Auto financiers of all stripes, from banks to captives, are getting the lead out when it comes to adopting electronic auto loan contracts, as dealers, lenders and capital markets players get more comfortable with the latest e-lending makes and models.
"We have gone from a very niche-oriented product to a very mainstream product," says Mark O'Neil, CEO of DealerTrack, which is a primary beneficiary, along with rival RouteOne, of the recent embrace of electronic contracting.
DealerTrack's eContracting technology has doubled its stable of participating lenders so far this year to nearly 10-and is on pace to double that number again by year-end. RouteOne's client roster now includes Bank of America, HSBC, Mazda American Credit, Lexus Financial Services and SunTrust. RouteOne, which has a base of 22,000 dealerships, offers multiple levels of integration, including electronic. It also offers Internet-based access and fax services.
Among the converts to DealerTrack's eContracting are JPMorgan Chase and Bank One-whose merger will create the nation's largest indirect vehicle lender. Other institutions that have signed on to DealerTrack include Union Bank and Trust and Capital One Auto Finance. Captive auto lenders that have signed on in recent months include Nissan Motor Acceptance Corp. and Infiniti Financial Services.
Heavy Hitting Adopters
About 15 percent of DealerTrack's base of 24,000 auto dealers have signed on for eContracting, with additional dealers signing on at such a quick rate that the product's penetration could be as high as 50 percent by the end of 2005. These participants will join DealerTrack's charter participants: Chase Automotive Finance, Subaru Motors Finance, Wells Fargo and WFS Financial.
Like similar Web-enabled platforms that aim to automate the back end of mortgage lending, eContracting cuts paper document transit as well as document-related labor such as keying and rekeying data fields. The result is a less expensive and time-consuming auto loan. "You can take costs out of the process for dealers and lenders by doing it electronically," says O'Neil, who adds that the primary competitive differentiator for auto lenders in today's marketplace is efficient, cost-effective customer service over better rates.
The contracting platform is the next step beyond receiving electronic applications for auto loans, which has been expanding for the past several years. Electronic contracting allows dealers to complete entire contracts electronically-including digital customer signatures-and to electronically transmit those contracts directly to participating lenders or captive finance providers.
Closing Down Mass Transit
The process eliminates paperwork and reduces "contracts-in-transit," or the paper contract copies typically express-mailed between dealers and financing sources. It allows the entire process to be completed within a day, meaning dealerships can receive their funding the same day they make a deal with a consumer. The platform also promises accuracy, since the loan becomes more low touch. In the traditional paper-intensive process, shipping, cross-checking and booking a retail contract can take as long as several weeks-with additional time added if mistakes are made when a contract is filled out.
Christine Pratt, a senior analyst at TowerGroup, says the technology can be useful in managing changes in auto contracts that often happened during the lending process. It's not unusual for a dealership to add items to an auto loan after a lender has given initial approval. In such a case, the two parties traditionally spend long hours in the phone haggling out the new details and forging a loan agreeable to both sides. "The customer would drive off with the car, and then the dealer would spend a fair amount of time trying to get the loan paid for by the bank," says Pratt, who adds that electronic contracting allows the loan to be quickly passed back and forth, making these agreements smoother.
Pratt says the ability to get a clean contract without a hassle is a decisive factor for many lenders in adopting electronic contracting. "The difference is you can deal a dealer: If you send your paper to me, I'll approve it and get you a clean contract, so your dealer doesn't have to spend hours on the phone with us. We'll take care of the contract, and instead of waiting a money, you'll get the funding immediately,'" she says.
Since competition in auto finance often comes down to who offers the best service to both the dealer and the consumer, one of the underlying goals behind the rollouts is that consumers would rather get their loan quickly than wait days just to save a few points on price. "This is a business that takes the path of least resistance," says Mike Brewster, svp at Union Bank and Trust. "Our job is to knock down hurdles and roadblocks."
Despite the benefits of time, labor and expense reductions, it has taken some time for electronic contracting to see the kind of traction it's enjoying this year. Observers say a less skittish dealership base and technology-receptive auto-finance markets are factors that have opened the door for wider adoption. "DealerTrack has done a nice job of educating the different parties in terms of what the process is like, being open and out front," says Steve Thibodeau, director of indirect businesses for Capital One.
Instilling Market Confidence
Auto finance, particularly in the subprime market, lives off the sale of auto-loan securitizations, and sources say DealerTrack has been scoring points with monoline insurers and credit rating agencies-who play a decisive role in determining auto loan asset-backed securities pricing-by explaining not only how the technology works, but how it's just as safe as traditional financing methods, if not more so.
"They've been working with the rating agencies to build confidence around the product," Thibodeau says. "They've also put safeguards in for consumers to ensure that everyone involved has confidence."
Instilling this confidence is vital, since any uncertainty about security or accuracy would force issuers of auto-loan securities to take a financial concession from investors or provide extra-credit enhancement for their securitizations, both of which cut into the savings provided by the technology. "Lenders are asking, 'If I securitize, will I have to pay a premium because of the technology? Will there be issues with underwriters and the monolines?'" O'Neil says, adding that DealerTrack has been in heavy communication with Moody's, Standard & Poor's, MBIA and others about the benefits and safeguards inhering in electronic contracting. The result has been a market for subprime auto- loan securitizations that has retained pricing levels favorable for issuers.
First Out of the Gate
DealerTrack also has a head start in the electronic contracting game over RouteOne, though TowerGroup says it's likely lenders will eventually use both DealerTrack and RouteOne in the years ahead, given their similarities. That includes financial institutions using platforms that were developed and owned by competitors.
Formed in 2001, DealerTrack competed contentiously with Credit On-line, its larger and more experienced rival at the time. The most efficient way to use Credit On-line was to access the network through the dealer-management systems, for which a dealer had to pay.
The rivalry ended in January 2003, when Credit On-line's Credit Connection network merged with DealerTrack, giving DealerTrack access to dealerships' data-management systems, a larger roster of lenders and a track to deliver electronic contracting without competition.
It's current foe, RouteOne, was launched two years ago by investors that included Ford, GMAC and Toyota. RouteOne has developed a Web-based system that enables dealers and their finance sources, including captives, banks and other financial institutions, to exchange credit application and decision information while on the Internet. "It's likely that lenders will see this as an opportunity to play RouteOne and DealerTrack against each other," Pratt says.
Once lenders get a handle on electronic contracting, Pratt says there are possibilities for the technology that go beyond auto finance. "One of the questions I get is, 'How do I make sure my branches in diverse states are giving out the right compliance documents? How do I ensure the contract is correct for a particular state?'" she says. "This solution, the idea of passing a contract back and forth until its correct and having customers sign it electronically, could work for other products, like home-equity loans. It could also improve customer service in branches as well."
