F&I Findings for 2007: Profitable Processes In The Finance Office

Over the past 12 years, Tom Arden has watched the flow of business wind steadily through his F&I department, but new trends are prompting him to gear up some fundamental changes in his approach to the business.

“I don’t know how long this industry goes before there’s more regulation over reserve,” said the dealer. “In the last couple of years, major lenders have been putting caps on the point spread. At the same time, improved quality is reducing warranty income in the service department. Dealers have to reinvent themselves as the place where their cars are maintained, and we have a renewed focus on selling maintenance agreements.”

With sales hovering around 100 cars a month, Arden knows all too well that his core business is a little soft—a common theme in the industry today. That’s why a renewed focus on F&I has become so important.

“The key is to get the customer to come back for the first maintenance stop and get [the customer] in and out in an hour,” said Arden, who’s father put him to work at Downs Ford in Toms River, N.J., 30 years ago. “If you do that, there’s a good chance of holding [the customer] for the full cycle of the car. With a maintenance contract, he’s already paid up front. The next thing you know, he’s buying a car. It’s a fantastic CRM tool.” 

For suppliers in the F&I business, undercurrents of change have also prompted many to rethink the approach to educating F&I managers. While keeping a heavy focus on training—a top priority over much of the past decade as legal compliance has become critically important—vendors are also adding new online tools to make it easier to sell products. While many of the benchmarks remain ambitious, they’re also offering some new strategies for achieving dealers’ goals.

Ending the reserve
As dealers have opened up their doors to more and more female workers, the revolution has made its way straight into F&I. Tony Dupaquier, director of F&I training at American Financial and Automotive Services, couldn’t be happier.

“I’ve been doing the F&I school for us for five years now,” said Dupaquier. “Five years ago, I’d have one or two females out of 20 students. This month, there are eight women out of 20, and some of my classes have more women than men. Typically, when I’m working inside dealerships and I see their numbers, we run the guy numbers versus the girls, and the girls typically run better numbers.”

Maybe, said the trainer, the women are just better at talking with customers. They also have shown plenty of aptitude for the kind of structure Dupaquier lays out in his classes. Even though compliance has been a big theme in F&I for years now, every class still has a few students that were never even remotely clued-in to the legal risks they’ve been running. “It is just amazing how flabbergasted so many of the students are,” he said. “They’ll say things like, ‘I didn’t know we couldn’t do that, or, ‘we’ve been doing that for years. I can’t do that?’”

To make sure none of that bad behavior is repeated, he focuses much of his time on a script that spans from, “Hi, my name is...” all the way to “…Sign here.”

However, the script has been undergoing some subtle changes, with one major change in the works.

“I suspect that, come 2010, we will not have the ability to make finance reserve,” said Dupaquier. “It’s coming in about two years. Banks will go to a 1 percent finance reserve rate, and that’s what we talk about. In the past, we made the bulk in finance reserves; we’ve got to get away from that.

“People are getting refinance letters in the mail; it’s so competitive,” he added. “As soon as they refinance the vehicle, all that F&I money is gone, profitability wise. The growing trend is in the products.”

Dupaquier also advocates a new approach to F&I selling. “A lot of our Internet-savvy, educated customers become very resistant to being sold, in the strictest sense of the word. You bring out the brochure and people get defensive and immediately say, ‘No, I don’t need any of that.’”

So, you have to present the products in a way that creates a sense of need. If an insurance company declares a customers car a total loss and refuses to pay off the loan after the factory warranty expires, the customer needs to consider that. “That creates a need for GAP insurance.”

Where credit insurance used to be a staple in F&I, Dupaquier is seeing less and less of it. Gap insurance profitability is down in many dealerships. Dealers are countering that by picking up added profitability from chemical packages that cover paint and sealant, dent repair, windshield etch, and road hazard.

“Another uncapped profit center is in maintenance agreements,” Dupaquier said. “It allows service advisers to up-sell on other services; tires, brakes, etc. Too many customers will go to Midas for their brakes. Dealerships are trying to do more and more to have the dealership be their customers’ 100 percent automotive place. Maintenance agreements encourage people to keep coming back, so they can sell them tires, oil changes, alignments and so on.”

For his classes, Dupaquier sets a benchmark of $1,000 F&I profitability per car. If a dealer sells 100 cars a month, he or she should have $100,000 of F&I profit out of that, including the finance reserve. Dupaquier is adamant about capping income from finance reserves at 35 percent tops.

“We’d prefer to be less than 50 percent profitability in reserve,” he said. “There’s too much of a chance of losing it. If I’m making 75 percent of my money on finance reserve, there’s a 70 percent chance I’ll make zero on those deals when they get the refi letter from Capital One.”

“The greater the opportunity for vehicles being upside down,” said Sundaram. “The more appealing it is to have the gap insurance and extended warranty contracts.”

DealerTrack already connects dealers to some 350 lenders, said Sundaram, but new regional lenders are being added constantly, and they’ve recently added a network of aftermarket vendors that F&I managers can look to.

“Dealers are customizing what they want to offer,” he added, “with platinum, gold and silver packages.” Dealers can pick which suppliers they want to put on offer and then the F&I manager can work a deal in real time, connected over the Internet.

