Before the internet made car pricing transparent, a car’s value was a big unknown for the consumer. Buyers would dealer-hop, negotiate for hours and do the back-and-forth between dealers before, mostly out of sheer exhaustion and frustration, buy a vehicle.
Still never knowing if they’d gotten a good deal on the purchase, or their trade.
Retail and wholesale pricing for cars at all levels – new and used – is now transparent to anyone with a smartphone in their pocket or an internet connection via a computer. TrueCar, Painter noted, was part of that change, since it offers customers a zip code-specific snapshot of what they will pay for a car (and also offers them a “TruePrice” discount by connecting them with a local dealership).
That transparency, apart from being good for consumers in obvious ways, is also good for the car industry as a whole, because it has forced manufacturers and dealers to rethink how cars are bought, not just sold.
That was step number one.
Painter’s self-admitted career-long obsession with fixing how cars are bought and paid for in the U.S. resulted in the recently launched Fair app.
“Right now, we have a system where people take on a whole bunch of debt to finance an asset with depreciating value,” he told Karen Webster in a recent interview. “That’s obviously just not a very good financial plan – and one we think we can improve on [with Fair].”
Cars as a Service, Instead of a Possession
Fair isn’t in the business of lending money to consumers to buy cars. Instead, Painter explained, Fair buys the vehicle that a consumer might want to purchase and then enters into an agreement in which the driver will pay for that car on a month-to-month basis. This one monthly payment bundles all the costs of car ownership, including insurance, maintenance and repair and wear and tear (both normal and excess). Along with that one monthly payment, there is a non-refundable “start payment,” which, Painter said, is the equivalent of the first and last month’s payment.
The cars are all pre-owned, and Fair itself carries no inventory beyond what they have under contract with drivers. The supply is managed through a network of local dealers, and when the car has lived out its useful life, it is liquidated.
Painter said there is a massive supply of cars for Fair to tap when a consumer wants one.
“There are nearly six million cars coming off of lease in the next 12 months,” he pointed out. “That provides a great value for customers, who have a large supply of lightly used, highly optioned vehicles to pick from.”
He also observed that modern consumers don’t like being sucked into long-term commitment in anything they do. Since cars represent a third of the average person’s net worth, and are almost always purchased via a long-term loan or lease, consumers would rather avoid that feeling of
A loan has to be paid off in full or else there are serious consequences for the consumer. Leases can be turned in early, but there are generally fairly stiff penalty payments for premature termination.
Fair, on the other hand, only asks that consumers return their cars into Fair’s custody when they are finished with them – no penalty, no additional payment. On average, Painter noted, customers tend to keep their Fair cars for 12-18 months. The average hold time for a car purchased today is 5-6 years – which also happens to be the average term of an auto loan.
Who Uses the Service?
Painter said the Fair customer runs the “whole spectrum.” Some customers are motivated by getting a car like they buy everything else: on demand via an app on their phone. Those customers, he said, tend to be early adopters with prime and super prime credit scores.
On the other end of the spectrum are thin file, near-prime and sub-prime consumers who need a car. Fair appeals to them, as they are not subject to the high interest rates or large down payment requirements that such customers face in a traditional underwriting process.
Instead of underwriting loans, Fair instead offers a subscription car rental service, and don’t check a consumer’s credit.
“If you are a customer who goes to a rental counter, you just get a rental car. You don’t pay more because you have bad credit. It doesn’t matter to the rental company – and we take a similar view,” Painter told Webster. “Taking people who are just starting out and have little credit, or who have had had a spotty payment history in the past, or who are on the edge, and then saddling them with expensive sub-prime debt to purchase a depreciating asset is not a good or a smart experience.”
For a Fair driver to get behind the wheel, he only needs to show proof of a valid license (to verify that they are legally allowed to operate a car) and proof that they can pay the monthly payments and the start payment. Fair, Painter noted, is largely payments form agnostic: They’ll allow customers to link to a credit card, debit card or bank account, but drivers can’t get behind the wheel until they’ve paid the start payment and provided a way to be charged on a recurring basis.
It’s just like a traditional car rental, with the added benefit that Fair payments are reported to credit bureaus each month to build up consumers’ credit. And in the event that the driver’s personal financial circumstances go south, it’s very easy to end the Fair arrangement – the consumer simply returns the car.
