The Benefits of E-Contracting

Competition is fierce, and profit margins are thin. Today’s dealers are looking for an edge in the way they do business, to increase CSI and improve their bottom line. Some have done just that, thanks to electronic contracting.

E-contracting is a paperless system that greatly speeds the funding process. It is a computer-driven delivery system that transports Electronic Retail Installment Sale Contracts, or ERISCs, which effectively replace the more cumbersome paper-based Retail Installment Sale Contracts (RISCs). ERISCs, by law, contain the same disclosures and formatting requirements as the paper version. However, the electronic contracts are considered safer for the consumer, as security measures lock the contract in place once it is signed. That means it can’t be altered from that point forward. Signatures can’t be added later, there are no couriers involved in transporting the documents, and the electronic chain of custody is clearly documented.

While there are distinct advantages for lenders using e-contracting, dealerships are the big winners in the process. E-contracting enables dealers to greatly reduce – and in many cases, nearly eliminate – contracts in transit. And fewer CITs means better cash flow. Deals are closed more quickly, and with fewer mistakes. There is no more waiting for approvals to arrive by fax, no more overnight FedEx packages leaving the dealership, no more unhappy customers returning to the Finance office to re-sign paperwork. The process is accomplished electronically, safely and securely, and with lightening speed.

But if there are so many advantages, why aren’t more dealers – and, for that matter, more lenders – participating in e-contracting?

Part of the answer is incentive. While dealer principals and general managers see the benefits of the electronic system – reduced costs, increased efficiency, fewer contracts in transit and a more positive cash flow – those rewards, more often than not, don’t filter down to the actual user of e-contracting at the dealership, which is the F&I manager.

At the same time, since F&I managers earn their income when their deals are funded, shortening that period is obviously in their best interests.

Another impediment to the adoption of e-contracting is training. When a finance manager who practices e-contracting leaves a particular dealership, his or her replacement may not have the knowledge base necessary to utilize the process. But by far the biggest obstacle in the full-scale adoption of e-contracting, experts agree, is the current culture of automotive financing – or, more specifically, the fundamental nature of mankind.

Lenders’ Perspective

The movement to adopt e-contracting is gaining momentum among indirect auto lenders and dealers. Simply stated, e-contracting is the ability for a dealer to forego paper contracts, in favor of submitting an electronically signed contract using signature pads to capture customer signatures.

Many lenders are presently engaged in assessing the cost/benefit tradeoff involved in adopting e-contracting. While the explicit costs of accepting e-contracts may be clearly defined in terms of per-contract fees and onetime integration fees, the ability to estimate the associated benefits has proved difficult for some lenders.

E-contracting’s most obvious impact on the dealer relations (or sales) process is the reduction of printing and distribution costs associated with contract forms. The extent to which complete contract packages are submitted magnifies this potential benefit. If all required documents (such as agreements to provide insurance, credit life and disability policies, etc.) are produced electronically, a greater proportion of the present printing and distribution costs would be eliminated.

The impact of e-contracting on forms version control expenses may be limited. Unless 100% of a lender’s contract volume was submitted electronically, the requirement to maintain and update a paper forms library remains. The assumption of 100% e-contracting utilization would seem highly unlikely, particularly during the initial phases of implementation.

Application Processing

Dealer-entered application channels are widespread and common. Their acceptance among dealers has been growing and their use is a key driver of lender application processing efficiency. Despite the growing popularity of dealer-entered channels, utilization rates still vary among lenders. For lenders with lower proportions of dealer-entered applications, the advent of e-contracting may produce an effect in terms of the percentage of dealer-entered applications. This effect is likely to extend from the fact that dealers, who were previously reluctant to enter their applications online, may now be induced to do so to obtain the benefits associated with e-contracting.