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Beyond the Full Product Suite

Beyond the Full Product Suite

Interest among dealers in F&I production and profitability is elevated as profit margins remain compressed, new-vehicle sales show signs of plateauing, and dealers seek to maximize opportunities for service-department revenue. Among F&I product providers and administrators, the pressure to deliver benefits that appeal to agents and dealers and deliver real value for end users has never been greater.

To learn how the industry is keeping pace with the evolving needs of agents, dealers, and car buyers, P&A met with six high-ranking executives from some of the provider and administrator segment’s biggest players.

The Importance of a Full Product Suite

Matt Croak, president of Wise F&I, says his company constantly updates, changes, and augments its F&I product mix. Product development has been a focus for the past decade, he says, stressing that, to be competitive, a provider must offer a complete lineup. But in the age of digitization, they also have to do a whole lot more.

“A full suite of products isn’t enough; it’s having the technology to bring those products into the dealerships through online contracting and menu providers and adapting to changes in the car-buying process,” Croak says.

Like Croak, David Pryor of Safe-Guard Products International says his company invests heavily in product development — at the corporate level as well as with dealer clients.

“Program and product design is a key part of the Safe-Guard process and is usually one of the first discussions we have with clients,” says Pryor, who serves as the company’s CMO. “Over a series of product design sessions, Safe-Guard will be able to understand the client’s goals, desired customer experience, and, ultimately, design the program and product requirements to drive success.”

Tony Wanderon, president of National Auto Care, says offering a full product suite ensures every agent and dealer can find the products that fit their customers’ needs. Partnering with a full-suite F&I provider introduces “numerous efficiencies,” adds Dave Border, president of Allstate Dealer Services, including easier account maintenance, combined billing and commission payments, and improved reporting.

Larry Dorfman adds “consistency in sales and F&I training” — a key consideration for any dealer that is serious about F&I production — to the list of additional benefits brought by a full product suite. A single provider can offer “streamlined training for all benefits, rather than two or more different companies fighting for shelf space and confusing the employees with different training processes,” says the chairman of APCO, home of the EasyCare and GWC Warranty brands.

For Patrick Brown, president of IAS, a full suite is “more than just VSC and ancillary products,” noting that his company offers services ranging from income development and reinsurance to compliance training and marketing solutions. “We can help them grow their business by offering everything they need to increase F&I production.”

Defining the Full Product Suite

National Auto Care’s Wanderon says that his definition of “full suite” depends largely on the client, but most will include vehicle service contracts, GAP coverage, tire-and-wheel, and appearance protection as the most critical benefits, relegating other product types to a lower tier.

Pryor also includes prepaid maintenance on his must-have list, followed by “daily driving” coverage, including but not limited to tire-and-wheel, dent, windshield, and roadside assistance. He says Safe-Guard is working to “round out” its suite with lot-management, connectivity, and theft-deterrence and -recovery products.

“We’ll continue to evaluate how consumers drive and use their vehicles and make sure that we’re offering products that offer extra peace of mind and convenience,” Pryor says.

Allstate’s Border divides F&I products into categories: Service contracts offer long-term peace of mind, GAP adds a layer of security to financing, and appearance products assure the customer their investment will be protected against undue disfigurement.

“The ability to bundle a number of these products into a combo product can greatly simplify the presentation process and increase consumer comfort. Additionally, a provider with a full suite of products should offer a competitive reinsurance program,” Border says.

Brown agrees, adding that components such as income development and training, technology that streamlines the sale and administration of F&I products, and “multiple, A-rated underwriters” are somewhat less tangible but still valuable features that can help make a product suite complete. Finally, Dorfman says new technology can help dealers and managers build smarter processes and help establish lasting relationships with car buyers.

“It shouldn’t stop with vehicle coverage,” Dorfman says. “Retention tools like the SAVY Driver app tie the customer to their vehicle and to the dealership for service and repeat sales, which is instrumental in today’s digital age.”

As for which products to leave out, Wanderon says that, if pricing cannot be based on the underlying risk, he’s not comfortable with it. “In other words, some administrators underprice their products to gain market share, and we will not chase those who chose that path.”

Brown stresses that each of the products in IAS’s suite provide value to dealers and customers and that his company takes extra steps to ensure they are properly presented and sold.

“We’re not comfortable providing products that don’t have a clear benefit to the consumer. Additionally, we stay on top of the regulatory environment to ensure that products are being provided in a compliant manner,” Brown says.

Self-Administration and White-Labeling

Dorfman says each of APCO’s products are self-administered and -insured, noting, “Our EasyCare and GWC brands are on them and we assure the service delivers our brand promise.” Allstate Dealer Services “proudly” stands behind their products as both administrator and insurer, says Border, and his company develops and insures white-label products as a service for other admins.

“As a full-service F&I provider, we have complete control over the design and pricing of our programs and products,” Border says.

“We have seen a demand for white-labeled products in various channels and are able to provide that service for our clients,” says Croak, noting that Wise F&I administers every product in its suite. IAS and Safe-Guard self-administer nearly every product in their lineups, according to Brown and Pryor, with roadside assistance serving as a notable exception for both companies.

“Safe-Guard administers all of the products we offer except roadside assistance. Roadside requires significant scale to efficiently operate a 24/7 response center and the associated dispatch networks. We prefer to partner with a dedicated roadside provider to provide this service to our clients,” Pryor says.

Although more than 95% of his company’s products are self-administered, Brown prefers to rely on third parties for “smaller bolt-on services,” roadside included. “The key for us is ensuring that we have the ability to deliver the best product, service, and value to the consumer. We strongly prefer to do that in-house, but if we can’t, we partner with third parties to ensure that we can deliver best-in-class solutions.”

Wanderon says National Auto Care’s 34 years of experience in the administration business has been “critical” to the success of the company and its agent and dealer partners. He counts more than 6,000 dealerships, credit unions, and banks and finance companies on NAC’s administrative services roster and millions of contracts sold to date.

“We believe providing these services to our partners, along with the product offering, is imperative. Being the administrator allows us to have unwavering commitment to superior customer service and support,” Wanderon says. “In addition, it allows our partners to place their trust in us to take care of their customers — and the end consumers — in a time of need.”

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An Interview with David Trinder

An Interview with David Trinder

David Trinder is the CEO and co-founder, with COO Kumar Kathinokkula, of F&I Administration Solutions LLC, a Chicago-based provider of administration and business intelligence solutions for the auto and powersports F&I industry. P&A met with Trinder to trace the genesis of his company, discuss the dealer and agent reporting solution they launched this year, and learn why it’s important to conserve diesel while circumnavigating the globe.

P&A: David, we have been friends for years, but I know next to nothing about your early life. You are originally from South Africa. That’s all I got.

Trinder: Let me give you the Cliff’s Notes. I was actually born in Livingstone, Zambia, a mile from the Victoria Falls. When I was young, my parents moved to what was then called Rhodesia, soon to become Zimbabwe. I lived there until I was 18. I left Zimbabwe to attend the University of Cape Town to complete a bachelor of commerce, and I basically never went back. After university, I became a South African chartered accountant, or CA(SA) — much like a CPA — and lived in South Africa for 20 years.

P&A: Is it difficult to be away from the place where you grew up?

Trinder: No, not really. My parents and sister soon followed me to South Africa, so I have no family there. Rhodesia became Zimbabwe just as I left, and it has remained a country in the midst of enormous political upheaval.

P&A: We only recently saw the exit of Robert Mugabe.

Trinder: We did. It remains to be seen whether Emmerson Mnangagwa can deliver to the hopes of a long-suffering people.

P&A: Did you practice accounting in South Africa?

Trinder: Well, I never liked the idea of being an accountant. I was always looking for opportunities and I also wanted to so some sailing. After I finished my articles and got my CA, my wife and I worked for two years and did nothing but save. We bought the best yacht we could afford — which was not much, a 31-footer — and sailed around the world together.

P&A: How did you learn to sail?

Trinder: You know, it was actually quite interesting. I went to visit a friend and she had these photographs on the wall of her sailing. I asked her how she learned and she said she took a sailing course. I found out what course it was and did it myself. Then my wife and I started thinking about where we wanted to sail, started saving, and set out on our journey.

P&A: You must have encountered some rough seas along the way. Were your lives ever at risk?

Trinder: No. We went through quite a few storms, but interestingly enough, the toughest times are when you’re becalmed. It’s beautiful, but without wind, it’s difficult psychologically. We left Panama for the Galapagos Islands and it took 13 days to travel 700 miles, which is pretty slow when you consider we usually averaged about 125 miles a day. On one of the days, we actually drifted backward 25 miles. We had to conserve our diesel, because we used the engine to charge our batteries. We had a rule that we wouldn’t run it for more than three hours a day. That meant that we really just had to wait for the wind. I met sailors who had horrendous stories of how they struggled through the calms. In a storm, there’s action. When you’re becalmed, you’re just waiting. A few days in, you can start losing your mind.

P&A: How long did it take to complete your circumnavigation?

