrook, of Saskatoon Automotive Group Acceptance and member of the Performance Group, has been working in the BHPH business for the past 20 years, focusing on both the lending and collections portion of operations. While he acknowledges that the point of the business is to make money, it is nice to help people who don’t have any other options.
“Of course you have to be profitable in any business, but when you help a customer who is struggling to get credit for a vehicle and has been declined everywhere else – keep in mind that most people don’t choose to have bad credit, their credit situation could be a result of the market, family illness, divorce or 10 other things that is not in their control – just by helping these people get re-established creates a whole new buyer/seller experience,” Middlebrook said.
Dubois has also begun to notice that Canadian franchises, who Middlebrook says have historically been hesitant to provide in-house financing, are increasingly doing just that.
“What franchise dealers have learned is, especially if they have multiple locations, by pooling older, higher-mileage vehicles from their multiple locations, they create an inventory for in-house financing,” Dubois said. “These vehicles would otherwise be sent to auction and sold for little to no profit. By reconditioning vehicles effectively, putting them out on loan through an in-house financing or in-house leasing program, it can be very profitable.”
Auto Remarketing Canada asked Dubois how long it typically takes the average Canadian dealer who takes on in-house financing to get comfortable with the new responsibilities.
“That ranges from instantly to a year,” he said. “Instantly is based on the actual business tolerance for risk. Some dealers are very risk averse so they don’t want to take customers that maybe have a credit score below a 500 or whatever. And so they tip-toe into the business and say, ‘So let’s just make sure nobody defaults.’ Well, that’s not very realistic.”
Middlebrook shared what he sees as a key mindset obstacle for dealerships considering BHPH.
“Most people at a dealership are trained to sell cars and not collect money so until they get the right person there is always hesitation in that,” he said. “The BHPH business is about collections to me and not about selling cars.”
“The biggest challenge in starting BHPH is figuring out your business model, or where you fit into the market,” Middlebrook said. “Our BHPH model is to help people who have been turned down in the past get into (a) quality pre-owned vehicle, as well as help them re-establish credit so in the future they can have the credit they deserve.”
And figuring out how to establish a business model is where folks like Dubois come in. From his point of view, the interest for the in-house financing business is there – the only things lacking are the tools to learn and understand how to do business properly.
Dubois’ Performance Group in Canada, otherwise known as a 20 Group, offers the following for its members, who are non-competing dealers looking to share business practices and help each other grow: monthly webinars, monthly composites with consolidated numbers for all members of the group, and two in-person meetings per year.
“It really is a great learning opportunity whether you’re new to the business or you’ve been in the business for a while and you’re just looking to get different input, new input, and discuss specific challenges,” Dubois said.
For more information, visit the Dealer Performance and Consulting site here.
With financing being one of the biggest pain-points for shoppers, it seems dealers don’t mind shelling out a bit more for better service from their financing companies and captives.
According to J.D. Power’s 2015 Canadian Dealer Financing Satisfaction Study, good service and fast contract funding for consumer-facing products come before low pricing in Canada’s auto lending marketplace.
The study measured dealer satisfaction with finance providers in four segments: prime retail credit, retail leasing, floor planning and non-prime retail credit.
“High-performing lenders are characterized as collaborative consultants rather than loan processors,” said Mike Buckingham, senior director of the automotive finance practice at J.D. Power. “What separates the highest-performing lenders from the rest is the broad range of support they provide dealers to help sell vehicles. This includes helping dealers understand the variety of lending options available, how to maximize profits, how to reduce expenses and how to effectively retain customers. Dealers, in many instances, are willing to pay a premium price to receive these services from the high-performing lenders.”
Prime
Breaking down this year’s results, dealer satisfaction with auto finance companies for the prime retail credit segment came in at 850 on a 1,000-point scale,
For the prime retail market, BMW Financial Services ranked the highest in franchised dealer satisfaction with a score of 936 on a 1,000 point scale. Mercedes-Benz Financial Services came in No. 2 with a score of 920, followed by Honda Financial Services at 895.
J.D. Power analysts also pointed out a few factors behind increased satisfaction among dealers working primarily in the prime credit space.
It seems dealer customers in the prime market value flexibility with the buying policy as the most important auto finance provider offering, with 17 percent of respondents citing this as a key deciding factor.
