Market Disruptions Are Heading Towards Your Indirect Auto Dealerships

Did you know you can subscribe to a car?

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Posted June 15, 2018 in by Argos Risk 

Using an app-driven vehicle subscription-based service, called, subscribers can pay a flat monthly fee to have access to a car in a pre-set price range without incurring the cost of owning. The subscription fee includes the car, insurance, maintenance, and roadside assistance. The benefit - drivers get as much car as they need by incurring the expense of a car only when they need it and can swap it out for another car in as little as seven days.

If you google “auto subscription services,” you will find is one of a growing number of providers in this market, joining many of the manufacturers, including Ford, Toyota, Hyundai, Mercedes, Porsche, and Volvo. Industry veterans view these programs as a new sales channel to attract millennials who choose not to rely exclusively on ride-sharing services, like Uber or Lyft, and are uncomfortable with financial commitments associated with traditional auto purchases and leases.

As an indirect lender, why does this matter?

While it’s still early and these programs are expected to evolve, subscription programs offer little to no profit margin for the participating dealerships, and they can wreak havoc with inventory. In addition, every new subscriber is someone who will not be making an auto purchase (or long-term lease) any time soon. Add this to the growing list of warning signs that there are market-disrupting forces heading straight towards auto dealerships.

Since 2010 and “cash for clunkers” programs, the auto industry has enjoyed accelerated, incremental growth in new car sales each year. However, the U.S. market has hit a plateau and is trending downward from its peak in September 2017. Many predict new auto sales will continue to decline for the next three years. The decline could also be exacerbated by the recent tariffs on steel, rising interest rates on auto loans, the buying behavior of millennials, and alternatives to traditional auto purchases and leases such as auto subscription-based services.

Due to successful sales over the past few years, many dealerships have become overly confident and might not be prepared for market downturns. As we saw in 2008, when dealerships encounter financial stress, they usually start to slow pay or stop paying their invoices and non-critical vendors. When a dealership reaches a point where they are unable to pay their state tax or their floor plan lender, the beginning of the end is near. A financially struggling dealership can put your organization at risk by not delivering clear and clean titles to you in a timely manner.

As an indirect lender, one of your compliance obligations is knowing the financial viability of the dealerships in your program. A common misconception is if your institution uses a third-party service that brings dealership relationships to you, that your responsibilities have been absolved or transferred. Unfortunately, this is simply not the case or true. Your institution still maintains the responsibility. However, if your institution utilizes one of these services, and they are vetting the dealerships, it would be highly recommended you understand their vetting process and receive copies of the documentation.

Another misconception is that since institutions know and monitor the loan volumes and value, they assume they know the dealer’s financial viability, which again is not true. They may know the dealership’s revenue, but not their expenses, how they manage their credit and trade payments, and if there are judgements, lawsuits, and liens against the dealership.

Vetting the financial viability of a dealership is not easy. It takes a great deal of time to find information, to interpret it, and then have the confidence to act. For financial institutions, one of the most common flags raised by examiners is a lack of resources and due diligence in this area.

It is extremely valuable to design your dealer risk mitigation strategy vetting process with these problematic assumptions:
  • Each dealership will have multiple banking relationships, including some you will not know about.
  • The dealership will have more than one set of books, you will only see the one they want you to see.
  • The dealership will paint a public picture that will encourage confirmation bias, including being active in local charities and churches, constantly advertising in local markets, and being consider a community leader.

  • Hence, when vetting, it is important to use multiple sources of information. One should include sources that are independent of the dealership; making sure to access information which provides insight on the dealership’s reputation, how they manage their credit, their trading relationships, and trending analytics.
    If you would like to know how you could automate the collection and analysis of financial viability and other important metrics and have immediate access to the viability of any of your indirect dealerships at a price that starts at $99/month, visit us at