Trinder: Three years, covering 30,000 miles. Of course, we were stopping all the time. We spent two days on land for every one day at sea. We visited every island we could.

P&A: What was your longest stretch at sea?

Trinder: Twenty-five days, from the Galapagos Islands to French Polynesia.

P&A: You must have been happy to see land.

Trinder: I suppose. But it became a lifestyle. We were pretty happy at sea. I did an enormous amount of reading. I read Bertrand Russell’s “A History of Western Philosophy” twice. I mentioned we focused on saving money before we left, and in that time, we were often hunting for used books. We left South Africa with a huge number of books — all of which my wife and I read.

P&A: Once you had completed the journey, what was your next move?

Trinder: My next move was joining a boatbuilding business. In fact, I was offered a share of the boatbuilding business. But I didn’t take it.

P&A: Why not? That sounds ideal.

Trinder: It was a very depressed industry. And I had options. I lectured at the University of Cape Town and started a construction company with two other guys: Buys, Trinder & Bossi. We started that together and it grew very fast. Right now, it’s huge. Two years later, my brother-in-law and I started InterAccess, a company dedicated to converting typed documents into electronic documents. We built that together and I sold it about five years later.

P&A: And of course your accounting skills were applicable throughout.

Trinder: Absolutely. If I had to choose, I would do the same thing again. But I’ve never had a job as an accountant. After selling InterAccess, I got a job with a private equity fund, and for about three years, I was one of the guys making and managing the investments. We invested in about 10 companies. But I was living in Cape Town and working in Johannesburg. I was basically not at home unless it was the weekend. Rather than move to Johannesburg, we decided to emigrate.

P&A: You emigrated first to Canada, correct?

Trinder: Correct. Emigrating to the U.S. has always been very difficult. You could get into Canada on a points system, and we were accepted. We moved from Cape Town to Toronto in April 2000.

P&A: Why leave Africa?

Trinder: You know, every time I looked at the value of the rand I had saved, it was worth less. But more importantly than that, we looked at South Africa and thought, “Is this the place where our children will have the best future?” We just didn’t feel South Africa would offer them the best opportunities in life. Looking back, we feel it was the right decision. All three of my children attended McGill University.

P&A: You had traveled the world by that point, but I imagine Toronto was still a bit of a culture shock.

Trinder: It was cold. But it’s interesting. You will forever be an immigrant. I was in my early 40s when we emigrated. I was brought up on rugby and cricket, but quickly had to adopt football, hockey, and baseball.

P&A: And you coached hockey.

Trinder: I did. I coached my son’s school team. And I really only knew a bit about hockey when I started. I had been watching for five years, but it is different when you have to manage the bench.

P&A: I’m guessing they needed a coach and you had the requisite leadership skills.

Trinder: I’ll tell you what it was: I got really tired of watching bad coaches who did not treat everyone on the team equally. I actually had enough after one year. I just decided the only way to enjoy watching the kids playing hockey was to take the next opportunity to become the coach, and I insisted that every child get equal time on the ice.

P&A: I learned to skate when I was 18, and it was difficult. I can’t imagine it’s any easier later in life.

Trinder: It isn’t. Honestly, I never learned to skate very well. When I was coaching, I always used to get another father who was a good skater when we were having practice sessions. And the children were all much better skaters than me. I did play on a men’s team for a year, and my skating improved a lot. But I can’t say I was ever very good.

P&A: What was the first job you took in Canada?

Trinder: I worked with the Bank of Montreal, helping them with all the ebusinesses they had acquired over the years. One of the companies they owned was DealerAccess. After a couple years at the bank, they asked if I’d take over as CEO.

P&A: Is that common?

Trinder: Well, I was only consulting with the bank. I was not an employee. And no, it’s not common. But they needed someone to run DealerAccess. I was there, waiting in the wings, and they knew me well. And of course it was a valuable move for me, to become a CEO in a new country.

P&A: How did it go?

Trinder: It went very well. Ultimately, I helped encourage Dealertrack to buy DealerAccess. Then Dealertrack moved me to the United States and I’m now a U.S. citizen as a result. I worked for Dealertrack for a few years, managing various areas of their business. And in the end, I bought from them, with Kumar Kathinokkula, the SCS Auto platform — and there began F&I Admin.

P&A: When did you first cross paths with Kumar?

Trinder: When Dealertrack bought this business in 2006. I quickly realized Kumar was the only guy who really knew what was going on. He became my righthand man. And of course it was much smaller in those days. When we bought the business, it was doing about 400,000 transactions for seven customers. Last year, we did 6 million transactions with about 60 customers. So it really has been a great story.

P&A: F&I Admin is based in Chicago, but you still live on Long Island, correct?

Trinder: I commute. And I have been doing so for the last 10 years.

P&A: Did you ever consider moving to Chicago or moving F&I Admin to New York?

Trinder: I had already moved my family from Cape Town to Toronto to Long Island. My children needed to see their way through school, then college, and I just didn’t see the need to move again. As for F&I Admin, Chicago is where Kumar was, where the team was. It really never made sense to move the office to New York.

P&A: How big is that team?

Trinder: We now have 58 people in the Chicago office, and we’ve started a company in India, where we’ve got 30 people now, all IT operations, developers and quality assurance experts.

P&A: Are you tiring of the commute or is it just part of your workweek?

Trinder: It is really just now part of my lifestyle. And I only come into Chicago for two nights a week.

P&A: How does your frequent flier account look?

Trinder: Pretty good, I suppose. I’ve certainly got a lot of Westin points!

P&A: You have served as advisory board chair for P&A Leadership Summit almost since its inception. What prompted you to take an active interest in the event?

Trinder: I think it’s really important for this industry to have an event where we have an opportunity to get together and talk about the industry and the direction the industry is going. I will do anything I feel I can do to help facilitate what’s good for the industry. I’ve been doing it for three or four years now and it’s worked very well. I get to work with the advisory board, all of whom are leaders in our industry. I enjoy the process. I enjoy the fact that we’ve got an annual conference that gives the industry a chance to come together and talk about issues and new ideas.

P&A: It’s an incredibly focused and informed group. We use the word “educational,” but that doesn’t quite describe it.

Trinder: That’s right. It’s less educational and more topical — more of an effort to ask how people are thinking about things than how they do things.

P&A: Are you open to input from past attendees and prospective attendees?

Trinder: We love to hear any ideas from anyone. It’s really appreciated.

P&A: You launched clearFI, a new dealer and agent reporting system, this year. How is it going?

Trinder: We’ve only just got it to market, although we have been developing the solution for some time. We have built a very good team around it too. With that and the other developments in the works, I am really excited about the future of our business.

P&A: Before our call, I reread an interview you did with this magazine in 2012. It was rather prescient. You predicted that connections among the various systems that run our industry would proliferate and create new efficiencies, and so they have.

Trinder: How interesting. Yes, they have.

P&A: You must be happy.

Trinder: I am. I think that the industry has gone a long way toward that. And I think F&I Admin has been a huge catalyst. We connect to every single menu out there. That’s the first step. We had to come right out and say, “Look, guys, all these systems have to work together.” That is why we’re so committed to clearFI, which will put data in the hands of everyone, no matter where it’s coming from. We are in the perfect position to combine administration and product performance data together with the performance of the dealership and the dealership’s reinsurance position. The connectivity gives everyone the ability to do the transaction, and now we’re giving them the ability to understand the data and make the right choices on what to do next.

P&A: Is the platform ready to roll?

Trinder: We’re in pilot now, but yes, it is there and ready to roll.

P&A: Have you gathered useful insights from the agents who are piloting clearFI?

Trinder: Yes, we have, quite a lot. And what we’ve discovered is that each agent is used to doing things a certain and often slightly different way. It’s remarkable to me how much agents fiddle with the data before giving it to the dealer. We’ve learned that not every agent sees things the same way. We need to make reporting flexible enough to fulfill these many disparate views.

P&A: I have to say that, if I were in your position, I would be disappointed by that. I would want the data to be the arbiter.

Trinder: Yes. But we’re dealing not just with the data but also the interpretation of data. We can’t just deliver a product and say, “Here it is. Make it work for you.” If you want everyone to adopt it, you must deliver the data the way they want to see it. And that’s just reality. I wish it was easier. But if it was easier, everyone would be doing it.

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An Interview with Jim Maxim Jr.

An Interview with Jim Maxim Jr.

Jim Maxim Jr. is the president of MaximTrak, a RouteOne company, and chief digital officer of RouteOne Holdings. He is credited with the introduction of the electronic menu concept and widely known as an advocate of transformative technology for dealers, agents, and product providers. P&A met with Maxim shortly before the 2018 NADA convention to learn what MaximTrak and RouteOne have on tap for 2018, the changes F&I faces in the years ahead, and what it’s like to watch your team win the Super Bowl.

P&A: Jim, NADA is nearly upon us. What are you bringing to this year’s show?

