During the research stage for my PhD thesis I found a very interesting article by BAH (Booz Allen Hamilton). It focuses on the US auto finance industry and discusses the challenges for market players, which arrive from different industry forces, e.g. falling credit ratings for major OEMs. This article was written in 2004; however some ideas and key questions are still worth to read.
In order to structure this issue, MIECZENIKOWSKI, HIRSH and REPPA make a distinction between different types of players: OEM captives, large banks, small bank, independents, and internet lenders. For each type its current role and some key questions are presented.
Well, at least one statement did not consider all aspects. In terms of small banks the following statement can be found: “View automotive financing as another service to their customers. Primarily interested in ROE and leveraging of their infrastructure. Key questions going forward: Grow or go? Whether the cost disadvantage due to subscale servicing of auto loans is made up in overall scale to the servicing operations and the potential to cross-sell other offerings?”
I would like to add some different questions: Make or buy? Even for small banks the auto finance business should be part of their product range in order to be a full service provider. The key question is: What processes should be used in order to achieve an appropriate ROE? Two basic options exist.
- The bank is able to create a flat organizational process with nearly no interfaces that ensure a quick process (less process time) from the front end to the customer to the credit servicing department. The next question would be whether it is possible to achieve economies of scale. Hence it can be recommended to establish a flat business process for consumer loans (personal loans) and to integrate the auto finance business within this process. The major benefit is that the bank can generate revenues from interests.
- If the bank is not able to create such a process (e.g. due to the limited number of customers) but wants to offer this product is well, the “buy-option” might be a solution. For this case the bank should seek for a white label product supplier. The bank can work as a sales agent; it still services the customer and manages the front end. Opposite to this the credit servicing is operated by the external service supplier; the car loan appears on his balance sheet. The benefits for the small bank: There is no need to create a process that can never achieve a ROE; furthermore it can focus on its core competence: servicing and consulting customers. One disadvantage is left: The actual cash value of the provision is lower compared to the interest revenues.