Why is haggling so prevalent in car purchasing? People are not comfortable having those conversations, and yet the customer-buying experience at a car dealership is known for it. Dallas Wells and Jim Young discuss how this is translated into the commercial loan negotiation process.
Puddy: Let’s finish this up.
Jerry: Did you two break up?
Puddy: That chick’s wacked. We’re history. Just left out a couple of things, rustproofing.
Puddy: Transport charge, storage surcharge, additional overcharge, finder’s fee.
Jerry: Finder’s fee? It was on the lot!
Puddy: Yeah, that’s the right. The floor mats, keys …
Puddy: How’re you going to start it?
Jim Young: Hi, and welcome to The Purposeful Banker podcast, the podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today’s best bankers. Jim and Dallas here is your hosts this week, and thank you for joining us. Dallas, I wish that that opening clip would be an indication that you and I were just sit here and talk about our favorite Seinfeld episodes.
Dallas Wells: Yeah.
Jim Young: Which might actually be our most popular podcast, but doesn’t really actually link to what we want to do here. The reason we include that include that clip of David Putty and Jerry at the dealership, in which Jerry realizes that he’s no longer getting the inside deal, it’s because of an article that you recently sent to me from the good folks over at Priceonomics. It asked a question I think a lot of Americans asked themselves, and I’m sure Jerry asked himself when he walked into that dealership: why do we haggle over cars? First, can you, Dallas, start off by giving us a basic overview of the article?
Dallas Wells: Sure, so the basic premise is we have this car-buying experience which really sticks out as being an oddball in all the other transactions that we do. There’s very few things that we actually haggle over. Most things have a price tag, and even those that don’t have a price tag, like buying a house, we negotiate those, but it’s this very sterile, removed, there’s a third-party in the middle kind of process. Buying a car, which is a pretty big transaction for most people, is that rare thing where you actually have to, face-to-face, haggle for the price. It’s just an oddball that sticks out in today’s economy. This article’s really talking about why is the car market different? Why do we still haggle over those and not most other things? What are the pluses and minuses, both to the consumer and to the car dealership? It just struck me as really interesting since we spend so much time talking about pricing and that … Well, we’ll call, instead of haggling, and the euphemism is negotiating, but it’s really the same thing of coming to deal terms. It resonated with me.
Jim Young: Yeah. The haggling thing particular resonates for me because I despise haggling. It makes me physically uncomfortable, and I married into a family in which I have watched my father-in-law do world-class haggling over jewelry at a Gold Souk in Dubai, and I was just mortified by the intensity of the exchange. I think most people, particularly in the United States, United States culture, at least, is mostly anti-haggling. Why is that that seems to have survived in the car market? What is about it that makes it so different?
Dallas Wells: I think that’s the thing that really sticks out about it is exactly what you just said, is it’s really uncomfortable. Most people do hate it. There are a few people who seem to really enjoy it. My father-in-law’s one as well. If he goes to a furniture store, he’s coming back with some of their lamps and fixtures from the floor to get him as throw-ins to buy the couch, but for most people, we really hate it. It’s because we don’t do it very often. The car market is different for a couple of reasons.
Number one, just the history of the car market. We’ve all heard the term horse-trading, which is exactly what it sounded like, where people used to trade around horses when that was the primary mode of transportation. The horse market really became the car market, and a lot of those same tendencies and just the culture around it seemed to carry over. Even some of the language has carried over, even down to horsepower, but the way the horse-trading market worked is you would have this horse that would get old and run-down and you would take it and trade it in on the younger model, much like we do with cars today. That piece of the transaction is really what’s unique about it, and what I think makes most of the negotiation, the haggling part, stick. You go in and the car will have a price on it, and given the amount of information out there on the internet today, you can find out not only what that suggested retail price is, but probably also what that dealer paid for it. That part’s all known and there’s kind of the, you know about what that price is going to be, you can compare dealerships to each other. That’s all easier than it used to be.