Competitiveness of rates with new vehicles (14 percent) and for used vehicles (11 percent) trailed, providing evidence for a dealer population that values convenience over cost.
Floor Planning
For floor planning services, satisfaction was quite a bit higher with an overall score of 934.
VW Credit Canada came out on top in this respect with a score of 958, trumping the average dealer satisfaction rate.
Scotiabank came in at No. 2 with a score of 956, followed by Ford Credit Canada with a score of 950.
Retail Leasing & Non-Prime Retail Segments
Moving on to highlight the retail leasing and non-prime retail segments, non-prime dealer satisfaction was just a bit lower than prime this year, coming in at 848.
Dealer satisfaction in the retail leasing segment is 853.
And though there are no ranking provided in these segments, J.D. Power reported BMW Financial Services, Honda Financial Services, and VW Credit Canada perform particularly well in the retail leasing segment; and Ford Credit Canada and Scotia Dealer Advantage perform above the non-prime retail segment average.
The study also showed the dealers appreciate visits from lenders’ sales representatives, most noticeably in the non-prime retail credit spectrum, where there can often be more gray area and questions regarding credit availability.
When the lenders’ sales rep visits the dealership a minimum of five times per year, satisfaction increases in prime retail credit (+90 points), in non-prime retail credit (+94) and in floor planning (+45).
In retail leasing, satisfaction increases by 89 points with just four visits per year.
Another key point of discovery in the study for retail leasing is when finance providers work with customer through the lease return process, satisfaction is dramtically improved — by 126 points, to be exact.
Lease return paperwork can be confusing and burdensome for dealers, as J.D. Power pointed out 68 percent or leases are returned to the dealership.
Relationships Increase Satisfaction
Overall, the study — which took a look at 6,300 finance provider evaluations provided by roughly 1,300 new-vehicle dealerships in Canada — found that dealer-focused sales rep service plays a huge role in overall dealer satisfaction.
When a high level of customer service is provided, dealer satisfaction goes up to 943, versus 744 when there is no focused support.
“Dealers are interested in building a collaborative relationship with their lenders,” J.D. Power analysts reported.
So much so, that when lenders provide primary buyer/underwriter personnel to facilitate credit approvals and speedy contract funding in the application and approval process, satisfaction increases by 81 points in the prime market and is up by 76 in the non-prime retail credit segment.
Below are the full rankings for the J.D. Power 2015 Canadian Dealer Financing Satisfaction study:
Prime Retail Credit Segment
BMW Financial Services: 936
Mercedes-Benz Financial Services: 920
Honda Financial Services: 895
BMO Bank of Montreal: 891
Ford Credit Canada: 889
VW Credit Canada: 884
Scotiabank: 855
TD Auto Finance: 851
Prime Retail Credit Average: 850
RBC Royal Bank: 832
Desjardins: 829
Toyota Financial Services: 795
Nissan Canada Finance: 772
GM Financial: 729
NOTE: BMW Financial Services and Mercedes-Benz Financial Services are award-eligible based on equivalent sample size calculations; Included in the study but not ranked due to small sample size are Acura Financial Services and National Bank of Canada.
Floor Planning Segment
VW Credit Canada: 958
Scotiabank: 956
Ford Credit Canada: 950
Floor Planning Average: 934
RBC Royal Bank: 901
NOTE: Included in the study but not ranked due to small sample size are BMO Bank of Montreal and Mercedes-Benz Financial Services.
NextGear Capital, which launched in Canada back in 2013, has opened a new office up north.
The company held a ribbon cutting ceremony last week to recognize the opening of its new Mississauga, Ontario office.
The new space is 12,000 square feet, and will be used to house the company’s customer service center and provide room for growth as the company works to expand its customer base in Canada.
"We are excited to begin operations in our new space, which was necessary to accommodate our growing business in Canada," said Roy Vandermeer, vice president of Canadian operations at NextGear. "This new office space also represents a significant investment from Cox Automotive to the Canadian automotive remarketing industry."
Along with Vandermeer, Cox Automotive Group VP Patrick Brennan, NextGear president Brian Geitner and NextGear chief strategy officer and general counsel John Wick also attended the event and offered remarks to dealers, industry leaders and auction employees about NextGear's growth in Canada.