Maxim: Our strategy is to support lenders and F&I product providers equally, so we have built a common platform they can do business on. Whether the product is on our menu or not, we are able to export all those documents for a single digital signing ceremony. We’ll be demonstrating that at NADA.

P&A: What else do you have planned for 2018?

Maxim: Starting in the second quarter, in terms of econtracting, we’re going to be able to support providers equally with MaximTrak’s ETrak business platform. Our team has been working hard on product platform integration. We want to show that we’ve invested. Ideally, we want to cut out administrative time and free up the F&I manager to help more customers.

Also, RouteOne recently launched Remote eSigning. Customers can use it to sign their loan or lease from home. We’re working hard to support the insurance sales process with startups like AutoGravity, Vroom, Drive Motors — there are a lot of them out there. How do we create a great online sales process?

P&A: And how do you protect F&I?

Maxim: The difference between the “F” side and the “I” side of the F&I equation is that customers are presented with insurance products. They’re not shopping for those products. So when you integrate with the insurance sales process, you have to be able to sell it virtually without having a salesperson present. We have to create a mechanism that adds value. Looking back at 2017, digital accounted for 4% of all sales.

P&A: That doesn’t sound like much.

Maxim: It’s not, but it’s growing exponentially. When you see a segment growing at 300%, it gets big pretty fast, and you can’t help but pay attention. All these startup companies are creating a layer between the dealer and the consumer. Their pitch is, “Use our technology to buy your next car. Nobody likes to buy from a dealership.” I can’t help but believe that, over time, providers will have to morph to make those products available on those platforms. RouteOne is becoming a conduit to support those fintech providers. We’re gearing up to support the entire industry, whether it’s online or in the showroom.

P&A: Is it fair to say the digital disruptors have a huge advantage, because they were never brick-and-mortar businesses and they get to work from a clean slate?

Maxim: That is fair. And they’re listing vehicles that do belong to a brick-and-mortar dealership on their sites, allowing customers to peruse the inventory, apply for financing, and value their trade. Then they can walk in with a pre-canned deal. Carvana does it with used cars. With new cars, it’s more of a sophisticated lead concept.

P&A: What would you tell the dealer who says, “Well, if I’m just going to be a delivery mechanism for some Silicon Valley startup, what am I doing here?”

Maxim: That dealer is already paying folks for leads. In this case, they’re paying for the value of connecting with a consumer they may not have otherwise. They’re still competing, still fighting for eyeballs. They’re just doing it in different ways. What’s the value of a car deal that came in after you spent $30,000 a month on Google? When you’re paying for a lead that comes in as a pre-canned deal, at least there is a direct correlation.

P&A: Does the presence of the disruptors mean the conversation about whether to adopt digital selling and contracting tools is officially over?

Maxim: Anybody out there who is hanging onto the concept of not using digital is hanging onto the past. Five or six years ago, product providers wanted to get into econtracting. Now 90% of products are contracted electronically. They’ve seen the benefit. And if the dealer is not econtracting, they’re not getting paid top dollar, because there’s an incentive built in.

The easiest way to do that is through the menu. You have got to make it easy to rate and econtract all those providers. Today, the administrative side is just as important as the sales side. We see dealers using our FLITE tool producing $200 to $300 more per vehicle than dealers using a paper menu. Looking at the financial impact, there is no way to argue that paper is better.

P&A: But you would agree that, if the customer wants to be offered the service contract and protection products they need — out of the million on the market — they still need an F&I professional.

Maxim: We are still in the early phases of introducing F&I products during the online shopping experience. We are seeing the concept introduced early on in the equation, maybe with some product education. We are not at that point where we’re saying you’re going to get a better F&I presentation online than in the showroom.

Our goal now is to equip F&I managers with the tools they need to allow that conversation to happen with every customer. I don’t think you’re ever going to emulate the experience you get with a good F&I manager. But we can create a seamless transition from online to showroom. F&I managers are still going to be the experts.

P&A: When will 96% of deals happen online and 4% in the showroom?

Maxim: We haven’t seen the fundamental shift that would take just yet, but the momentum is building. And when we hit that tipping point, dealers may find they need to create an Apple Store-style sales position. We have already seen Mercedes and BMW put their versions of the Genius Bar in stores. And product providers are going to have to get savvy about how to integrate these services into their platforms.

P&A: You joined the auto industry after working at Lucent and General Electric. Did you see an opportunity to be the “tech guy” in the dealership world, starting with the F&I menu?

Maxim: Not at all. I started from the ground up, working inside dealerships, learning and, ultimately, training on the F&I process. That’s where the menu began. When I started, the concept was around, but it was a photocopied piece of paper. There was no such thing as a menu system. We were pushing the concept as a way to get away from step-selling. I never set out to design dealership technology. I saw a fundamental need for a menu system and leveraged my skillset to do that. Then, once we created the technology, we realized we needed to externalize it to get a return on our investment.

P&A: If you were to open a dealership next week, what would it look like? I’m picturing a hyperfuturistic, fully automated store filled with floating touchscreens and staffed by robots.

Maxim: There is no doubt that, if I owned a dealership, there are a number of things I would do to streamline the sales process. I believe that lightly negotiated pricing and one-price models are coming back. My dealership would employ a one-price model. We would have high-quality salespeople and experts who can handle any question and have the conversation about F&I. But you’re not going to see robots walking around. The technology is only there to give people better tools to take on administrative tasks. You can’t automate people out of the equation. Streamline the process, inject technology to cut out wasted time, and employ systems that enable people to get the best results they are able to achieve.

P&A: It’s happening in the service department now.

Maxim: It is happening now. And the reason it’s hitting service is simple: Customers don’t have the time or patience they once did. Let them make appointments online. Integrate with their phones and send them text updates. We are even seeing dealers getting rid of their loaner operations to engage with Uber and Lyft. Why have a $40,000 asset sitting around if I can give my service customers three or four Uber coupons?

P&A: Can you give us a big prediction? What’s the next major development?

Maxim: Here’s what I see right now: The digital retailing efforts are really in their infancy. The idea is to enable consumers with tools to give them the power to self-deliver the vehicle. Give them the payment and F&I tools, do it virtually or in the showroom, wherever they’re comfortable, on any device.

I think this is going to have a pretty big impact on the front-end variable operations side. There will be a paradigm shift on how we sell cars. I don’t know how that will play out, but it’s going to have a major impact. Dealers are going to have to come up with a way to deliver a great customer experience. The dealers who get it right will get a big market share. Customers don’t want to have a great experience online and then run into a buzzsaw at the dealership.

P&A: How’s the family?

Maxim: Doing great. We have two boys. Baseball season is cranking up as we’re closing out hockey and basketball. I’m an Eagles fan, and we were fortunate enough to go to Minnesota as a family and see the big game.

P&A: That’s fantastic. I saw some crazy videos of Philly fans celebrating. Was it pure insanity?

Maxim: Well, remember, the Super Bowl is a pretty pricy affair, and people come from all over, so you’re not necessarily getting the typical home fan. And the NFL makes it very much a family event. There was a play zone and games for the kids. The whole NFL Network studio was there. Players were meeting fans and signing autographs. Polaris is headquartered nearby, so they had guys on snowmobiles, doing backflips. It was a great all-around family vacation.

P&A: And a great game. Philly was dominant, but you can’t ever count the Patriots out.

Maxim: They went up by one point and, man, we were sweating. I thought, “OK, here’s Tom Brady’s show. Here’s how it happens.” But we kept them from scoring and won the game. It was amazing.

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Risky Business: P&A Meets Ride-Hailing

Risky Business: P&A Meets Ride-Hailing

Few emerging automotive industry trends have garnered as much attention as ride-hailing. Services such as Uber and Lyft offer mobile app-based services anyone with a smartphone can use to arrange and pay for a ride, typically for less than the cost of a taxi and almost always with a driver who is using their own personal vehicle to pick up fares.

Drivers and passengers are prompted to rate one another after each ride, and both parties have good reason to keep their grades up. For drivers, that requires delivering a memorable customer experience and maintaining their vehicles to a high standard of cleanliness and repair.

These factors combine to create an attractive transportation option. The numbers prove it: In 2017 alone, the global ride-hailing leader, San Francisco-based Uber, facilitated four billion rides in 600 cities in 78 countries. (It took the company seven years to rack up its first billion.) With 75 million monthly active riders and three million active drivers, the company currently averages about 15 million rides per day.

Executives working at the highest levels of the F&I product provider and administration segment are well aware of the expanding reach of ride-hailing. They know a certain number of the units covered by their service contracts, GAP policies, and protection products are being used for livery. They can assume Uber and Lyft drivers are far more likely to blow through their mileage limits than the average car buyer. In many cases, the mere fact that the vehicle is being used for commercial purposes voids the coverage.

So how serious is the issue, and how are industry leaders responding? To find out, P&A reached out to Brian Krasavage of Allstate Dealer Services, Kelly Price of National Automotive Experts (NAE)/NWAN, Safe-Guard Products International’s David Pryor, and Tony Wanderon of National Auto Care (NAC). We quickly learned ride-hailing isn’t keeping our sources up at night, but it is on their radar, and further complications — and opportunities — almost certainly lie ahead.