Then you say, “Oh, but I’ve got this old car that I want to trade in.” Well now, there’s this very unique variable that gets thrown in there, where now that dealer has to evaluate what do you have, what’s it worth, what’s it worth to them versus what’s it worth to you. We kind of have to now do this dance around, “Well, how much are you gonna give me for the trade-in? How does that affect the price of the car?” There’s also all the extra stuff, and I’m not just talking about the extra from Puddy, the keys, floor mats, finder’s fee, all that kind of stuff. Finance charges. You know, dealers make a significant amount of their profits on the financing piece, and most people don’t really realize that. Actually, I just had this conversation with my younger brother a couple weeks ago. He was talking about how he felt like he would get a better deal just to go to the lot and pay cash, just write them a check. I’m like, “No, that’s not how it works.”
You don’t talk about whether you’re financing it or not until you get to the agreed-upon price, because the financing’s a whole separate thing, and they get some form of kickback for wherever they place that loan. Kickback maybe is a bit of a harsh word. That’s technically what it is, but has some negative connotations to it. All those moving parts are what makes, really, each car transaction what the article calls a snowflake. Each one is really different because there’s different pieces and packages of the car that you’re actually buying. The trade-in’s going to be different. Financing or not, at what levels, all that stuff is different. As well, did you buy a warranty or not. There’s very rarely a combination that’s consistent enough that you can just have a standard package price for it. Since every deal’s different, we’re going to haggle over it and negotiate it.
Jim Young: How about we go with incentive instead of kickback? Does that sound better?
Dallas Wells: Yeah, that’s much better. I like that better.
Jim Young: Good. Well obviously, you mentioned financing. That’s good as a good segue, because obviously we want to tie this in to how you compare the car haggling process to what you see in banks. Is a commercial loan a snowflake like buying a car?
Dallas Wells: Yeah, most of them really are. If you think about loans in general, consumer loans usually do have a price on them. There’s lots of reasons for that, the big two being compliance on one side, the CFPB doesn’t want you doing a whole lot of haggling with your customers over consumer loans; and then the second piece is, is that those really are much more commoditized. They kind of come in standard packages, standard set of features, basically, if you think about it in car terms, and so they are all much more alike. A commercial loan, though, those are all very different. There’s simply too many variables. We see this a lot where there’s several firms out there that sell, basically, a service where they say, “Here’s the average pricing for this type of loan in your marketplace.” We always say, “Well, wait a second? That’s not possible for them to really have good information on that. There’s not good data on that,” because there are too many variables for them to account for, for them to have a really statistically-significant average of that exact kind of deal in your marketplace.
You’re going to have each individual borrower is going to be pretty unique. It’s going to be a business. It’s going to have its own risk grade. It’s going to be in an industry that has its own set of risks and factors you have to consider. There’s going to be unique sets of collateral. There’s going to be guarantors that are going to change the picture a little bit. There’s going to be, if it’s a real estate, then there’s gonna have tenants. How strong or weak are the tenants? What existing relationship does that customer already have with the bank? If they’re doing a $100,000 loan and they’ve got $10 million worth of deposits already at your bank, they’re going to get a different price than somebody who’s in the opposite situation. There’s really too many variables.
Each one is a unique snowflake, and so when you come to that deal, there is no set price for that. There’s a starting point, which you would think of as kind of the manufacturer’s suggested price, but that’s all that really is is a jumping-off point. People are generally kind of uncomfortable with that, and what we’ve found is that even though the bankers do it on a regular basis, they’re really uncomfortable with it too. That’s really one of the core problems we’re trying to solve is, how do we find a better solution to that uncomfortable conversation between lender and borrower.
Jim Young: Yeah, and when we were putting together our show notes, I had said, “Gosh, it, it doesn’t feel to me, when, when I talk to bankers, that they don’t strike me as, as Jerry Lundegaard in Fargo trying to get you ah, to buy that undercoat.” It doesn’t feel like that, so how do you find it to be different, where you’re doing this sort of thing, you’ve got the snowflake, you have all these different variables. You are going back and forth on it, but it’s not that haggling, “Let me go check with my boss,” sort of thing from Jerry Lundegaard. How is it different, then?
