One on One with Tricolor Founder and CEO Daniel Chu

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One on One with Tricolor Founder and CEO Daniel Chu

by TIADA Staff

During TIADA’s recent Virtual Conference and Expo participants had an opportunity to listen to the wisdom of Daniel Chu, Founder and CEO of Tricolor, the nation’s largest used vehicle retailer focusing on the integrated sale and financing of vehicles to Hispanic consumers. This breakout session had the highest number of attendees during the live presentation when dealers also had an opportunity to ask Chu their own questions. Here’s an excerpt from that interview conducted by Kenny Atcheson from Dealer Profit Pros.

What is a mission driven company and why is it so important at Tricolor? At our company we talk about building a business that is sustainable, not a business that is designed to maximize profits on any given year but a business that over time is sustainable — and when we talk about sustainability, we talk about being able to deliver value to the consumer. There is also an underlying belief that, to the extent we can deliver value to the consumer, the economic outcome will take care of itself. And so, being mission driven to us is all about aspiring to a purpose that is more overarching, it’s not about how many cars did we sell or how many locations do we have. It’s really about a view around how can we really enhance the customer’s life by providing some value that ultimately enables them to build a path to mainstream financing.

How are you using data analytics and technology to attract the right customer? We finance a customer who oftentimes doesn’t have a history of credit bureau data. In most cases they don’t exist in the credit bureau. We begin by gathering as much data as we can, as a BHPH operator we have the advantage of actually interacting with the consumer. If you look at the large lenders in sub-prime auto, like Santander, Wells Fargo,

etc., those finance companies are buying paper from the dealer so they never build that relationship with the consumer. On the other hand, we are interfacing with that consumer, we are gathering an enormous amount of data on that consumer that over time we are able to observe specific profiles and see how those profiles actually perform on their loans and in turn, we then have the ability to align marketing and underwriting. We capitalize on the opportunity we have to actually go out and market the customers that our data tells us are going to pay well and that yields a good outcome. There is a lot of valuable insight in the data. Would you say that makes the sales process easier for the salespeople because you are getting the right customer in, in the first place?

We do and you know, today in BHPH we have a product that we say is sold, it’s not bought. Apple has a product that is bought. You don’t go to the Apple store and people say “what does it take today to make you buy this iPhone?” You just go in and say “please, do you have an iPhone in stock, I want to purchase it.” We have a product that has to be sold and we want to facilitate the ability of our sales force and we do that by hopefully driving leads that are appropriate to our financing criteria. But also, going back to being mission driven and being a sustainable business model, we want our sales force to understand that we are trying to provide value to the consumer and, to the extent that they buy into that and communicate that, we believe they have a distinctive advantage in terms of being able to actually transact a sale. Our salespeople know that as a company we aspire to actually serve that consumer and, going down to the specific transaction they are working on, we have a very strong desire for that customer to have quality transportation at a reasonable price with financing that is not only affordable and realistic but financing that they can be successful with. That’s really important for us. Are you using your own technology to compile that data? Can you reveal what you are using?

Sure, we actually have made a fairly significant investment in what we call “decision signs” we use today. It is the ability to take an enormous amount of data that we’ve collected during our 12 years of operation and over 70,000 loans, and with technology available today, we can actually identify patterns. And that’s the key, identifying those patterns that in some way, correlate to performing on a loan. Prior to using that technology, what people call deep learning or machine learning — a component of artificial intelligence, we used simple regress analysis. We would look at the

Keeny Atcheson attentively listens to Daniel Chu’s response during their interview which drew a large audience on the first day of the virtual conference.

customer’s attribute and how it correlates to payment; for example, how does how many years a customer has been in his job correlate to payment. That is one variable, that’s really simple analysis. Now we know all these different data points like how long have they been at their residence, how many income earners in the family, and many others. We try to find the patterns and how they correlate, try to figure out what communalities among lots of attributes are really important and we use that to shape our marketing and to drive how we underwrite. Since the larger the data set is, the more accurate the results, what about the dealer that just has one location and is fairly new?

We all started with one dealership and it is a process over time. But in those cases, you do 1) rely on some third-party resources for some scoring methodology, and 2) you potentially are going to finance some portion of your borrowers who actually have a credit score. The credit might not look good but you want to find something in that bureau data that gives you a reason to finance that customer; in other words, is it a customer that lost its job during the pandemic but was doing fairly well until that point? Is it a customer that went through a divorce but up until then was fine? You want to be able to look at what’s available and see if you can overlook the fact that the numerical score that you get from the bureau may not be attractive, it may be so unattractive that nobody else will finance them but you see a story in that data, that would be one approach. And then another approach, you have bureau data, you have other alternative data because

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a lot of subprime consumers pay bills that they don’t necessarily get credit for. For example, if the customer pays his rent on a house that is owned by an individual and pays it on time for 10 years, that information will never show up in his bureau record so, I think it is important to figure out how to use some data that is not going to show up in his bureau report but that you can actually go out and verify.

In addition, if you are just starting out, you want to figure out what niche can you possibly explore that might give you an advantage and the reason you want to explore a niche is that it is really the fundamental of our business. There are too many smart and entrepreneurial operators in Texas so it’s going to be very hard just going out and compete as a BHPH operator. Our focus was on one component, the Hispanic market, and we felt that we could invest the resources to understand that market better than anybody else. We didn’t want to compete with all the successful entrepreneur BHPH in Texas. There are other niches that provide opportunities, and so to the extent you have identified those niches, then overtime, as a complement to bureau data and alternative data and third party resources, you are going to develop your own set of variables that you think are really important that might be specific to that niche and I think there is a lot of opportunity there. There’s a lot of competition in Texas so finding a niche, being differentiated, I think is a big key.

What should every dealer be doing to help protect the industry and their dealership?

There are a lot of dimensions people should consider in how they look at protecting their business. We are in an election year and that election year has some likelihood of catalyzing a lot of change that would impact our business. I think BHPH has been the recipient of a very hands-off regulatory environment and everybody loves that, everybody wants a pro-business environment and nobody wants to have to constantly be restrained by regulatory issues but I think there is a really good chance that for the next couple of years, post-elections, we see a different regulatory environment. So, when we talk about protecting our business, we believe that developing a culture around compliance would be a worthwhile investment. If there is a change in the administration, it’s very likely that you would see regulation addressing industries like BHPH. It would definitely address payday, it would definitely address title loans, it would probably address BHPH and so, in our opinion, rather than sit around and be frustrated with that change, we believe that operators need to get ahead and do some planning now and actually embrace the idea that a compliance culture is probably in your best interest if you want to protect your business. ...if you are just starting out, you want to figure out what niche can you possibly explore that might give you an advantage and the reason you want to explore a niche is that it is really the fundamental of our business. There are too many smart and entrepreneurial operators in Texas so it’s going to be very hard just going out and compete as a BHPH operator.

Do you use technology for compliance?

We use a lot of the compliance tools that Hudson Cook provides; they have a compliance system designed to the BHPH industry and those are some good investments. Entrepreneurs tent to overlook compliance because entrepreneurs are all about investment in strategies that drive revenue and investing in compliance doesn’t feel like it’s going to drive revenue so it’s not going to be prioritized but if you are going to protect your business today, that’s an important area to focus on.

Editor’s Note: You can access the full interview, and all other education sessions, in the virtual conference platform. Content will be available through November 16. See page 28 for more information.