There is a growing opportunity for banks in automotive financing, a niche that has long been dominated by the manufacturer-owned captive financing arms, according to industry participants.
The car loan market is divided into two segments: the direct market (a bank making a loan directly to a consumer); and the much larger indirect market (banks partnering with car dealers and providing the financing when a customer negotiates a deal with a car salesperson). It's the indirect market that is dominated by the captives, but both markets have opportunities for banks looking to take the plunge into auto loans.
The return on assets in car loans is slightly less than a bank's overall ROA-anywhere from 0.5 percent to slightly north of one percent-but as banks troll for new business, they are seeking ways to finance more cars, says Mark Perleberg, lead automotive expert at the National Automotive Dealers Association.
Banks' market share of the direct market has been declining for years as manufacturers' financing arms grow, says Steve Schooff, spokesman for Capital One, which is introducing a service that uses the Internet to expedite the application process.
Schooff says this market is one that many banks have simply found too competitive with the captives. "The manufacturers have made a lot more money financing cars than making cars," he says. The captives have the option of cutting rates below market prices-sometimes as low as the highly marketed zero percent deals-so the "challenge for banks is how to compete around that," he says.
The Capital One product is the latest in a growing handful of programs, but it is hardly the only option for banks considering this market.
The National Automotive Dealers Association offers a similar service, "eloan," which is linked to its site, says NADA's Perleberg. Plus, the credit union industry is pushing into car loans with a service that enables a customer to tentatively arrange financing for a car purchase. The Credit Union National Association did not have historical numbers for comparisons, but chief economist Bill Hample said that car loans represent a "significant and growing" area for credit unions.
To be sure, there are other opportunities for banks to exploit within automotive financing, says David McKay, senior director, auto finance for Power Information Network and JD Power. One is the used-car market. McKay says that while captives are forced to focus their limited resources on the new vehicle market, dealerships will look to banks and credit unions to fill the gap. Plus, he says that margins tend to be higher than with new vehicles. "There's a lot of value in those [used] vehicles," he says. Indeed, according to NADA, there were 20 million used cars sold in 2004 with an average price of $14,000 each. In terms of cars sold, that's 18 percent more than the 16.9 million new cars sold that year.
The used-car market is a major driver creating opportunities for banks, says Mark Pregmon, svp at SunTrust, one of the most active banks in the car-loan business. And within the used-car market, eBay in particular has become a growing factor, which opens the market up wider than ever before with an unprecedented ease of advertising. Another inroad into the car-loan market for banks is via partnerships with captives. Bank of America recently signed a deal with GMAC to buy $55 billion of car loans over the next five years. And in December, GMAC sold another $20 billion to the Bank of Nova Scotia, also for five years. McKay says he expects to see other captives make similar moves soon.
And yet one more inroad for banks is to finance the "floor plan" at dealers, McKay notes. Often times, the cars in a dealer's show room are not actually owned by the dealer, but are financed-and banks are increasingly looking to that market to extend loans.
However banks may decide to approach the car market, McKay says that they need to be committed to the idea that it's an old-fashioned, relationship-oriented business. "Technology is important, but you need those relationships," he says.
Somewhat offsetting the opportunities in the direct market is the one major obstacle of irrational competitors, says Pregmon. He sees banks and finance companies jumping into the market periodically with pricing that's too good to be true, he says, and while consumers usually take the best deal they can get, finance companies cannot sustain those types of deals. "I have a saying here that 'I'm constantly in the death grip of our stupidest competitor,'" he quips.