What’s the Big Deal?

Summarizing the consensus opinion, Price says she is not particularly concerned about ride-hailing, noting that, for most affected units, the owner is only using their vehicle to earn supplemental income in their free time.

“I really don’t think there is much difference between using a car for ride-hailing and using a car for light business use,” says the CEO of NAE/NWAN. “For those consumers who would like to work for a ride-hailing service full-time, inclusive rental and lease options are available from both Uber and Lyft.”

“I don’t see what all the fuss is about. We price our products based on time and miles,” said Wanderon, who serves as NAC’s CEO. “Do I care? Yes. It is a problem, but not because of the expiring miles.”

Wanderon’s chief concern is the enhanced likelihood of a claim arising within the first two or three years of ownership, which is traditionally considered a low-risk period for new vehicles. “If they drive more than 25,000 miles per year, they come into risk fast, and you’re not going to have the earnings to pay the claims. … When you get a higher loss upfront, you want to make rate adjustments, but you don’t really understand the risk you’re taking on at this point.”

Pryor sees ride-hailing — and carsharing, which includes Zipcar-type services and pooled fleets — as a “significant opportunity” for Safe-Guard, where he serves as CMO. If F&I products are designed to protect customers from the “perils of ownership,” and ride-hailing increases those perils, he argues, opportunities for sales proliferate.

“This is not only due to higher vehicle usage, but also the fact that these vehicles are now a source of income for our customers,” Pryor says. “This commercial approach to vehicle ownership sharpens the customer focus on the value our products provide over their ownership lifecycle. Our only concern is identifying when these vehicles are used for ride-hailing so we can design and price the products appropriately.”

Krasavage agrees. The vice president of Allstate Dealer Services says his company is responding to the expansion of ride-hailing by evaluating ways to adapt their products to meet the needs of those drivers. Rather than exclude or disqualify commercial users, Allstate’s service contracts, for example, are being updated to include them.

“For GAP, we view ride-hailing as a business use, and the vehicle is eligible for coverage under our commercial GAP product offering,” Krasavage says. “We are evaluating the impact on our lease product, Allstate Excess Wear & Tear, which currently excludes business use; however, due to the typical high mileage associated with ride-hailing, we don’t envision a significant number of leased vehicles being used for ride-hailing.”

Equally telling is a recent move made by Allstate’s business insurance division, which partnered with Uber to provide commercial coverage whenever the driver’s app is switched on.

“Overall, we view the changes in transportation preferences as opportunities to address new needs,” Krasavage says.

Qualification and Sales

Krasavage says his company’s inclusive approach is designed to keep things “as simple as possible” for dealers and customers. But he does not downplay the need to collect whatever information is necessary to determine the coverage each customer’s usage demands. Price agrees, noting that NAE/NWAN has yet to see a “true impact” from ride-hailing, but that hasn’t prevented her team from continuously monitoring their programs. Pryor says Safe-Guard relies on its dealers and claims team to identify ride-hailing customers, primarily because they want to know how that application affects purchase, usage, and claims.

“At this stage, our main focus is on collecting as much data as possible to understand customer behavior and product opportunities,” Pryor says.

Wanderon knows that, outside of asking them, there is little product providers can do to determine whether a given F&I customer plans to use their new vehicle to pick up fares — in fact, at the time of purchase, some car buyers may not know themselves. Rather than interrogate their customers, he advises F&I managers to qualify them by making clear the terms of the contract. If the customer understands the coverage, they should be less likely to buy products they won’t be able to utilize.

“When they do have a claim, and we deny it, we’re the bad guys,” Wanderon says. “But we wouldn’t be able to identify them unless Uber shared that information with us.”

“Ask the right questions, then make the appropriate product suggestions based upon the customer’s answers,” Price advises. “There are a variety of products offered by our industry such as service contracts, appearance protection, and others that would provide great benefits to these consumers.”

Krasavage concurs, adding that, if a customer identifies themselves as a ride-hailer, they should be rewarded with a customized F&I presentation. If the dealer’s lineup includes an applicable service contract, a commercial GAP product, and robust paint-and-fabric and tire-and-wheel protection, it’s a win for all sides.

“If a customer is serious about conducting ride-hailing to the point where they consider it their primary business or an important source of income, the F&I manager should emphasize the importance of keeping their vehicle in the best condition possible,” Krasavage says. “No one likes riding in an Uber or Lyft vehicle that is in disrepair or unkempt. A vehicle in better condition can help maintain a high level of rider satisfaction and ratings given that impacts their reputation.”

“To me, people who are ride-hailing, in most cases, they take care of their cars better,” Wanderon adds. “That’s their livelihood. If you’re an Uber driver, you want to get that five-star rating.”

Other Concerns

Pryor said he anticipates specific pricing for ride-hail-oriented programs and usage-based pricing for carshare programs. For now, he says, Safe-Guard remains in data-gathering mode. “From our perspective, the value of having a larger, more robust pool of data on the impact of ride-hailing outweighs the short-term risks associated with the higher usage.”

Safe-Guard is currently testing unlimited-mileage vehicle service contracts in select markets, Pryor adds. He expressed dismay at the fact that some third-party administrators have used evidence of ride-hailing to deny claims. “This short-term gain creates tremendous customer and dealer dissatisfaction and risks tarnishing our entire industry. Transparency and education are key; both customers and those selling the products need to fully understand what is covered by the products available.”

Price believes understanding which products ride-hailers want and need is just as important as the pricing. To that end, NAE/NWAN’s lineup includes options that should appeal to Uber and Lyft drivers.

“We offer a variety of terms, including unlimited-time service contracts, that follow the vehicle odometer only, rather than coverage being based on both time and mileage,” Price says. “These flexible terms provide the customer and dealer with options for standard and nonstandard use.”

Allstate offers a “full array” of time and mileage options, including a 36-month/125,000-mile service contract, Krasavage reports. Change is inherent to the automotive business, he adds, and providers and administrators owe it to themselves to build offerings around individuals who use their vehicles to generate personal income.

Looking further ahead, Price wonders whether the growing popularity of subscription-based services, including programs introduced by such manufacturers as Cadillac and Volvo, will temper the demand for ride-hailing — and F&I products.

“Our industry needs to adapt to current and future buying trends,” she says. “The vehicle-buying landscape is changing. As providers to the industry, we need to closely watch consumer buying trends and make the necessary changes to remain relevant.”

If vehicle ownership really does go out of style, Wanderon says, Uber may be the least of the industry’s concerns.

“Clearly if there are fewer consumers buying vehicles, there will be fewer opportunities to sell our products,” Wanderon says. “If new-vehicle sales fall from 17 million to 13 million, that will have an effect.”

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Industry Trends for 2018

Industry Trends for 2018

It’s a good time to be in the automotive industry — or any business, as long as the stock market continues to hit record highs, unemployment remains low, and consumer confidence stays strong. But auto dealers will continue to rely on F&I to maintain profitability, bring customers back for maintenance and repairs, and create opportunities for participation in reinsurance programs.

P&A interviewed 21 of the segment’s leading executives and experts to get their insights on the trends that will shape the economy as a whole and the F&I industry in particular in 2018.

The Economy

Our experts agreed that the aforementioned economic indicators, coupled with the late-December passage of the Tax Cuts and Jobs Act of 2017, should put more money in American pockets and keep the country in a car-buying mood, even as new-vehicle sales plateau. The Trump administration’s next major legislative target is a massive infrastructure bill, which could create even more jobs.

“I expect a very healthy economy in 2018,” said Joel Kansanback, president of Automotive Development Group (ADG). “The recent tax changes and the potential for a future infrastructure bill should continue to fuel optimism and investment.” Kansanback does expect vehicle sales to fall, “but not a dramatic dropoff — maybe a 5% reduction in total sales and probably greater separation between the dealers — meaning the stronger dealers will grow and the weaker dealers will shrink more than 5%.”

Heading into 2018, the U.S. economy is enjoying “good momentum,” said Kristen Gruber, president of Dealers Assurance Company (DAC). “Unemployment is at a 16-year low, inflation is almost nonexistent despite years of low interest rates, and the stock market rose about 19% in the past year. These factors all contribute to a strong consumer confidence index, which bodes well for the automotive industry.”

Citing new-vehicle sales forecasts in the “still robust” 16.7 to 16.8 million-unit range, Gruber noted that trucks, SUVs and CUVs continue to attract buyers as gas prices remain low. Sales of electric vehicles may increase, she added, but their share of the market has yet to reach double digits. Autonomous vehicles could be the segment to watch in 2018.

“I think we’ll see additional manufacturer spending on self-driving technology, with some launches scheduled for as early as 2020. The big question is whether federal regulators will slow this process or help to speed things up,” she said.