The company first entered Canada a little bit over two years ago and was occupying an office in Toronto. And just last month the company made its account management technology available to its Canadian customers, for around the clock access in both English and French.
Auto Remarketing Canada chatted with Vandermeer earlier this year to discuss the company’s expansion.
When asked what is top-of-mind for the business in Canada this year, Vandermeer said, "With the launch of our technology offerings in Canada, dealers will have access to our flexible term plans tailored to their individual business needs. Vehicle type and value, average inventory turn time and sales volumes are all factors in developing a successful finance strategy that will help dealers achieve their growth and financial goals.
“This is a fast-paced and time-sensitive business, and our online account management tools are geared to provide valuable real-time information that allows dealers to make informed decisions while on the go. Our goal this year is to introduce our technology offerings to our existing and rapidly growing customer base in Canada, and we fully expect to continue the growth trajectory we experienced in 2014 under the NextGear Capital brand,” he continued.
For more from Auto Remarketing Canada’s interview with Vandermeer, see the March/April edition of Consignor Corner.
Though the industry is under the impression there is going to be a bit more supply in the lanes this year, analysts are also talking about the “theoretical” nature of the upcoming move.
Josh Bailey, editorial director at Canadian Black Book, pointed out in an interview with Auto Remarketing Canada this year will most likely present a “theoretical increase in supply,” meaning many auction attendees won’t get a chance at the extra vehicles coming through the wholesale pipeline.
Looking at where prices stand today is key, Bailey said, since residuals have fared much better than originally expected, especially for four-year lease vehicles, “the bulk of the used market.”
“The forecasts were originally much lower than what the market price is today. So, the reason I think it is a theoretical increase in supply is that the dealers and the lessees are likely going to buy these cars before they hit the auction,” Bailey said. “If there is equity in the vehicles, then someone is likely to take it before it makes it to auction.”
Matt Rispin, general manager and owner at North Toronto Auction, pointed out in early March that overall volumes remain the same as lease returns from many of the auction’s customers haven’t begun their full return cycle.
Bailey contends that when auctions start to review values that are off and there isn’t equity in these vehicles, that’s when the industry might actually start allowing quality used vehicles to pass through the supply funnel and end up in the auction lanes.
And when this shift occurs, Bailey said, “It’s not likely going to be any one segment; it will most likely be the market as a whole.”
Though supply hadn’t spiked dramatically during the first few months of 2015, auction execs were seeing shifting trends and signs of more growth to come.
Don Wallace, general manager at Manheim Toronto, said in late February, “There are a few more off-lease vehicles making their way to the auction direct from OEM captive leasing arms, but we also see an increase in quality late model vehicles that are being acquired at lease-end online by dealers and wholesalers only to make their way to auctions anyway to capitalize on the arbitrage opportunity.”
Wallace explained a number of manufacturers will most likely see “modest” volume of off-lease inventory in 2015.
“We expect auctions across Canada to play a greater role in supporting this volume as many dealers especially in metro markets don’t have the physical space to absorb the increased volume,” Wallace said.
At North Toronto Auction, Rispin said supply hasn’t jumped up yet, “but, it’s coming!”
“We are expecting most of our volume increases to be upstream this year and perhaps a light trickle down to the lanes. But the expected lease return volumes should be purchased upstream, and therefore, the lanes will see their increase on 2016 as upstream can’t manage the volumes,” said Rispin.
Wallace pointed out in order to look at wholesale supply trends, we need to address automotive sales as a whole, especially as it relates to demand.
“With two years of record new car sales in Canada generating increased trades and the return of off-lease returns to remarketing channels, there is definitely more supply however demand appears to be keeping in step as noted by strong conversion rates,” said Wallace.
“Overall we expect a robust market for buyers and sellers in 2015, especially if they react in a timely manner to both micro industry trends and macro-economic factors,” he continued.
As for when supply expansion will start putting downward pressure on used prices, look toward 2016.
“Price relief should be coming, but it will be less noticeable in 2015. Next year, this topic should get juicer,” Rispin concluded.
Find this story and more content stemming from the Auto Remarketing Canada Conference in our March/April Auto Remarketing Canada Digital Magazine.
Kia is offering a new product in Canada that will benefit both dealers and consumers in the F&I department.
