By Thomas Aronica, CEO/Founder of Biller Genie and SkyBank Financial – Miami, FL
There is, perhaps, no better illustration of the “with great risk, comes great reward” concept than the “Buy Here, Pay Here” (BHPH) sector of the sub-prime automobile industry.
However, the advent of automated billing systems has decreased the risks associated with this market while improving cash flow and profits for these dealerships. In short, these systems offer a disciplined approach to billing and collections, tasks that are needed in a sector that lacks sophisticated practices.
First some history. This sub-prime lending practice took hold in the early 1970s in response to the savings and loan crisis and strengthened in 1990s with the financial crisis.
This volatile sector has reflected a roller-coaster ride in recent years. In the first quarter of 2011, BHPH dealers held a total of 9.5% market share of all used car financing in the United States. It then dropped to 6.2% in late 2015 as traditional lenders dabbled in this risky market, according to Experian. This significantly decreased a large revenue stream for used car dealers since these loan portfolios were a large profit center.
As the economy has improved, traditional financial institutions have shied away from sub-prime loans, and now BHPH dealerships have re-gained their position to nearly 12% of the total share of used car financing in the United States. This is good news for the dealers who in recent years have seen growth in their loan portfolios. But with this growth must come more efficient portfolio management through a decrease in default buyers. Many dealers are finding solutions through automated billing systems. The results are clear: a reduced number of delinquent payments, with more loans going to term and fewer repossessions, makes for a much more valuable portfolio.
In an industry that is accustomed to delinquencies, every healthy account contributes to the bottom line. Many independent dealers are increasingly using these systems to automate tasks related to billing and accounts receivable. Once implemented these programs free up finance departments of the tedious and frustrating tasks of collecting outstanding bills and invoices from a distressed demographic whose bank accounts are traditionally oversubscribed.
In this risky sector, the vendors that are the easiest to pay, traditionally get paid first. Many sub-prime lenders require customers to mail payments or bring cash or money orders to the dealership. For many, some who typically work multiple jobs, this is too cumbersome.
One of the biggest benefits of automated payment systems is that it enables the borrower to make a payment in a time and method that is most convenient for them, not the dealer.
Let’s take a look at some of the advantages:
1. Invoices are presented on a timely, professional basis. There are instructions with how to pay with one click or text, and clear explanations of due dates and penalties (late fees, repossession, etc.) for late payments.
2. These systems can also be programmed to address past-due accounts and delinquencies with customized texts, emails, and phone calls reminding owners of past due amounts and providing a one click or text solution to make an immediate payment.
3. A major benefit is that these automated payment systems offer a variety of payment methods to make it easy and convenient for the homeowner such as credit and debit cards, electronic checks and ACH, and even cash payments. They can also enable automatic billing to a designated account on specific dates or custom schedules to eliminate delinquencies altogether.
Another advantage is that these systems take all of the guesswork out of who paid and who didn’t since they keep accurate logs of each buyer’s payment history.
Consider other advantages:
- Seamless integration with popular DMS, LOS and other accounting systems.
- Variety of convenient payment options including credit, debit, ACH, and cash.
- Payments can be made over the phone, online, via SMS or mobile app, or in person.
- Clients can securely pay with one click or text.
- Having an automated billing system allows BHPHs to sell their portfolio’s at a higher value since lenders that would acquire the portfolio perceive customers that are on self/auto pay as more valuable. Having more data on payment trends and demonstrating preferred communication method also increases value to portfolio buyers.
Independent used car dealers have a unique opportunity as traditional institutions move away from financing purchases by those with poor credit scores. This is a lucrative source of revenue for the BHPH dealerships which have a window to maximize portfolio performance by using sophisticated billing and collections processes offered by these automated systems.