COMMENTARY: BHPH dealers need to continue adapting as auto industry returns to normalcy
Chaos. I can’t think of a better word to describe what occurred in the automotive industry between 2020-2023. From increased costs and severe inventory shortages as unfortunate consequences of COVID, to finding ourselves in a historically high inflationary period with rising interest rates, it was an unprecedented three-year period for the industry.
So much so that chief economist Jonathan Smoke commented in Cox Automotive’s 2024 Forecast 2024: “A decade from now, when we look back at the years immediately following the global pandemic of 2020, we’ll be awed by the dramatic swings and unprecedented circumstances the economy and auto market endured.”
I’ve been involved in the automotive finance industry for more than 30 years and I wholeheartedly agree.
Due to the industry’s ability to endure these recent circumstances, Cox has predicted that 2024 will mark the “return to normalcy” for automotive. While I agree with the general spirit of that prediction, I believe one industry segment in particular still faces significant pressure to continue adapting and evolving: the independent Buy Here Pay Here dealer.
For decades, buy-here, pay-here dealers thrived on being a trusted local option for its target customers. With a by design “Mom & Pop” feel, many of the most successful BHPH dealers experienced wild success with no need to invest in complex technology, predictive modelling, or artificial intelligence tools. In fact, many dealerships were able to successfully make lending, collections, and repossession decisions based on gut instinct and past experience.
However, the rising costs of capital, inventory, auto parts and employee salaries have severely decreased margins, resulting in much less room for decision error. BHPH dealers are well-advised to use this “return to normalcy” as an opportunity to take their businesses to the next level and get to an ahead of their competitors.
My company, Xperisource, advises a number of BHPH dealers and serves as the outsourced customer service, collections, and servicing arm for several of them. At the most basic of levels, our goal is to help BHPH dealers get better at what they do and make informed decisions through a combination of our industry experience and access to industry leading tools.
My primary areas of advice for any BHPH dealer include:
Embrace data and analytics
Analytical tools that provide insights into creditworthiness, customer preferences, historical payment tendencies, probability of payment, and loss and the overall health of a portfolio were once reserved for the industry’s “big players.” As these tools have become more commonplace, they are more accessible from a price and complexity standpoint for smaller dealers. Furthermore, any reputable servicing partner will possess these tools and provide you with access to the benefits they provide for a fraction of the cost.
If you are still unsure, remember that your competitors are undoubtedly exploring the use of powerful modelling platforms to make more informed decisions on originations, collections, repossessions, and more. It’s time for all BHPH dealers to evaluate their current business model and embrace these types of tools. In my view, this is a path to sustained success.
Take compliance seriously
The automotive industry has long been one of the most scrutinized from a compliance standpoint, whether it is related to sales and marketing or financing. Regulatory agencies have placed an even greater focus on dealerships and lenders catering to the subprime customer. The CFPB, for example, has released bulletins as early as January of this year specifically about BHPH dealers, and have successfully fined others in recent months.
I’ve had the good fortune to work with dozens and dozens of BHPH dealers over the years. The vast majority are honest and ethical businesses offering a critical resource to subprime customers who otherwise would not have access to auto financing. Even for companies with the most stellar business practices, I still advise them to go to every length to avoid being guilty by association due to a small yet highly publicized number of “bad” players in the industry.
With that in mind, compliance should never be an afterthought, or a “check-the-box” activity handled by those with limited or no expertise. Compliance, especially today, needs to be a dedicated discipline handled by experts who know the ins and outs of local, state, and federal guidelines. That’s why one of my first hires at Xperisource was an accomplished compliance executive.
If you are considering outsourced servicing, collections, or customer care partners, carefully scrutinizing their compliance expertise should be at the top of your list of qualifications.
Continue to prioritize the customer experience
One of the concerns I hear from BHPH dealers when discussing relying more on data and analytics is losing the personalized customer experience they have been providing for so long. In reality, nothing could be further from the truth as committing to these tools will enable you to provide an enhanced experience for your customer. From truly understanding their preferences on an individual level to communicating with them through the channels they wish to communicate through, you will be able to better find and serve your potential customers.
For example, we always advise our clients to provide multiple options for customers to communicate with them, whether it is live human agents, email, chat, or self-service AI. Customer preferences continue to vary wildly in this regard so providing all options is paramount. Additionally, powerful modelling tools will allow you to understand when a customer typically pays their bill, for example, so collection calls take place at the appropriate time and without the borrower reaching a negative inflection point.
These considerations merely scratch the surface of what is available to help BHPH dealers make better decisions, serve their customers better, and improve their bottom line. Jonathan Smoke pointed out in that same report: “The past four years have been chaotic, even by auto industry standards, and have shifted many normal seasonal patterns out of whack, which adds to the difficulty of forecasting what comes next.”
While industry is currently enjoying a momentary return to normalcy, now is the time for BHPH dealers to evolve and be ready for whatever comes next.
Louis Ochoa is president and CEO of XperiSource, a customer care, collections, and loan servicing company with significant experience in the BHPH space.