Kia Motors Finance (KMF) launches in Canada today, bringing new lease options for Kia shoppers.
Hyundai Motor Finance hit the market back in early January. The new KMF branch will also be headquartered in Toronto.
Ross Williams, Kia Motors Finance chief executive officer, explained the latest move is a “natural next step in our growth in Canada. It gives our dealers another way to support their brand, and the KMF business development managers and support team will help dealers provide great customer service.”
Williams will also be a keynote speaker at the upcoming Auto Remarketing Canada Conference, scheduled for April 20-21 at the Westin Harbour Castle in Toronto.
To start, KMF will provide branded lease products through Kia’s national dealer network.
KMF management said the company will also work to deliver further financing products for both consumers and dealers, efforts which will be focused on “building and sustaining” the Kia brand in Canada.
“The launch of Kia Motors Finance is the next step in terms of brand evolution in Canada. Ultimately, it will enable our dealers to provide a fully integrated suite of Kia-branded financial solutions to further enhance the customer purchase and ownership experience.” said Maria Soklis, vice president and chief operating officer at Kia Canada Inc.
TREND Financial — which specializes in custom-made automotive financing solutions — announced today it has signed an $81 million non-revolving credit facility with long-term partners Maxium Financial Services.
The company’s statement noted the move is designed to accelerate significant company growth, and will allow TREND “to continue its pace of growth for 2015,” with a focus on its strategic and financial objectives.
“We are encouraged and very excited about the amazing momentum TREND is experiencing and believe that with this additional capital the company will grow even more significant, “ said Brent Sawadsky, TREND chief financial officer. “Our strong working relationship with Maxium Financial Services and our dealer network will continue to fuel our success.”
Nahum Kaplan, president and chief executive officer, also voiced enthusiasm for the new deal, nothing it exemplified the industry’s confidence in TREND’s company mission.
“This additional funding is a great vote of confidence in TREND’s vision of how companies can accelerate their revenue growth, as well as in the long term potential of our company,” Kaplan said. “We are by far the fastest growing company in our market category, and we plan to use this funding to invest even more heavily in ensuring our continued success with our Ontario dealer network, as well as increasing our focus to franchise dealerships to further accelerate our growth.”
NextGear Capital is ramping up its presence in Canada and announced this week it has hired a new vice president of Canadian operations.
Roy Vandermeer has been chosen for the new VP role.
In this role, Vandermeer will be responsible for the growth and management of NextGear Capital's Canadian division, the company’s statement said.
"As we continue to grow our international presence, it's important that we place the right people in position to fuel our customers and help them turn a corner in their business," said Brian Geitner, president of NextGear Capital. "Roy has played a significant role in the development of our customer base in Canada and we look forward to his continued leadership and contributions to our company in this new role."
Vandermeer brings with him over 30 years of industry experience, starting as a sales representative with Georgetown Chrysler in 1981.
He joined NextGear Capital in 2013 as the regional director for its Canada region.
Before joining NextGear, Vandermeer spent 12 years in various leadership positions within Manheim's Canadian operations.
Other past experiences include posts with AFC, CIBC Finance and Municipal Financial Leasing Corp.
Vandermeer said, "I am proud and honored to work for such a great organization and look forward to continuing the momentum we have built since launching NextGear Capital in Canada."
Hyundai Motor Finance announced today it has launched in Canada, giving Hyundai dealers across the country access to captive financing options for their customers.
The new branch will be headquartered in Toronto and is a subsidiary of Hyundai Motor Group.
“Today’s launch follows months of development, including assembling a top-notch team, building high quality products and services, and consulting with dealers on their needs from a captive finance product perspective,” said Ross Williams, Hyundai Motor Finance chief executive officer. “We have six business development managers on the ground to serve Hyundai dealers. Hyundai-branded financing will enable dealers to now offer an exclusive Hyundai-branded sales experience.”
Starting out, Hyundai Motor Finance will provide branded lease products through the Hyundai national dealer network.
And over time, company management said, the captive will “continue to innovate and deliver new financing products for both consumers and dealers,” in an effort to help sustain and build the Hyundai brand in Canada.