“Majority opinion points to tightening car sales in 2018,” said Kumar Kathinokkula, COO of F&I Administration Solutions. “There are a few opinions pointing to a steep fall. I tend to believe they will decrease but not fall off a cliff. It will lead to increasing focus on service and F&I income to offset the even lower front-end gross income. Industry leaders taking a longer view see 2019 and 2020 sales declining further but not necessarily sharply. I am anticipating higher focus on selling more profitable products through more channels than ever before.”

“The economy is going to be great, really great,” said Dylan Doran, president of Western Fidelity Insured Services. “Tax reform is going to give our industry just the shot the U.S. auto segment is going to need. We’ve been on a racetrack for seven straight years, and the car was just about out of gas. Then tax reform is signed, and this is going to refill the tank, which is going to give us a few more good laps.”

“All economic forecasts lean forward in 2018, with favorable metrics indicated for the general U.S. economy and as those indicators apply to the auto industry and automobile dealers,” said Jim Maxim Jr. “Household incomes will be up with low unemployment, so consumer confidence will be high. Interest rates will remain low, motor fuel will remain available and cheap, and credit availability will remain good.”

Maxim, who serves as president of MaximTrak (div. RouteOne) and CDO of RouteOne Holdings LLC, also cited several “interesting tidbits” from Edmunds’ 2018 Automotive Industry Trends report, namely record returns of off-lease vehicles and aging trade-ins.

“As far as this second trend, I see it as a uniquely advantageous one for dealership F&I operations, as buyers of older models realize the value of vehicle and budget-protection products such as service agreements, prepaid maintenance and GAP,” Maxim said. “The Edmunds report also notes an increasing days-to-turn trend in 2017, the highest since the recession, which will require dealers to give even more attention to inventory management, pricing strategies and used-car reconditioning to sell cars more quickly, also reducing floorplan interest.”

Maxim also cited a Prevedere report predicting a saturated market will produce few buyers and dealers — and providers — must maximize every sales opportunity. Lee Bowron, a partner in the actuarial and insurance consulting firm of Kerper and Bowron LLC, warned that economic indicators don’t tell the whole story.

“The consensus seems to be that the economy will continue growing in 2018, but the automotive market will continue to see a decline in new-car sales,” Bowron said. “This is due to the expiration of pent-up demand for new vehicles and a large supply of late-model used cars.”

In the fourth-quarter “Economic & Market Review” he produces for BOK Financial Corp., CIO Jim Huntzinger ticked off a number of less-discussed but no less important indicators for car sales, including strong consumer spending, corporate earnings and housing prices. However, he cautioned, “Despite the clearly improved economic news, interest rates have been rangebound. That’s not to say they haven’t moved up, but the increase in rates has been modest.”

Huntzinger said a “well-behaved” interest rate market is critical to economic growth, earnings growth and full unemployment. He believes the directors of the Federal Reserve Bank understand and support this conceit.

“The Fed continued their now well-established pattern of small, ¼-point rate hikes through 2017. That pattern will continue in 2018, as the Fed has three additional rate hikes forecasted during the year,” Huntzinger wrote. “There will be a leadership change at the Federal Reserve in 2018 as Jerome Powell takes over as chairman from Janet Yellen. The overall Federal Reserve strategy will remain unchanged even though leadership will change.”

Huntzinger added that he believes individual and corporate tax cuts will help boost business activity and wage growth and “help to cushion the blow of any possible geopolitical shock, should one occur. … The U.S. economy showed improved growth beginning in the spring of 2017. The tax plan should reinforce this growth pattern in 2018.”

“In general, I see more of a flat year as rising interest rates offset the trickle down from the tax changes,” said Jeff Jacobs, CEO of Universal Lenders, home of the ZERO Plan. “I see a moderate gain in the automotive industry as the tax changes put money in the pockets of those who still need a vehicle but could not afford it prior to the tax change.”

Tax cuts could provide a “significant boost” to the economy in 2018, said Greg Petrowski, senior vice president of GPW and Associates Inc. Though their effect on new-vehicle sales remains to be seen, “The automotive industry has been trending downward the past two years, and the new tax reductions may serve to buck the trend.”

Despite that downward trend, Brian Reed believes overall sales will remain strong.

“Assuming there are not any significant events — such as war, housing meltdowns, etc. — 2018 should be another good year with used-cars sales making up for the drop in new-car sales with sales of at least 16.75 million,” said Reed, who serves as CEO of F&I Express.

“Many economists are projecting growth in the 3% to 4% area for next year. This doesn’t necessarily portend great things for the auto industry,” said Rick Roesel, director of F&I operations for Brown and Brown of Kentucky. “Fortunately for many of us, the past five to six years gave us growth and record years in our industry. Meanwhile, the economy just kind of stayed parked in the 1.5% growth area. So, just because the economy grows at a healthy clip it doesn’t mean the auto industry will too — although it sure doesn’t hurt.”

The Industry

Our experts agreed that keeping up with emerging technology will be critical to success at every level of the F&I industry in 2018. Kelly Frommer, director of sales for Line 5, noted that online retailing has changed the way American consumers buy everything — except, in most cases, new vehicles.

“Consumers today know exactly what it is they want, how much it should cost, and how much they should spend. Consumers are using the internet for their research and for almost all their shopping needs,” Frommer said. “I can now buy all my groceries, clothes and technology from the comfort of my couch. No more long lines at the registers? No carrying groceries up the stairs? I’m in. The list of what I cannot buy online is now shorter than what I can buy online. The automotive dealership — and especially F&I — must keep up.”

F&I Express’ Reed concurred, noting that the appeal of online F&I is not limited to convenience.

“Consumers are demanding more transparency in process and pricing in both the car-buying and F&I process,” he said. “Dealers are at early stages of embracing the change of processes, with many dealers taking real action and making process changes in sales and F&I while other dealers talk about changing but are not taking the actual steps to really implement a change. … Then, as more dealers adjust their processes, it will force other traditional dealers to change or no longer be in the consumer’s consideration set.”

Bowron agreed that car buyers will be drawn to online purchasing options. He also noted that “Rapidly changing technology may put pressure on used-car prices as models become outdated more quickly.”

James B. ‘Jim’ Smith said the industry has started to “feel its way around” these new models, including combining online vehicle and F&I sales.

“But this will be an evolutionary as opposed to a revolutionary process,” said Smith, who serves as CEO of SouthwestRe and chairman of the board of DAC. He pointed to the growing influence of the subscription model, which appears to have been embraced by Ford and General Motors, among other automakers.

“This is a concept that targets more of an age-specific customer — think millennials — but the industry is definitely aware of this mindset for all demographics and continues to develop more programs that fit this concept,” Smith said. “Our industry needs to be aware of the technical aspects, such as payment-frequency implications, from both a regulatory and processing perspective for the subscription model.”

F&I and compliance expert Michael A. Tuno, the president of World Class Dealer Services and ARMD Resource Group, said rising vehicle prices and extending loan terms will put pressure on dealers to manage the trade cycle.

“In F&I, this troublesome trend can be solved by having products that shorten the trade cycle. The existing accelerated payment programs in the consumer finance industry will have some role in this area, but look for new products to emerge that will make this trend a more positive one for F&I and the industry as a whole.”

Tuno also pointed to leasing as a “partial solution” to the affordability gap, but he doesn’t believe the leasing option alone will grant dealers and factories the brand loyalty they desire.

“Consumers who lease will generally shop for any lease which hits their budget price point, regardless of the retailer or the manufacturer. Just as was mentioned above for the loan segment of the industry, look for new products to emerge that will aid the F&I department in this area,” he said, adding that dealers will also keep a watchful eye on credit underwriting for subprime borrowers and must keep their own houses in order as well. “F&I will be at the forefront to ensure that the relationship with the lender community remains one where trust and mutual respect will continue to be the hallmarks of the relationship. Any notion of powerbooking and altering consumer credit must be extinguished in the F&I office.”

Like most executives in the P&A segment, GPW’s Petrowski watched GAP losses rise industrywide throughout 2017 and remains concerned about the wellbeing of the core F&I offering heading into the new year.

“We’ve continued to see significant deterioration in GAP profitability and we’ll continue to monitor rate increases and the trends in the underlying drivers of GAP losses, such as total loss frequencies, depreciation rates, loan terms and credit quality,” Petrowski said.

Kathinokkula agreed but feels that GAP still presents opportunities for streamlining the administration process. “The consensus appears to be that GAP pricing will see some major structural reform – one that is perhaps long overdue. This will not only manifest itself in how GAP premiums are underwritten, but also in an increasing drive to make the administration of GAP much more efficient and cost-effective. Express Recoveries is already providing the launch pad for making cancelations easier to process, but there is tremendous opportunity to streamline the GAP claims process.”

DAC’s Gruber predicted loan terms would continue to extend as average transaction prices rise, noting that car buyers will continue to focus on their monthly payment when arranging financing.

“Negative equity increased in 2017, both in terms of the percent of trade-in vehicles with negative equity, as well as the amount, and I expect this trend to continue without a significant tightening of credit. Additional pressure on used-car pricing will result from 4 million off-lease vehicles expected in 2018.