That subscription model is one that’s gaining footholds across the auto industry, Webster noted, with OEMs across the board coming up with car-as-a-service models where customers agree to pay a monthly fee for the privilege of trading in their car for a new model every 10-24 months.
Painter noted that he doesn’t tend to see these services as competitors, since they almost all focus on new cars, whereas Fair exclusively trades in the used car market, which is three times larger. Instead, he is heartened by the fact that the biggest and best-known names in car manufacturing are embracing the model.
More than just a model, though, Painter believes – after years of contemplating how to optimize the process of putting drivers behind the wheel – this month-to-month subscription might be the approach consumers will want and need in the future.
But, he noted, they do hold a particular appeal for one specific subset of owners: Uber drivers.
Fair + Uber
Fair found itself in the headlines earlier this year when it purchased Uber’s Xchange Leasing unit. At the time, reports indicated that Uber had sold the program because operating an auto financing arm to lease cars to drivers had ended up becoming a massive money pit, costing the firm a loss of nearly $9,000 per car.
That figure, Painter told Webster, made a great headline, but didn’t really do much to align with reality. It wasn’t a figure released by Uber – it was an estimate of the depreciation rate on the cars in Uber’s fleet … not really a count of how much of a loss they realized when operating an auto leasing unit.
Moreover, he noted, in many ways Uber did exactly what it set out to do when it launched Xchange Leasing.
“Uber had a very simple objective: Get more drivers behind the wheel so they could move customers around. They succeeded in that endeavor, as they got 40,000 drivers signed up in a three-year period,” Painter explained.
However, in the rush to get their service to the market, they didn’t develop the in-house expertise to build out the infrastructure to place drivers behind the wheel in a cost-efficient manner. Fair, Painter contended, is built and run by “the people who built the modern infrastructure of auto leasing” and thus know the area well.
Today, Fair is Uber’s exclusive auto leasing partner. When a potential Uber driver downloads the Uber app and notes that they need a car, Uber’s app points them directly to the Fair app.
According to Painter, Fair offers Uber the best of all worlds, providing their drivers with a less expensive alternative to getting a good car, along with an off-balance sheet partner.
Painter firmly believes the future of cars is subscription ownership.
And for some car owners, he has point. Ridesharing and other delivery-as-a-service drivers need access to cars to support their businesses, but for shorter terms and at cheaper price points. There are also large segments of the consumer marketplace that could gain a massive pricing advantage through an app that allows for a month-to-month ownership option that avoids loans and large down payments.
Still, customers will vary.
Some, particularly urban residents who are engaged by the ever-expanding range of ridesharing options around the world, might just dispense with cars entirely. City parking in some U.S. cities can cost $500 a month and up – the same price as a five-year loan on a $30,000 car.
Ridesharing might be just as cost-effective as a cars-as-a-service application that comes with the convenience of not having to drive.
For more suburban residents, it remains to be seen. Some customers like the idea of owning a car and being done with monthly payments at some point. Cars last longer than they once did, with the average age of U.S. cars at 11.5 years old. That’s five whole years without any payment.
For other groups – say, families that need a large minivan or SUV for a few critical years of their children’s lives but then quickly don’t need a car that large – the Fair value might offer a strategic way to fill a need for less.
“If we are right about the market, we think over time, people are going to be less and less interested in borrowing money to buy a depreciating asset. We think cars as a service will transform how people think about ownership,” Painter said.
It’s a big aspiration, and time will tell if Fair will play out in Peoria as well as it does in Portland. Painter expects that Fair will be available in all U.S. markets by the end of 2018, and will go global in 2019.
The market for cars has changed remarkably already, he noted, and will continue that transformation even more rapidly as cars become more connected – and possibly even driving themselves. The question now, for every player in the space, is how to innovate for a rapidly changing present and a future that is still hard to predict.
And using an app like Fair could get consumers more interested in turning over cars every 12-18 months instead of every five, six or 10 years. To that end, Painter hopes to earn a customer for life – and change the way that all consumers think about accessing mobility.
“There has never been a more dynamic period in the auto industry,” he noted. “As an entrepreneur in the space, it is very invigorating.”