BHPH– Market Perspectives 2019, Byrider Commentary
BHPH— The following commentary was provided by Byrider in Carmel, Indiana, relating to its franchise network of BHPH dealers. It appears that much of the growth in the BHPH industry came from larger operators that have the scale to more cost-effectively manage the increased regulatory, digital retailing and financing challenges. Following are some important market observations for 2019:
OPERATING PERFORMANCE – During 2019, unit sales were up by 2.7% year over year for the average Byrider franchise store. At the same time, the credit quality of those originations was improved over the prior year. More importantly, the average portfolio grew 6.6%, net dollars charged off were down 4.6%, and charge-off as a percentage of the portfolio was down 10.2%. The results were that average pretax earnings were up 75% year over year.
REGULATORY – The penalties for noncompliance are severe and every operator needs a compliance function that addresses the various regulations, monitors and adapts to compliance changes, and conducts audits to ensure that compliance procedures are properly implemented. This cost can be shared across multiple stores, where applicable. Although the CFPB was not as aggressive in 2019, the individual state AG’s have filled the enforcement gap. The impact of this enforcement change varies between states.
FINANCING – The most important trend in BHPH finance has been the move from traditional commercial bank asset-backed lines and into asset-backed securitizations (ABS) market. Approximately a dozen of the largest BHPH industry operators (many backed by private equity) have been able to make the move to the ABS market. The move requires large scale portfolios and provides access to lower cost capital and higher loan advance rates, even when such deals are conservatively structured. Local and regional banks were being carefully scrutinized by bank regulators in 2019. Therefore, many banks searched for larger, established operators, forcing smaller operators to either self-fund or seek higher cost capital.
DIGITAL RETAILING – Customer preferences have evolved. More subprime customers now want to shop and get approved online (maybe even execute a contract online and have the car delivered to their home). In addition, customer expectations are more selective in regard to inventory quality.
ECONOMIES OF SCALE – The advantage of the BHPH dealers servicing local markets has always been the ability to better understand the customer and react to their needs (sales, service and collections). While their overhead was typically higher on a per contract basis they could still manage the portfolio better than a distant third party lender so the economics made sense. However, today the larger BHPH operations are figuring out how to keep the local market presence but also integrate the efficiencies of a large lender (i.e. better scorecards, electronic documentation, centralized underwriting and collections).
BHPH operators must be more efficient to be profitable and scale their operations in the future. That requires a lot of capital. Many longtime BHPH dealers feel increased pressure to retail vehicles and underwrite and collect more efficiently due to capital constraints. Industry consolidation appears likely for operators who fail to adapt to the market changes and implement technology to make more from less.