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Chase finds competitive edge in captive-like auto financing partnerships

Unique partnerships with select manufacturers have helped drive JPMorgan Chase & Co.'s growth in auto loan and lease origination volumes over time.

Bank officials touted the arrangements with the likes of Mazda Motor Corp., Subaru Corp., Maserati and Jaguar Land Rover Automotive plc during Chase's Feb. 27 investor day as providing "quite a bit of scale" and a competitive advantage for their company.

Chase, citing Experian data, said it ranked as the No. 3 bank lender in the U.S. auto finance market in 2017 based on financing market share for new and used loans and leases at franchised and independent dealers.

"We'll continue to invest in these partnerships, leverage our full suite of capabilities to deepen dealer relationships and, of course, provide an improved digital experience to our customers," said Executive Vice President and CFO Marianne Lake.

Chase's auto loan and lease origination volume fell 5.9% on a year-over-year basis to $33.3 billion in 2017. It was the first decline reported by the bank in auto originations since 2011, according to a review of its historical statistical supplements.

Across the auto loan and lease business, Lake conceded that Chase's market share "is down a bit" as the company emphasized underwriting discipline. Co-President and Co-COO Gordon Smith attributed most of the 40 basis points of share the bank lost during 2017 to its shift away from "really long duration" auto loans, such as those with original terms to maturity of 84 months. It had previously backed away from the subprime portion of the market.

Over a longer time frame, Chase's investor day slide deck showed a compound annual growth rate in auto originations of about 7% between 2012 and 2017. A compound annual growth rate of 21% in originations through the manufacturer partner channel more than offset a decline in Chase's indirect auto channel during that period.

"It's not like the co-branded card scenario, but it is a very close partnership," Smith said in comparing Chase's approach with auto manufacturers relative to the strategy wherein banks issue what amount to general-purpose credit cards branded in the name of partners in industries such as retail and travel.

Chase seeks to build a strategic, long-term relationship through which it attempts to "understand much more clearly what it is [an automaker is] trying to achieve, what their model lineup is, how we [can] integrate our infrastructure more closely to them and understand what the need is that they're trying to deliver for their customer," Smith explained. The net effect, he added, is that Chase captures "a significant amount more of their share than we would do otherwise."

Chase acts as the equivalent of a captive finance company through the manufacturer partnerships with white-label arrangements under names such as Mazda Capital Services and Subaru Motors Finance. Various other manufacturers, including Ford Motor Co., Toyota Motor Corp. and General Motors Corp., own and operate captives to provide consumer and commercial financing to their dealers. GM acquired the former AmeriCredit Corp. and ultimately transformed it into a full-fledged captive operating as General Motors Financial Co. Inc.

Though an executive said that Chase, through its arrangements with multiple manufacturers, is "the only bank that has that kind of scale in the industry," it is not alone in pursuing the partnership strategy. Its most notable peer in that realm may be Santander Consumer USA Holdings Inc., which has conducted business for nearly five years under the Chrysler Capital name in partnership with Fiat Chrysler Automobiles NV.

Santander Consumer, under its previous leadership team, had identified growth in Chrysler-like arrangements with other manufacturers among its strategies for expansion beyond its core nonprime lending business. It entered a letter of intent for one such relationship in January 2014 with Maserati North America for the creation of Maserati Capital.

Chase ultimately announced its exclusive private-label financing agreement with Maserati North America in April 2016 through which it conducts business under the Maserati Capital USA name. Its partnerships with the other manufacturers date back longer: 2009 for Jaguar and Land Rover and 2010 for Mazda under the current private-label name. Subaru and Chase said in 2011 that the bank had been the automaker's "captive" lender at that point for more than 10 years.

"It's a really neat opportunity there," Smith said of Chase's manufacturer partnerships. "We've got lots more room to grow."