Capital One Financial Corp.'s automobile financing unit is trying to enlarge its market share by partnering with community banks to provide loans the banks cannot make.
The McLean, Va., company, which does the bulk of its automobile lending through the Internet, recently struck deals with two banks to lend on their behalf and is working to sign on more. Capital One is marketing its three-month-old Agent Banking Auto Finance Program mainly to community banks that do not make car loans.
But David R. Lawson, the president and chief executive officer of Capital One Auto Finance, said he hopes to expand the program to large retail banks that do not want to operate their own direct auto lending programs. Capital One already has deals with AAA of Heathrow, Fla., and CostCo Wholesale Corp. of Issaquah, Wash., he said.
Mr. Lawson and an executive of one of the community banks that has teamed up with Capital One said the partnership allows banks to keep customers they might otherwise lose to a competitor.
"Why send them down the street to a credit union when you can provide competitive financing," said Alisha J.R. Johnson, the director of marketing at the $394 million-asset Highland Bank of St. Paul.
Joining Highland is BOK Financial Corp. of Tulsa. However, BOK Financial, with $17.3 billion of assets and operations in Arkansas, Colorado, New Mexico, Oklahoma, and Texas, declined to discuss its partnership with Capital One.
Mr. Lawson said that the program, in addition to boosting Capital One's share of the car-loan market, is a low-cost, low-risk way for a bank to offer car loans at nationally competitive rates.
"The cost the banks would bear would be what marketing they want to invest and then the cost of interconnecting from their system to Capital One," he said.
With over $13 billion of auto loans, Capital One is one of the largest auto lenders not owned by a major manufacturer. It sees the bank partnerships as a new market for its car loans.
Community banks have strong relationships with their customers, Mr. Lawson said, and Capital One plans to use those relationships to beat out lenders who advertise car loans on the Internet and the general public.
Banks can put a link to Capital One's car loan site on their Web site or have branch employees fill out applications for walk-in customers. The bank receives a fee for each loan made; Capital One processes, funds, and services the loan.
Ms. Johnson said she discovered Capital One's program by visiting the company's booth at a marketing conference. Highland could not make money on auto loans because it could not charge enough interest and remain competitive, she said. It did not want to hire the personnel and pay for the back-office functions that an active auto loan portfolio would require.
Ms. Johnson said the program was similar to partnerships it had made with other companies to do mortgage loans and brokerage services. Such partnerships allow Highland to focus on small-business lending, which it considers its core competency.
The Capital One program is "a good complement to our product line while being a product we don't want to offer ourselves, because of our size," she said.
Ms. Johnson said Highland has processed 21 applications since the program began in March. So far the bank has offered the auto-lending program only through its Web site, but it will send out statement stuffers and advertise with signs in its branches this month.
Capital One is not alone in its approach. The $63 million Ohio Central Savings of Dublin is trying something similar. So is Enhanced Technology Financial Services Inc. of Olympia, Wash.
Enhanced Technology originates and services all kinds of consumer loans, including car loans, mostly for community banks. It has 24 client banks and hopes to have 200 within two years.
In Enhanced Technology's consumer loan programs, unlike Capital One's car loan deals with community banks, the client bank keeps the loans in its own portfolio.
R.W. Christensen, Enhanced Technology's president and CEO, said community banks are passing up hundred of billions of dollars in the consumer loan business by avoiding lines of business like car loans. If they want to keep their depositors as customers, they need to offer a wide range of loans, he said.
"In a generally rising interest rate environment, bankers will have more difficulty retaining deposits unless they have multiple relationships, including lending relationships with their depositors," Mr. Christensen said Tuesday.
