AI Will Put Dealers in Control of Lending

How Low-Cost AI Underwriting Models Will Impact Automotive

Finance and Insurance (F&I) operations have become a pivotal battleground for profitability in the rapidly evolving and hyper-competitive automotive retail industry. As the six largest publicly traded dealership groups report declining F&I gross profit per vehicle in the second quarter of 2024, a deeper narrative emerges—one where controlling the F&I process, primarily through captive lending solutions and integrating AI-driven technology, is increasingly crucial. DCS Dealer Controlled Solutions is pivotal in this shift, bringing advanced AI technology to market that enables dealers of all sizes to handle the lending process, especially when serving subprime consumers.

Highlights:

• Decline in F&I Gross Profits: The six largest publicly traded franchised dealership groups experienced a decrease in F&I gross profit per vehicle during Q2 2024 compared to the previous year, highlighting a broader industry trend.
• Continued High Gross Profit: Despite the decline, five of these groups maintained F&I gross profits above $2,000 per vehicle, demonstrating the ongoing importance of F&I as a critical revenue stream.
• Structural Enhancements: CEOs of major groups like Lithia & Driveway and AutoNation attribute their sustained F&I performance to structural changes in their F&I operations, including in-house F&I product providers and captive finance companies.
• Strategic Control Over Lending: Controlling the F&I process by forming captive lending solutions and acquiring third-party F&I products allows dealerships to access critical consumer data, such as payment histories, credit scores, and equity positions. This strategic control enhances customer retention and fosters long-term loyalty.
• AI-Driven Underwriting and Technology: The rise of AI-driven underwriting and intuitive loan origination systems is democratizing lending capabilities. It enables even smaller dealerships to act as lenders, thus leveling the playing field across the industry.
• Dealer Controlled Solutions' Role: DCS Dealer Controlled Solutions is at the forefront of this technological revolution, providing dealers with the tools and platforms needed to control the lending process, especially for subprime consumers, and to enhance customer relationships through personalized and timely financial solutions.

The Financial Shift in F&I Gross Profits

The six largest publicly traded franchised dealership groups saw a decline in F&I gross profit per vehicle during the second quarter of 2024 compared to the previous year. Despite this, five of these groups maintained an average F&I gross profit above $2,000 per vehicle, underscoring the importance of F&I as a significant revenue stream. CEOs from groups like Lithia & Driveway and AutoNation emphasized in their earnings calls that their F&I performance remains strong and is expected to stay above historical levels, thanks partly to structural changes in their F&I operations.

For instance, Lithia & Driveway CEO Bryan DeBoer highlighted that their F&I gross profit per vehicle should consistently exceed past levels due to enhancements made over the last five years. Similarly, Asbury Automotive Group focus on its in-house F&I product provider, Total Care Auto, exemplifies how large dealership groups are reducing reliance on third-party intermediaries to capture more revenue.

The Strategic Advantage of Controlling the Lending Process

This shift towards controlling the F&I process by forming captive lending solutions and acquiring or privately labeling third-party F&I products is more than just about capturing immediate revenue. It's about the strategic advantage of having direct access to critical consumer data—payment histories, credit reporting, equity positions, and loan-to-value (LTV) ratios—which leads to higher customer retention levels. This strategic advantage puts dealerships in the driver's seat, offering them more personalized, relevant, and timely financing options, increasing the likelihood of repeat business and fostering long-term loyalty.

When dealerships manage the lending process, they create an intrinsic tether between themselves and the consumer. This connection allows dealerships to offer more personalized, relevant, and timely financing options, increasing the likelihood of repeat business and fostering long-term loyalty. For example, by monitoring a customer's equity position and LTV, dealerships can engage with them at crucial moments, such as positive equity in their vehicle, making trade-ins or new vehicle purchases more appealing and financially viable.

The Role of AI and Advanced Technology in Democratizing Lending

While large publicly traded groups have leveraged their resources to control more of the F&I value chain, advancements in technology—particularly AI-driven underwriting and intuitive loan origination and servicing platforms—enable every dealer to act as a lender, regardless of size. This democratization of lending capabilities, powered by advanced technology, is a promising development for the industry, leveling the playing field and opening up new opportunities for all dealers.

AI-powered systems allow dealers to assess risk with greater accuracy and efficiency, making it possible to offer competitive financing options even to subprime customers. Intuitive loan origination systems further simplify the lending process, integrating seamlessly with existing dealership operations and making it turnkey for dealerships to control the entire financing journey.

This democratization of lending capabilities is where DCS Dealer Controlled Solutions comes into play. By bringing these advanced technologies to market, DCS is not just empowering dealers; it's reshaping the industry. The platform offers a comprehensive suite of tools, from AI-driven underwriting to robust servicing platforms, enabling dealers to navigate the complexities of subprime lending with the same level of sophistication as their larger counterparts.

Dealer Controlled Solutions: A Game-Changer for Subprime Lending

DCS is at the forefront of this technological revolution, providing dealers with the means to control the lending process and, in turn, enhance customer retention and profitability. By offering access to vital consumer data and AI-driven insights, DCS Dealer Controlled Solutions enables dealers to tailor financing options to meet the specific needs of subprime customers while mitigating associated risks.

The platform's intuitive loan origination systems streamline the process, making it easier for dealerships to offer in-house financing and manage loans from start to finish. This capability boosts revenue by capturing more F&I profits and strengthens customer relationships by providing a seamless, personalized experience.

Moreover, by controlling the lending process and having direct access to comprehensive consumer financial data, dealerships can proactively engage with customers, offering timely refinancing options or trade-in opportunities that align with their financial situation. This approach leads to higher retention rates, as customers are more likely to return to a dealer who understands their unique needs and offers tailored solutions.

The Future of F&I is in Dealer Control

The automotive industry is undergoing a significant transformation as dealerships of all sizes gain the tools to control the lending process and optimize F&I operations. With the integration of AI-driven underwriting and intuitive loan origination platforms, dealers can now operate with the same expertise and profitability as large publicly traded groups.

DCS Dealer Controlled Solutions is leading the charge in this new era, bringing technology to market that empowers dealers to serve subprime consumers more effectively and retain customers for the long term. As the industry continues to evolve, the ability to control the lending process will be a crucial differentiator for dealerships, driving sustained success in an increasingly competitive market.