Dallas Wells: Yeah, I think the big difference is number one, the difficulty in banking in general. When you’re buying a car, there are lots of variables, but there is still a differentiated product. Are you buying a Porsche or are you buying a used Ford Pinto? There are lots of different tangible things there to compare and contrast, and then those will have a price. Now what it’s worth to the dealer versus what it’s worth to the customer, to the buyer, that’s the difference and they’re trying to find a middle ground.
The difference in commercial loans is that the price is the product. The price, when we say price, it’s not just the rate. In loan terms, the price is really, well what’s the term? What’s the collateral? Who’s guaranteeing it? Is it fixed or floating? It’s all those deal terms together, that’s the price, and that really is the product. We use this phrase in the whitepaper that we just released a couple weeks ago. A lot of bankers will say, “Hey, our money’s just as green as the guy down the street.” That thinking of your product as just the money that you lend, it’s really the wrong approach. The product is not the money itself, it’s how it’s packaged. It’s what the customer actually ends up experiencing, which is all those deal terms. That’s the biggest difference is, the price is the product and so you have to be comfortable in negotiating that thing and then the difference is, is just the process we go about doing it.
You use the, “Let me check with my boss,” that kind of typical sleazy car salesman approach. Lenders are incentivized in a much different way. Most lenders are still incentivized just to get deals done, so they do want to help borrowers make deals happen. They’re trying to find, basically, “How can I give the borrower exactly what they want without my boss yelling too loud?” which is very different than, “What can I sneak past this customer?” Just the whole set of incentives around it is very different, but it really starts at that core difference of, “What’s the product that we’re selling?”
Jim Young: Yeah, and one thing we talk about, and again, just like before we said incentives sounds better than kickbacks, conversation sounds a lot better than haggling. Honestly, I think it is a more accurate description of what we talk about with commercial lending. One of the things, actually, a quick tease for chapter seven of our book Earn It that’s coming out tomorrow after this podcast. We talk about actually during that conversation being transparent, and I don’t think you would, in an auto dealership, have the salesperson say, “Well, here’s what I need on my end to make this work.” Talk a little bit about that and why that works in commercial lending.
Dallas Wells: I think the key there that you’re really talking about, and using the phrase conversation instead of haggling, is a lot of borrowers come to the table with that mindset of, “Well you told me the rate’s four and a quarter, so I’m just going to start pushing back, so I want to pay four.” That is haggling, and that’s not gonna be a situation that … You’re not going to win that. At best, you’re going to meet somewhere in the middle and both people walk away feeling disappointed and probably a little dirty, like, “Man, that was just gross.” What it should be instead is, since commercial loans are such a snowflake, and their business is so different, it’s really more of discovery and that’s kind of the right mindset. It’s a discovery conversation. I’m trying to figure out what is it that’s going on in your business. What are you doing? What do you need the capital for? My job is not to haggle with you over trying to gig you for a little bit of extra money. My job’s to provide you with the best solution to that need.
It’s really more of a doctor asking questions to find the right prescription, rather than let’s haggle over this number of this good that’s sitting there in front of us, you know the car sitting there on the lot while we negotiate price. That’s really what we want to get to is, a transparent conversation where we say, “Here’s what the bank needs to make this work. Let’s find a way that we can make it fit in with what you’re trying to do. What is your business need? What’s your funding requirements for this? What are you shopping for? Let’s find the best fit that we can find.”
Jim Young: Going back to the article, it ends by talking about how the future of car buying might change. Talk a little bit about that and again, can you compare that to banking’s future.
Dallas Wells: Yeah, so what the article talks about is how there have recently, and I’m using, again, my air quotes on a podcast, but starting back with the now-defunct Saturn, and also CarMax, the biggest used car sales company in the country, they both use fixed pricing. You don’t haggle over the price for those two things. That was actually the big pitch for Saturn. The cars were actually pretty crappy, but people could walk on the dealer lot, know what the price was, and just pay that. They actually had some decent success with that, but for the most part, cars still bought the way they’ve always been bought, with the horse-trading. There’s a big new player that’s changing that a little bit, and that’s Tesla.