“None of this is good news for GAP providers,” Gruber added, “and I expect to see more rate increases for this product.”

Gruber did express optimism for online F&I. She believes introducing the benefits of protection products earlier in the sales cycle could promote better understanding and higher penetration rates. But she reiterated that autonomous driving was a segment worth watching for product providers and administrators.

“Technology has the potential to shorten the car-buying cycle, driving more customers into newer models sooner as they seek the benefits of collision-prevention systems,” she said. “High-tech service contracts that cover these systems will become even more important due to the high repair costs.”

“VSCs will continue to reign supreme,” said Kathinokkula. “But certain ‘micro-trends’ are going to continue to gain momentum towards becoming major trends. Coverages that were traditionally considered ancillary are being bundled with VSC — where regulations allow and make sense — such that a single contract could serve as a ‘one-stop shop’ for customers to get more benefit. While it is likely to stay more of a blunt bundling for a majority of 2018, providers are going to get more sophisticated as more analytical and computing power is brought to bear in how the products are structured to cater to specific needs of customers.”

For used-car buyers, Maxim noted, certified pre-owned units continue to offer an attractive alternative to buying new. But he also believes demand for CPO and other used units creates a “unique opportunity” for dealers who wish to harness the power of F&I as a service retention tool.

“As dealers recognize the retention-building value in selling service contracts, prepaid maintenance and tire-and-wheel packages that tend to ‘connect’ the used-car buyer to the dealership, dealership service volume will increase, as will repair order volume and repair order dollars,” he said. “Too often, dealers have not wooed used-car buyers to keep them servicing at the dealership and establishing the service habit that translates into other car purchases down the line. As the purchase price of these high-quality, well-maintained used cars continue to rise, some consumers will find value in purchasing GAP insurance, to cover the spread between loan value and replacement cost.”

Taking a wider view, Maxim stressed the need to recognize the emerging technological “singularity” that will combine every part of the purchase and ownership experience — from shopping and buying to financing and servicing — and driven by the increasing application of artificial intelligence.

“Everything is connected, and the winners are the gatekeepers who facilitate flexible and modular processes and connect them with consumers,” said Maxim, who listed such advances as data-mining systems and predictive-analysis tools among the precursors to the AI revolution ahead. “All this is so new and moving so fast through our industry that we give no second thought anymore to the basic predictive analysis tools built into the engine onboard computers and systems sensors. The Department of Transportation has already proposed making it easier for cars on the road to talk to one another. Furthermore, at the recent Consumer Electronics Show, Nissan announced its work connecting human brains to vehicles.”

The widespread introduction of driverless vehicles will “revolutionize” the industry, Maxim said, and dealers and providers who embrace it will deliver a “full ecommerce solution” that will create an interactive F&I experience for customers, transform the vehicle delivery process, and drive dealer profitability.

Meanwhile, as ADG’s Kansanback pointed out, “While there has been a lot of conversation about F&I starting earlier in the buying process, outside of a few maverick dealers, very few have had the desire to put themselves out there. So it will be interesting to see if there is another waver ready to dive in or if adoption will continue at a pretty modest pace.”

“Where will F&I income growth come from as we max out revenue from the dealer-controlled finance transaction?” asked Universal’s Jacobs. “Service drive, cash and lease customers offer the best opportunity. These areas can no longer be ignored if you want to grow the F&I income.”

David Kaseff, a partner in the accounting firm of MarksNelson LLC, said he expects F&I products to “continue to evolve to meet the challenges posed by a changing tax and regulatory environment for product participation.” Attorney Aaron E. Lunt, head of regulatory affairs for The Warranty Group, noted that the Tax Cut and Jobs Act preserved the federal tax credit for those who purchase electronic vehicles.

Lunt expects those sales to rise, and not just because of the tax break. Automakers, regulators and industry outsiders, such as Tesla, all seem to be leaning away from the internal combustion engine, and the F&I industry will eventually have to adapt.

“Further for the F&I office, cars are still going to break down, so the need for service contracts — and other ancillary products — will remain vibrant, and the need for product innovation remains strong,” Lunt said. “Car maintenance and repairs can be expensive, so consumer appetite for products remains high.”

As for Western Fidelity’s Doran, “Manufacturers are always on my radar. Volkswagen putting a six-year, 72,000-mile comprehensive manufacturer warranty on all 2018 models catches my attention. We will be watching this closely, as potentially this could create a path for other manufacturers to follow.”

F&I Products

Which F&I products will be the big sellers in 2018? John Braganini, principal of Great Lakes Companies, listed appearance protection and tire-and-wheel coverage. The reason? It’s simple: “Cost and profit margin,” he said.

Doran said bundled ancillary products represent the industry’s largest growth segment. “Consumer acceptance is strong for a high-value offering of products such as paintless dent repair, windshield repair and replace, key replacement and wheel-and-tire protection, bundled together in one offering,” he said.

Frommer agreed, noting that, although service contracts “always beat other protections in sales, especially as vehicles get more complicated to repair,” bundled products represent the kind of value most car buyers understand. “The more coverage you bundle into one program, the more popular it will become with today’s consumer.”

“The growth in ancillary product sales will continue to outstrip growth in vehicle service contracts,” said Brent Griggs, president and CEO of Portfolio. “Penetration of VSCs is at an all-time high, whereas adoption of GAP, theft protection, loyalty and appearance protection products will continue to grow, and they are more affordable for car buyers.”

“Service contracts will remain strong,” reiterated The Warranty Group’s Lunt, noting that, as cars become increasingly expensive to repair, consumers will feel compelled to avoid the high cost of unexpected repairs. “Shifting that liability through service contracts is an attractive and affordable way to do so — a form of personal risk management.”

SouthwestRe’s Smith said service contracts will “obviously” remain at the top of the F&I heap in 2018, followed by GAP, “which maintains its popularity, especially given the benefits from a consumer perspective, which unfortunately has translated into underwriting pressure from a provider perspective.

“I believe that GAP will remain popular but not as popular, and aftermarket products such as protection products will fill some of the decline in GAP,” Smith added.

“Dealers looking to optimize every opportunity will ratchet up their marketing of VSC, prepaid maintenance and similar products that provide valuable services and keep customers returning to the dealership,” Maxim said. “Linking used-car buyers to the dealership for ongoing service needs is imperative — no dealer can afford to lose these customers to the aftermarket.”

Increased vehicle prices and quickening depreciation will continue to aid GAP sales, Maxim added, and he identified lease wear-and-tear as another strong product for 2018.

“Maintenance program sales increased in our arena in ’17 and will continue to gain popularity as dealers look to increase service retention,” said Brown and Brown’s Roesel. “The four-in-one or five-in-one ancillary products are continuing to gain popularity, as customers see a lot of value in those programs.”

“We see increased emphasis on embedded products — products which are purchased by the dealer and provided to all customers,” Bowron said. Tammy Siegrist, a partner with Kaseff at MarksNelson LLC, cautioned that “New statutory and regulatory disclosure rules may negatively impact dealer-obligor product offerings.” Tuno expects the 2018 F&I product mix to continue to rely on service contracts, GAP and appearance and wear-and-tear products. But that’s not to say he expects dealers to stand pat.

“Dealer participation in F&I profits within reinsurance and retrospectives will remain big selling aspects of F&I products. The clear winners for F&I products sales will be the product providers who can offer these additional profit opportunities for F&I, as well as offering upfront profits to dealers,” Tuno said. “All profit areas for F&I products that providers offer will be increasingly important to retailers as the margins for new and used vehicles is challenged to ever thinning margins. The entire process where profits are generated upfront, during the F&I sale and after the claims are paid will be important in 2018.”

In conclusion, said Randy Crisorio, the president and CEO of United Development Systems (UDS), “Automotive F&I participants must be nimble and prepare to address challenges and adapt to change in the coming year. They should expect a moving landscape in lender acceptance and in cost of credit. Nothing dramatic expected here, but there will be changes nonetheless.”

Processes and Technology

Without an F&I process, there can be no F&I sales. Without technology, the F&I process runs the risk of fading into irrelevance. So say many of our experts. But many others, including UDS’s Crisorio, say expectations must be tempered with some degree of skepticism.

“Technology advances by way of process integration and delivery systems will continue to be the hot topic in the new year,” he said. “Dealers beware of technology pronouncements that promise profit growth — well-trained people accelerate profitability, not computer monitors. Dealers beware of new technology with an expensive overload of bells and whistles that keep us from promoting fundamentals that energize our results. The human factor drives and technology aides.”

Crisorio predicted that dealers will continue to rely on “traditional F&I staffing scenarios” in 2018, and that the evolution of F&I products via expansion and adaptation will move at a moderate pace.

“F&I product evolution by providers trying to set their products apart from the masses and adaptation to an emerging retail landscape will be present but not as high-powered and visible as I expect technology to be,” Crisorio said. “Technology will be the F&I headliner for 2018.”

