In 2019, the buy here, pay here (BHPH) industry continued its steady growth with larger operators benefiting the most due to their effective cost management, the ability to weather any regulatory impact, engage in digital retail more aggressively and resolve financing challenges. Following are some important market observations for 2019.
Our company’s average franchise store’s unit sales were up by 2.7% year over year while the credit quality of those originations improved over 2018’s numbers. 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.
In regulatory matters, the Consumer Financial Protection Bureau was not as aggressive in 2019, though many state attorneys general have engaged more on the enforcement front for the year. Noncompliance violations are severe, which is why a franchise system makes so much sense. It’s a shared cost to help address the various regulations, monitoring and adapting to compliance changes, and conducting audits to ensure that compliance procedures are properly implemented.
The shift from traditional commercial bank asset-backed lines to asset-backed securitizations (ABS) market is the most noticeable finance trend in BHPH and it’s been a gamechanger. 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.
There are ever-shifting preferences in the BHPH customer base as the marketplace continues to evolve. More subprime customers now want to shop and get approved online, and in many cases, complete the sale with home delivery. In addition, we’ve noticed customers are more and more selective in regard to inventory quality.
BHPH dealers have always excelled and set themselves apart in local markets because of their ability to better understand the customer and react to their needs in the three major areas of operations: sales, service and collections. Overhead may typically be higher on a per-contract basis, BHPH operators 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).
It will require a lot of capital for BHPH operators to be more efficient and more profitable as they scale their operations in the future. Many long-time 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.