Selling value
A few years ago, said John England, president of Resource Automotive, dealers were getting upwards of 60 percent of their F&I income from finance reserves and 40 percent from products. Now that ratio has been reversed, and the emphasis on effective F&I selling is greater than ever.

Most dealers these days know that in this kind of competitive environment, they need to give up a half-point or a point on a loan to win a customer’s finance business. “You want the finance business to sell the products,” said England.

“I think people have always argued, ‘Can I do a thousand dollars a car or better and have high customer satisfaction ratings?’ And you can,” he said.

Technology is making things easier, England added. Today’s F&I manager can go online to bone up on products and gain additional training. However, the Web also adds to the demands of the job. More and more customers are going online to learn about the products that an F&I department has to offer. They’re generally better educated, more demanding and have already had some experience with some of the products on the market, with both good and bad results.

“People have to get back to selling value,” added England, “the features and benefits of what they offer. Not 10 or 12 products, either, but five or six that do well.
Some dealers only sell three products and do that very well, but five or six is closer to average.”

The two big picture trends that have captured the attention of Raj Sundaram, senior vice president of the dealer solutions group at DealerTrack, are the increase in leasing alongside the surge of sub prime deals in the automotive market. In one sense, leasing can cut into the amount of F&I work a dealer can do. An extended warranty won’t make any sense in that kind of a deal. However, when your sub prime business is growing from customers challenged on gaining financing, dealers will have a better chance of selling F&I products.

“The greater the opportunity for vehicles being upside down,” said Sundaram. “The more appealing it is to have the gap insurance and extended warranty contracts.”

DealerTrack already connects dealers to some 350 lenders, said Sundaram, but new regional lenders are being added constantly, and they’ve recently added a network of aftermarket vendors that F&I managers can look to.

“Dealers are customizing what they want to offer,” he added, “with platinum, gold and silver packages.” Dealers can pick which suppliers they want to put on offer and then the F&I manager can work a deal in real time, connected over the Internet.

Full spectrum lending
Longer and longer note terms on vehicles are also playing out in favor of the F&I department.

Everyone’s seeing a “trend towards longer factory warranties and extended financing terms,” said Jim McDavid, vice president of North American sales for the JM&A Group. “Both of these items directly impact the F&I department by increasing customers’ desires for ESAs, gap waivers and other credit protection products to go along with these longer factory warranties and financing terms.”

Sometimes, it’s the lenders that are undergoing the big transformation.

“I see a lot of lenders going to full-spectrum lending,” said Brad Rogers, vice president of sales and marketing at RouteOne, an online aggregator like DealerTrack. “Lenders want to be a one-stop shop.” Wells Fargo has combined its prime and sub prime operations into one shop so they can cater to all a dealer’s needs as easily as possible. AmeriCredit has moved to the full spectrum as well, as they cater to dealers anxious to qualify as many buyers as they can.

F&I managers always have to keep in mind that the clock is ticking with each new customer. “You run into time constraints in the F&I office,” said Zurich Direct Underwriters’ Glenn Roberts. “The magic number I hear is that customers need to be in and out in 30 minutes, so dealers need to streamline operations through using technology and business practices that vary from what they were doing previously.”

The migration of menus to the Web is allowing managers to do more in less time. That’s particularly essential these days, said Roberts, who’s also keenly aware of the squeeze on dealer reserves.

“The trend toward the Web-based menu is going to be good for the dealers,” he said. “You can tell when the menu is done, and it helps with compliance. But the real benefit is to have a coherent way to lay out five or six products at once.”

Alleviating wait times in the F&I office is of increasing importance for dealers grappling with CSI scores, said McDavid. To counter any problems, he added, dealers are adding more workers to F&I and cross-training employees to stand in when needed. And they’re turning to e-contracting to streamline operations with new technology.

Most dealers still prefer to handle training one-on-one, said Bruce Foster, director of JM&A’s Performance Development Center, but technology plays an important role in training as well. “We have noted a greater interest in Web-based training programs, as the automotive industry becomes more reliant on computers and the Internet,”  Foster said. “For this reason, JM&A is starting to develop several online courses, in order to meet the various needs of all of our dealer clients.”

Roberts advises against trying to do too much with any one buyer, and attempting to tick through a long list of F&I products with an impatient customer is a recipe for resistance.

“One of the other things we’ve gotten traction from is getting the F&I manager out of the office and greeting customers on the floor and collection information there,”  Roberts said. It increases the amount of time a manager can get with a customer and improves their odds of success.

“Everything around the process is choreographed,” said Roberts about Zurich's F&I Selling System. With a script, dealers are insuring themselves that they’ve made full disclosure to all customers. The approach Zurich uses doesn’t require a verbal sledgehammer. “There’s no hard selling involved,” he added. The thing that is counterintuitive for many dealers is that the more you tell people and give them information and good reasons to buy, the more things they buy.”

A scripted approach also borrows a page from the U.S. military, which focuses on a large dose of training to make sure rank-and-file teenagers can accomplish complex tasks. The same sort of approach pays off in the automotive sales business. Call it Semper F&I.

Vol 5, Issue 8