Banks in Car Leasing

There are many similarities between the consumer's reac­tion to the energy crisis and leasing companies' fears about banks entering into the car leasing field. There are a great many people in this country who feel that the press has overly alarmed consumers and that the national administra­tion has not acted properly in alleviating falsehoods about our energy resources. In contrast, it appears to me that many individuals in the leasing industry have become overly alarmed and look at banks with the assumption that banks have all the money necessary, as well as the desire to take over the car leasing industry. I categorically refute the posi­tion of any banker or independent lessor who takes such a stance. I base this postulation on some of my bank's experi­ences and what I feel will probably occur.

Maryland National has been in the car leasing business for nearly three years and has witnessed some of the re­wards and some of the inherent pitfalls apparent in this very specialized field. It is my firm belief that the net effect of banks entering the car leasing field will be the creation of dynamic and unparalleled growth in the individual leasing segment. This expansion can profit existing leasing com­panies as much as, or more, than the banks which promote leasing as a new service.

Our entre' into car leasing was based on two premises - first, the trend toward individual leasing was growing each year and we were concerned with the possibility of erosion in our car loan portfolio, especially if leasing continued to become more popular in years to come. Secondly, our bank's decision paralleled one which certainly each one of your respective firms made. We saw car leasing as being profitable and were aware of the gross return involved. Many bankers will view car leasing as a natural extension of their car lending activities and may tend to be somewhat myopic at first, only to discover the many dissimilarities between car financing and car leasing. We had to learn these idiosyncrasies. We had deliberated over our leasing venture and determined that we would test the water, if you will, before diving headlong into a massive commitment to this service. Our activity in automobile leasing is set up as a function of a national bank, although we do have an equip­ment leasing company operating in our holding company. Our car leases are all open-end leases.

Early in our new endeavor we found that leasing cars was a different "ball game" than financing them. I'll relate a few of our experiences only because I believe other banks will profit by our mistakes and the fears of some of you may be allayed.

It has been said that some bankers are not good sales­men. In the typical car loan transaction the role of the lender is that of an "order taker." The customer has al­ready, in many cases, arranged to purchase the car before applying for a loan, or at least knows what model he is going to buy. We discovered to our dismay this was general­ly not the case when a customer wanted to lease a car. After three years, it is evident to us that car leasing involves more than just order taking. Quoting accurate monthly rentals, closing the sale of the lease with the customer, getting the lease signed, securing proper insurance coverage and purchasing the car as well as close follow-up, all repre­sented many new elements for our leasing representatives who were primarily installment loan oriented.

During the first year in operation, small problems crop­ped up but it finally started to gel and then came the early, terminations and disposals. We made mistakes, but corrected them because we recognized that leasing cars was a sophisticated service with a high degree of financial risk. There are other traps for new lessors whether they're banks or leasing companies.

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(1)-What form of advertising will best accomplish the promotion of this service? How many advertising dollars will be required to develop the projected number of leases? Will the income projections of the leasing operation support the expense for promotion of the new service? Or will the bankers' rationale be "Advertising for car leasing provides great institutional benefits."

(2)-Will the banker truly recognize all the expenses in­volved in car leasing when determining the return on invest­ment, or will some "creative accounting" be employed? The manpower commitment, i.e., numbers of employees to numbers of leases outstanding is far greater than a similar comparison to loans outstanding. The fact is that car leas­ing, while being more profitable, is also far more expensive than car financing.

(3)-How about the credit judgment of the car leasing manager who is constantly under pressure to lease more cars?

We have had to be careful not to let the number of units taint some of our fundamental credit judgment. We've not had many repossessions, but I see the strain of lease volume versus sound judgment as being a problem for anyone who chooses to enter the leasing arena. I also wonder if the individual lessee places the same emphasis on prompt pay­ment when leasing as he does when he's borrowing.

Now, what about the impact of banks entering the leas­ing field? First of all, the yield doesn't currently exist in fleet leasing to cause large numbers of bankers to get into that competitive market. This is not to say that one or two more might not try, but not the masses. That leaves the individual segment, and it is well known that individual leasing is becoming more popular each year with hardly any stimulation from manufacturers or independent lessors. Compare for a moment the entry of banks into car leasing with their entrance into the credit card field in the mid-sixties. Think about what's happened in the credit card industry in the last decade. I think it is fair to say that the credit card is now an American way of life.

Many banks have entered the leasing field and many are standing in the wings waiting for the "smoke to clear." Banks must, however, recognize that there are pitfalls in leasing and work with groups such as AALA, to perfect the science and promote the concept.

Individual car leasing will, in my opinion, experience dramatic growth in the years which are ahead of us in spite of the energy crisis and the volatilidity of the economy. I attribute this to the ingenuity of independent lessors, com­bined with the creativity of banks which choose to act as lessors. I am convinced that banks in leasing will be healthy for the industry. I've watched one horse leasing operations come and go and as they did, some left scars on the car leasing industry. I am thoroughly convinced that inde­pendent lessors are highly skilled automotive people who are equipped to meet new challenge whether it comes from banks, manufacturers, large finance companies, insurance companies or even an energy crisis!

This article was adopted from a recent speech presented by Mr. Ray Nichols, Vice President, Maryland State Bank.