Tesla has a different model from the ground up. They don’t have a dealer network, you buy directly from Tesla. The other thing that they have is very constrained supply. They just can’t build enough of those things yet to scale it, which is actually what investors hate about Tesla, but there’s such a backlog of orders that there’s not a lot of negotiating to be done. Here’s the price of the car, take it or leave it. If you don’t want it, there’s thousands of people behind on the waiting list that will gladly pay it. Tesla also has this really powerful brand image, and so the question that the article poses, which I think is a good one, is does that way of buying start to be associated with, instead of a crappy Saturn, with more of this premium product and this brand experience that’s very different. You don’t go to a slimy-feeling dealer and negotiate a price, you deal directly with Tesla, which has this nice, cool, tech sheen to it, and you buy directly from them for the price that it says. It’s like this status thing.
Does that start to shift the market over time, and do more people start to offer cars like that, and do more consumers want to buy cars that way? It poses that question without a real answer. It’s kind of like, “Well, we’ll see.” The correlation to banking there is there’s some fintech companies trying to do kind of the same thing. If you go to LendingClub or any of the commercial variations of that, and there’s a bunch of them, but if you go to any of those places and apply for a commercial loan, you don’t haggle over the price. In fact, you’re not going to talk to a person. What they’re going to do is they’re going to give you a few basic options. You’re going to choose those and then there’s just a price. It’s take-it-or-leave-it. Even those have, again, a little different feel to them. There’s a brand image associated with those, and those loans are actually quite a bit more expensive than what you’re going to get at the bank.
That’s one of the interesting things from the article, which again we’ll link to in the show notes, but it talks about this haggling thing, even though people hate it, it actually ends up giving them better pricing. This is, I think, kind of the similar thing where banks, even though they’re doing a much more hands-on approach, since we are negotiating this thing you end up with a better deal, on average, than you do from those other players. I don’t think we know the answer to this one either, though. I don’t think we know what the impact is from fintech, either as an adversary to banks or as a partner with banks. What’s the impact on how commercial loans get done?
What we’ve seen over time, and I think this trend continues if you back to way back, like the 1930s, used to, all loans were negotiated. If you went to George Bailey and asked to borrow $100, you would kind of figure out what the terms were. There was no rate sheet that George would pull out of his desk drawer. Home loans worked the same way. Eventually those just become much more commoditized and there’s just a price for those. That trend started from very small consumer loans and then it went to mortgage loans, now it’s gone to small business loans. Basically it keeps moving up the scale into more and more complex commercial loans. That’s what we’re starting to see with those fintech players coming into bigger commercial deals. I think that trend continues.
The other point that I think’s an important one is that there’s so much money at stake, and it’s such a rare transaction, and they’re such unique transactions, that there will still be haggling involved with these, or negotiating or conversations, for those ones that are most impactful. If you’re borrowing 10 million, 25 million, 100 million bucks, you’re not just going to pay the sticker price. When we sell software, we don’t just have a price tag sitting on the box that we ship to them. There’s a discussion about what’s the right set-up for you guys, and what role do we play and you play, and we come to a price. That’s how complex transactions are still going to work, and most of these, I think, are still going to fit that, but more and more are going to fall into that, “It has a price tag,” thing. I think that’s the interesting thing that banks will have to negotiate over the next several years.
Jim Young: Yeah, and again, that article is called, “Why Do We Haggle For Cars?” It’s in Priceonomics. We will have the link to that in the show notes for this episode, as well as the whitepaper I referenced, “Are You the Bank of Last Resort?” Again, you can always find those at precisionlender.com/podcast. That’s all we have time for today. Thanks to all of you for taking the time to listen. If you like what you’ve been hearing, make sure to subscribe to the podcast feed in iTunes, SoundCloud, or Stitcher. We love to get ratings and feedback on any of those platforms. Thanks for listening. Until next time, for Dallas Wells, I’m Jim Young and this is The Purposeful Banker podcast.