Don Romano, president and CEO of Hyundai Auto Canada Corp., outlined the benefits of Hyundai-branded financing for dealers and their customers:
“After more than 30 years in Canada, captive financing is a logical next step in Hyundai’s development in this country. Hyundai employees and Hyundai dealers coast-to-coast are working tirelessly to continuously elevate the complete customer shopping, purchase, and ownership experience,” he said. “As part of this initiative, Hyundai Motor Finance will deliver on an integral component with new levels of service. Hyundai’s new captive finance company’s mission is the same as ours: to exceed our customers’ expectations.”
General Motors Financial posted across-the-board growth in North American loan originations during the third quarter, but loan penetration in Canada was down by over 10 percent from the second quarter.
As of the end of September, Canadian loan penetration as a percent of General Motors retail sales sat at 15.5 percent, down from 27.6 percent at the end of the second quarter. That said, it was up from 8.6 percent a year ago.
During the Q-and-A portion of the latest conference call to discuss company results, GM Financial president and chief executive officer Dan Berce pointed out that Canadian penetration, in general, “bounces around a little bit more because the vast majority of our originations are lease-related in Canada.
“Our penetration of their sales really depends on the overall penetration of lease in Canada,” he said.
GM Financial’s North American lease portfolio stood at $5.8 billion at the close of the third quarter.
That’s up sequentially by $1 billion.
But Canadian lease volume softened by $176 million quarter-over-year; however, that doesn't seem to be a cause for worry, according to company management.
Berce said, “I want to point out that the Canadian volume, again, is going to fluctuate depending on lease offers from GM Canada. Nevertheless, year-over-year, our (loan penetration) volume is more than double in Canada.”
He explained that GM’s overall lease penetration in the U.S. and Canada was fairly steady year over year, “and slightly trails industry averages on a mix-adjusted basis, when you consider lease penetration for pickup trucks is not as high as passenger vehicles.
“Their penetration is at or near industry levels,” Berce added.
From a credit standpoint, the company’s lease portfolio in both the U.S. and Canada is predominantly prime.
“We're experiencing extremely low delinquency and minimal default in that portfolio, as we would expect,” Berce said.
In Q3, GM Financial reported that consumer finance receivables 31-to-60 days delinquent constituted 3.9 percent of the portfolio at the close of the third quarter, marginally higher than the 3.8 percent reading recorded a year earlier.
Company accounts more than 60 days delinquent made 1.7 percent of the portfolio as of the end of Q3, compared to 1.5 percent a year ago.
Altogether, GM Financial’s North American loan originations came in at $1.957 billion during the quarter that closed on Sept. 30. The amount broke down to be a $905 million figure for the company’s AmeriCredit channel, contracts originated on vehicles sold by non-GM dealerships. The figure marked the fourth quarter in row of growth, and up from $673 million the division posted after the close of the fourth quarter of last year when the streak began.
GM Financial’s North American Q3 loan originations on new vehicles climbed to $680 million, up from $392 million in the year-ago quarter. Financing for used vehicles at GM stores also posted a healthy year-over-year, increasing from $156 million to $372 million.
“The GM channels, both new and used, increased significantly primarily because of the rollout of our prime program, which not only added incremental prime volume, but also enabled us to be more relevant to GM dealers,” Berce said.
“We now have a one-stop shopping opportunity with a full suite of products. That has increased our volumes across products, loan lease and commercial,” Berce said.
Nick Zulovich, Subprime Auto Finance News editor, contributed to this report.
RouteOne Canada Corp. announced its integration today with CTL Corp. — a specialty finance company serving customers looking for non-traditional credit options.
The companies say this move will help dealer clients in servicing more subprime customers and provides another options to sell to consumers with challenging credit.
"Our integration to RouteOne will help us help dealers to provide an exceptional borrowing experience for our nonprime and subprime customer base," said Scott Newhouse, chief operating officer, CTL. "We can broaden our reach across this market and deliver the outstanding service our customers know and expect."
What does the move mean for dealer clients of RouteOne?
Now, RouteOne Canada dealer users who have a relationship with CTL to complete the credit process electronically through the RouteOne portal.
"The addition of CTL to the RouteOne platform allows our dealers to help even the most credit-challenged customer — one who may not be able to obtain traditional financing," said Barry McMillan, president, RouteOne Canada Corp. "Not only does CTL serve this unique market segment, they're committed to assisting customers rebuild their credit. CTL will offer our dealers an important alternative to serve customers."
