Image courtesy of @Nerdmatters store on Etsy
The food fight scene from Animal House always reminds me of the auto finance environment. Applications tossed around everywhere, lender sales reps begging for more of them, application aggregation platforms pumping them to everyone (for a fee), underwriting models squeezing pricing and maximizing risk, as well as the low book to look ratios.
In the end, the environment is a stinking mess.
Adding more “food” to the melee is the handful of lenders with unsophisticated, unsustainable underwriting models, where you have to tell the dealer, “Ride them until they drop,” which may take six to 12 months to evolve. And, you cannot get in a race with them to oblivion.
The only way to shield yourself against the food fight is superior risk analytics (seeing beyond the mess), visionary marketing strategies (differentiation), and staying out of the lunchroom (find underserved markets).
Seeing beyond the mess
If your risk analytics and pricing models are not differentiating you from the pack and finding opportunities in the application buffet, are they good enough, or are you eating in the wrong cafeteria? I would argue that the traditional point of sale channel is overly saturated, and risk modeling has peaked for the majority of participants, leading to margin compression.
Efficiencies and scale are common; therefore, a more cost-effective model isn’t likely.
In the early days of AmeriCredit, the market became inundated with competition from Mercury Finance, SunStar, First Merchants, AFG, WFS, Aegis, etc. Do you see any of those names still around?
Late one evening in 1995, I was complaining to our Head of Risk Management, Mike Miller, about how our competitors were undercutting our callback by $50 to $100. Additionally, we were only receiving “dead” applications from the temporary building at the back of the franchise lot, those applications that had been thoroughly worked over and turned down by the F&I office inside the store. Our risk tools were scalpels versus our competitions’ blunt underwriting butter knives, but we were not advantaging ourselves. Why couldn’t we compete with the captives for the near- and sub-prime paper, allowing us to get first look at “live” applications?
The very next day, Mike presented me with a four-tier pricing solution, starting with 12 percent interest rates scaling up to our state max rates. Did we purchase many 12 percent deals? Maybe a few, if any, but we moved into the real application flow, offered callbacks that competitors couldn’t comprehend, nor compete with, and set us on our way to domination.
I don’t know if this strategic repositioning is even possible today or if lenders can find a dominant risk position as we had, but I can tell you it was one heck of a lot of fun when we did it.
My favorite marketing guru, Seth Godin, radically changed my approach with sales and marketing. The concept was simple, yet profound:
Your greatest success is found when you can confidently say, “You Can’t Get This Anywhere Else.”
When can you say that? If you are one of the many in the food fight, you definitely can’t differentiate yourself from the purity of this statement.
Steve Burke, our CEO at Agora Data, started a mission to Seth Godin’s mantra in April 2017. I jumped on board in June 2018. The BHPH industry has the greatest entrepreneurs in the world, but it is woefully underserved with liquidity and analytics.
By integrating with all of the major DMS providers, Agora created a secure marketplace for liquidity. The data from that platform has positioned us to launch soon our suite of analytics and tools to help dealers understand, in real-time, the value of their most significant asset, their portfolio. Being able to see valuation at the portfolio and loan level, as well as the drivers of performance, will empower this underserved market to prosper.
BHPH dealers will have the transparency to underwrite and optimize the performance of their portfolio. They can manage the lifecycle of their loans or confidently negotiate liquidity with the lenders who compete to acquire their performing, seasoned loans, whose performance is highly predictive.
By creating transparency and sophistication for BHPH dealers, Agora is endeavoring to provide what they can’t get anywhere else, opening the opportunity for them and the lenders that serve them.
I got tired of the food fights, so I went where I could dine without the insanity.