“The race to technology is a long and never-ending journey,” Doran said. “Of course, there will be developments. CDK and Reynolds will continue to attempt to bully themselves with threats of ‘long-term contracts or else,’ while scrappy startups will dazzle dealers with technology for discounted short-term or month-to-month deals.”

But Doran said the advancement of a fully digitized F&I process — one that does not require the customer’s presence at the dealership — will be the headline to watch for.

“Technology will play the biggest role in developing the conduit to consumer transactions outside the showroom,” he said. “These companies will also develop F&I product offerings via some kind of remote presentation. This is the technology I’m keeping my eye on.”

Bowron said that, while it may take a few years, he too foresees a greater share of the F&I process taking place online. Braganini predicted continued improvement of integration with DMS and menu providers. Lunt put the onus on product providers to “make it easier for dealerships to do business” in 2018.

“Providers that invest heavily and implement technology improvements that create a more seamless process for dealers, provide better transparency on profitability, and provide real-time performance metrics will be ahead of the curve,” Lunt said. “The more real-time data, the better, and technology will play an integral role.”

“I’ve never been what you would call a ‘techie.’ But I can tell you that the technology end of our industry is going to continue to change, and change quickly,” Roesel said. “A good amount of this pace depends on the state and county title offices. When they go paperless, it’ll be off to the races on all other aspects of the delivery.”

Kansanback concurred, predicting the trend toward an earlier, online introduction to F&I products will continue, but that is only one part of the digitization equation. “Early adopters will embrace a paperless deal jacket as well as utilizing pre-menus and menus that can be emailed. Technology is super important, but having solid processes with the right people will still carry the day.

“I also think we have to accept that the consumer isn’t going to be dazzled by an iPad or a huge computer desktop,” Kansanback added. “They are more sophisticated than we give them credit for.”

Reed said the technology that will propel F&I forward is already largely in place and available now. It’s up to dealers and dealer systems providers to embrace it and incorporate it into the product roadmap.

“What some companies call ‘digital retailing’ and what Cox Automotive calls ‘connected retail’ represents bringing together all parts of the deal to ultimately provide the ability for a dealer to do the complete deal — including desking, F&I, DMV and dealer docs — all online, regardless of where the dealer or the consumer are located,” Reed said. “That will start happening in 2018.”

Jacobs is less certain. “I don’t believe dealers have the expertise or processes to go totally paperless,” he said. “They are not ready yet to push the button and paperlessly econtract everything. They still make too many mistakes!” However, Jacobs, added, “They do need to speed the process to give F&I more time to sell.”

That is the central promise of the new technology available to dealers, Griggs said, but real results will require “significant investment” by F&I providers. “More dealers will demand instant access to their F&I performance as it continues to become more and more important to the overall financial performance of the dealership. Great F&I providers will be ready to provide this.”

Rules and Regulations

Whatever their political affiliation, anyone working in the automotive retail and finance industry had to admit some measure of optimism following the January inauguration of President Donald Trump. As the Republican candidate, Trump had promised sweeping regulatory relief if elected. He has largely lived up to that promise, even going so far as to appoint a man who once described the Consumer Financial Protection Agency as a “sad, sick joke” as the agency’s new director.

Lunt said he predicts a “relaxing” of regulations at the federal level but not any significant changes. In addition to the leadership change at the CFPB, the Trump administration has “decelerated and deemphasized” the push toward further
regulation. However, he noted, “Automotive dealerships remain primarily regulated by the Federal Trade Commission, and it is a very capable and active regulator.”

Lunt further noted that service contract providers are primarily regulated at the state level by insurance departments and other state agencies. State attorneys general, consumer advocates and plaintiff’s attorneys will remain vigilant, and so should dealers and providers.

“Regulatory scrutiny will continue to present, and the retail industry will continue to strive for greater transparency and professionalism,” Crisorio said. “Training will continue to be a focal point — doing things the right way despite what appears to be a diminishing influence of the CFPB and its unqualified practices of the past.”

“Because of the leadership change in the CFPB and the concomitant lessening of regulatory pressure on the lending and automotive industry, the landscape should be greener,” Smith said. “However, there are still many levels of pressure, such as the recent complaint filed by the state attorney general in New York for abusive aftermarket sales tactics.

“Bottom line, even though there is a lessening in certain regulatory arenas, the F&I and dealer community still needs to be cognizant of the rules and regulations in the marketplace,” Smith warned.

Tuno agreed, noting that, although there may be relief ahead, “The sheer volume of regulations that have emerged over the past 20-plus years has made this part of running the business extremely difficult.”

Like Smith, Tuno pointed to the “mini-CFPBs” that have sprouted up at the state level — including in his home state of Pennsylvania — in the wake of Trump’s election.

“This means that the retailer, product providers and distribution channels are all at risk due to the direct control the attorneys general have over these areas, especially if compliance isn’t a part of the culture or curriculum. The industry needs to be in better control of this risk and be in a better position to chart a safe course through this often-difficult area.”

Siegrist noted that some significant changes relating to reinsurance programs have already taken place. With tax reform came a “dramatically” changed landscape of dealer participation options.

“For example, given the new rules, dealers investing in non-controlled foreign entities must now evaluate the viability of these structures,” Siegrist explained. “The passive foreign investment company rules may significantly impact the taxation of these structures. Also, the new legislation reduces both corporate and pass-through tax rates which impacts the analysis of the appropriate dealer participation program that may best suit a particular situation. We have also seen increased interest in dealer-owned warranty companies.”

Dealers who operate their own reinsurance companies must also consider new diversification rules under IRC § 831(b) when operating their own reinsurance company, and additional disclosure requirements also exist under the new IRC § 831(b) requirements, Siegrist added.

“The IRS has yet to release guidance on these new disclosures. The industry is also waiting for guidance related to the new diversification rules. This lack of guidance presents its own challenges for dealers and their tax advisors,” she said.

Petrowski concurred, noting that, “In order for some of these programs to remain viable, they may be required to modify their structures to comply with these new requirements.”

The Subscription Economy

F&I owes much of its success to the concept of commitment: Car buyers commit to a vehicle, auto finance sources commit to the loan, and F&I providers commit to protecting the investment. As the subscription model catches on, Tuno said, the P&A segment will feel the difference — and could benefit.

“I see a great deal of impact of the subscription economy on the way consumers buy F&I products,” Tuno said, pointing to the success of companies like Amazon, Netflix and Spotify. “The subscription economy offers a tremendous upside to the industry, because it breaks the transactional revenue stream and provides for an annuity flow of cash stream for F&I products.”

Roesel expressed little fear of the shift toward a subscription model, believing that product providers will continue to innovate along with the market.

“This is a very resilient industry; we’ve always found ways to make money in most circumstances. This is no different,” he said. “Our processes will adapt as the framework of selling a vehicle changes. I’m certain there will be opportunities and products ahead that we don’t even see coming yet.”

“Today’s consumers are embracing the subscription model, and these consumers are primed to embrace F&I products,” Frommer said. “F&I products have always taken care of most of the consumer’s vehicle needs, similar to a subscription service. For the F&I department to capture the subscription-type consumer, they must bundle as many of their coverages into one product and offer the F&I products as a subscription-type service.”

“The industry seems to be addicted to single-premium products which are financed,” Bowron said. “The customer’s preference would probably be to have some of these products outside the loan. There seems to be a lack of suitable products for customers that aren’t financing, so development of these products will expand.”

Lunt described the subscription economy as a “structural shift” toward a more encompassing relationship with each customer. But F&I products require a high degree of specific underwriting performance, and that creates a unique obstacle for providers and administrators.

“The F&I industry, and the broader insurance marketplace, is built on pooling risks, but individually pricing each unique risk,” Lunt explained. “Unless providers can identify a way to accurately price subscription products, and have confidence in loss potentials to set adequate reserves, this could be a perplexing problem.”

Bold Predictions

Asked to offer further predictions for 2018, Griggs said he expects mergers and acquisitions activity among dealerships to build upon the momentum it has gained in recent years.

“I believe auto dealer consolidation will accelerate in 2018 as more profitable dealers gobble up weak operators and economies of scale become ever more important,” he said. “Major auto consolidators will finally reap the rewards of their past and present acquisition strategies — provided they have not overpaid for their acquired stores.”

Braganini predicted higher losses and pricing for GAP. Gruber said a growing cohort of high-mileage, rapid-depreciation Uber and Lyft drivers will negatively impact underwriting results for GAP and service contracts. Jacobs expects delinquencies and default losses to rise as a result of lenient credit purchasing and extended monthly terms. “It’s a cycle of greed and it is due to reappear!” he warned.

Smith predicted that 2018 will be marked by two characteristics: First, dealers will look for new ways to distinguish themselves from the competition, which could spur greater interest in loyalty programs and associated products. Second, investing in training and development will continue to pay dividends for dealers and F&I personnel.

“But distinguishing yourself from your competitors not only applies to the dealers; everyone operating in our industry needs to adopt the same principles,” Smith said.

