Dealers satisfied as the line between captive and banks blurs


J.D. Power asked Canada’s new-car dealers how happy they were with their access to retail and wholesale financing. Among other things, the marketing information company found was that Canada’s banks – BMO, RBC, Scotia and TD Financing Services – are playing an ever-larger role in dealership finance and dealers are content with that.

When it comes to subprime financing, J.D. Power found there are only two players, Scotiabank and TD Financing Services.

Lubo Li, who directed the study for J.D. Power, said no scores were available in this market since the survey needs four players to do a ranking. He went on to say that the two banks are virtually the only players.

“Most of the small competitors have disappeared. Those that remain are inconsequential,” Li said.

Still, he noted that dealer satisfaction with lenders’ performance in this market grew even though business managers no longer enjoyed the opportunity to shop around and pit lender against lender as they once had.

In the prime retail credit area, BMO and Scotiabank ranked third and fourth this year behind M-B and BMW Financial Services respectively. Following the banks were Honda Financial Services and Ford Credit Canada and VW Credit Canada.

Once again, a dramatic turnaround from the time when the captives owned this market.

“Bank penetration has increased dramatically over the years,” he said. “Dealers may use captives for subvented deals, but they’re also using T.D, BMO, RBC – whoever provides the best deal.”

And the banks are happy to oblige them, the study found.

“The penetration is phenomenal!”

Why? Because that’s where the money is.

“If you look at what they offer – very good deals. Their cost of capital is much better than the traditional captives. They are able to offer what the traditional captives couldn’t,” Li said.

“We’ve never seen that before.”

Besides the good rates, the banks service procedures are being fine-tuned to make dealers happy overall, the survey found.

The annual study, the 14th of its kind, takes a look at dealer satisfaction with money lenders in four segments: prime retail credit; retail leasing, floor planning and subprime credit.

Satisfaction is weighed in relation to products, application/approval process,.

When it comes to leasing, the survey measures four factors: offerings; application/approval; vehicle return process and sales representative relationships.

When it comes to leasing, the lessor’s vehicle return process is the most contentious and the key to satisfaction or, more often, dealer dissatisfaction, the survey revealed.

One factor is inspection and who’s doing it. Most captives have handed off the job to third parties. That’s where the tension begins.

“Dealers often find the inspection companies too zealous while the captive wants to avoid cost buildup,” Li says. “Dealers say this only forces the customer to shop around. Dealers want more flexibility to keep the customer.”

He sees this as an almost unavoidable conflict of interest.

The next issue is early termination. Dealers want to keep the customer. They favour a pull-ahead strategy. But dealers complain captives have a “no early return” policy. And that stymies dealers who want to make their customers a lucrative offer to get them out of the old lease and into a new lest they go shopping when the old one expires.

“No one has a solution,” he says.

But Li sees a way out of the impasse. It’s an American idea called “flexible dollars.” He says the captive sets aside an amount of money to cover repair costs and the cost of early termination. In return, the dealer has to hit renewal targets.

“But the dealer has to hit those targets,” he says.

If there is an area where the captives still rule, the survey shows it’s floor planning.

“There has been no significant shift. Captives still are dominant.”

But problems remain. Dealers complain lenders are inflexible when it comes to the timing of audits and paybacks.

The survey was done in February. Of Canada’s 3,400 new-car dealers, 1,400 or 40 per cent responded.

“That’s pretty good,” Li said.