Kathinokkula sees the future on a much larger scale. “Most people are well aware of the explosive growth in capabilities of artificial intelligence and big data. These are synergistic trends that are making systems more and more capable of predicting what will happen rather than explaining, via reports and dashboards, what has already happened. Artificial intelligence needs big data to act as a sample set to ‘learn’ from. And then the lessons learnt are applied to influence future transactions.”

Kathinokkula predicted that large organizations with “foresight, large data sets, and good budgets” will invest significantly in these emergent technologies. They will use them to calculate which coverages to offer to whom and at what price point to ensure maximum profitability and likelihood of sale.

“Toward the end of 2018, we are going to see reports of the first major inroads of such insights into menus and other selling platforms,” Kathinokkula said. “Furthermore, the first generation of such systems will streamline VSC and other mechanical claims to ensure more efficient claims processing.”

“For agents, the time is now. We have a great opportunity to help in a sales climate that will have dealers looking for help more than ever,” Kansanback said. “Even a slight downturn will produce some panic among some dealers, and that provides opportunity for the best agents to step in and do their thing — the manufacturers and big box providers are not equipped to help.”

Griggs said there is no reason for F&I providers to panic about the near future, even as they keep a close eye on the trends that will shape their success.

“Successful F&I providers that focus on creating wealth for their dealer clients through income development and great service will continue to fare well,” he said. “We offer consumer-friendly, value-added products that also happen to be a major driver of dealer profitability. What’s not to like about that position?”

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An Interview with Cindy Allen

An Interview with Cindy Allen

After a 10-year absence, Cindy Allen has returned to StoneEagle as the company’s new CEO. She rejoins a leadership team that includes her husband, Brent Allen, and her brother-in-law, Bobby Allen. P&A caught up with Cindy Allen shortly after the announcement to ask what’s in store for 2018, where her passions lie, and whether great singers are born or bred.

P&A: Cindy, you’re the new CEO of StoneEagle, but you are not new to the company, correct?

Allen: That’s right. I spent 15 years here on my first go-’round. I was vice president of the portion of the business.

P&A: How does that part of the business differ from the StoneEagle we know?

Allen: I’ll set the stage by saying that, when I first came in, there were only 15 people in the company, including Brent and Bobby. They just needed someone to answer the phone while their receptionist was on maternity leave. I found myself at the front desk waiting for the phone to ring. In the time between phone calls, Bobby challenged me to build StoneEagle a website.

Now, this was the early ’90s, before companies used websites to build communities, before search engine optimization. So I bought a how-to book, sat at the desk, and built a website. As a next step after completion of our website, he asked me to figure out how to connect our insurance administration systems to the internet as well.

At that point, StoneEagle’s credit life, vehicle service contract and F&I product administration systems leveraged IBM AS/400 machines. It was unheard of to connect large enterprise systems to the internet. That was the challenge Bobby put in front of me.

So, with guidance from Bobby and Brent, we worked with IBM to identify the other software layers we would need to connect our enterprise systems. We found the right tools and the right people and started development. It looked like a website, but it was really a connection between our web user interface back to our administration systems.

At that point, the dotcom boom was right around the corner. We were not sure how the company would evolve. We decided to spin the site off into its own little company, and at this point, it’s bigger than the administration system side of our business. It became my baby and I had chance to learn from that and the 15 years of growth that followed.

P&A: Where did you go to school, and what was your initial career path?

Allen: I went to the University of North Texas, and I actually went to school for vocal performance. My studies had zero to do with business or software or anything else I would use in my career. But that performance-oriented major made me comfortable in front of folks, particularly when giving presentations.

P&A: When you hear a great singer, how much of that is natural ability and how much of it is training?

Allen: It really depends on the singer and the genre. When you see phenomenal, classically trained performers? That’s a combination of raw talent, and a phenomenal musical ear — including the ability to really tune in — and significant hours of training and technique. Of course, in country or pop music, it’s a lot of personality and performance as well.

P&A: What’s your genre?

Allen: Contemporary Christian and jazz.

P&A: How far did you take it?

Allen: Since I got into the full-time swing of corporate America, I’ve performed at many weddings and led worship at church. I never went down the professional path, but it is a passion, a great love of mine. But I literally came in here as a temp and never got to leave.

P&A: And I understand you’re a serial entrepreneur.

Allen: I’m certainly entrepreneurial in the way I think. After helping start and then not only surviving that critical first two years but absolutely thriving, it gave me the fever to start and grow new things and see them to conclusion. Less than 0.4% of new companies will go on to produce $10 million a year. You will do several rounds of hiring before you get to the point where you need other people to hire for you. That initial phase gives you an opportunity to create an environment. But it’s also an opportunity to grow personally. You are absolutely in charge, and your own integrity affects the way you do business and your interactions with individual clients. You can create an organization people love to do business with.

It is incredibly motivating and rewarding to turn around and look at your people and know their lives have been impacted for the better by being a part of the organization, not to mention the lives of the people who rely on the services you provide. Then you see other opportunities, and it’s tempting. You think, “Is there a business there? Can it stand on its feet financially? Can it have an impact? Can we create an environment that people want to work in?”

So I don’t know if I’m a serial entrepreneur. I’m not out there starting new companies all the time. But I have had the chance to participate in several startups, and I love it.

P&A: Are you still able to control the culture once the company grows beyond its launch?

Allen: Great question. The first thing to know is you never have control of the culture. It’s a constant channel of investment. You have to be purposeful in everything you do. You have to keep an eye on the impact of the choices you make and how they affect your organization’s culture.

I think culture becomes an afterthought to most corporations. They let the pace and churn of the business take over. They forget that organizations are made up of individuals, and if you don’t have a purposeful focus on it, the culture is not going to be there. It takes an all-in effort from everyone in the organization. And when folks aren’t a great fit for the culture, they might feel a little uncomfortable. They either get in and get excited, or they leave.

P&A: What responsibilities have you been tasked with as CEO?

Allen: My primary responsibility is to come in and add support and structure to an already phenomenal team to drive growth. The executive leadership team here is fantastic. The cultures of StoneEagle Insurance Systems and are a little bit separated — not all that far off, but it’s a great opportunity to make those cultures more combined. I think that, in many ways, we’re still the industry’s best-kept secret. Some clients use a single StoneEagle solution and have no idea what else we can provide.

P&A: What do you have planned for 2018?

Allen: We spent the last few weeks slowing down enough to look at strategy. Companies grow in spurts. You’re growing internally, then adding clients and growing externally. As you gain momentum and scale, you need to pivot, adapt your processes to fit the new size, and look at how your teams are organized. It’s a question of where we’re at today and where we’re going to be tomorrow: If this is our big goal in 10 years, here’s where we need to be in three years and here’s where we need to be at the end of 2018.

Of course, new opportunities will come up along the way. You have to be purposeful, not reactive. Does this fit our strategy or not? Can our teams align to do what the client expects in the next quarter or the next year? In 2018, we will be closing on several major opportunities. We want to do that with a high degree of efficiency and create an experience our clients will love. I call that the “client experience design.”

We have had so much growth, especially over the past few years. Our team has done a phenomenal job, and we will do even better with a strategy that is built around that growth. We know the next wave of growth is coming. We want to be prepared for it and execute on it the best way we possibly can.

P&A: And that will include letting your clients know the full capabilities of the company.

Allen: Absolutely. It’s in the appropriate place in the strategy. You will begin to see us talk more and more about what we can do, end to end, in our industry. You’ll see it in the way we talk about our brand and the channels of access to our technology. There is a lot to look forward to. It’s an exciting time to be here. And I can’t say enough about what this company has accomplished over the last 10 years. At the same time, it will be exciting to see how we can grow in impact and size over the next 10 years.

P&A: What are your passions outside of work?

Allen: Family. We have two daughters, one married, and hopefully we will add grandchildren to our family soon. Our younger daughter, Andy, is in her junior year at the Art Institute of Chicago. She is predominantly art-oriented, incredibly creative, sings and plays guitar and piano. She would live life without a computer if she could. Our older daughter, Alex, is an entrepreneurial businessperson at heart and a total overperformer. She recently came to the company to work with our CTO on a temporary basis. Just a few days in, he said, “We need to keep her.” We are so proud of both our girls!

Passions change as life evolves, but I still have a tremendous passion for music, sitting down at the piano to play in my off time and leading worship at church. I love to cook. I love to do stuff with Brent. We love to go to our lake house in Oklahoma.

P&A: Now, I like Brent, but …

Allen: Thank you. I like him too!

P&A: We all do! But at some point, aren’t you going to get sick of each other?

Allen: You know, I spent 15 years working with him and about 10 not working with him. I far prefer working with him. I missed him like crazy, so I can’t tell you how thrilled I am to be back. I know it’s not the same for every couple, but it’s amazing how working in the same company and having the same knowledge of the workday — the challenges you had to tackle — it’s great. I love it. And I’m pretty sure he does too.

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