The Nomis Narratives

The Experience Advantage 

After 20 years of implementing profitability models and helping lenders optimize their auto portfolios, we've observed a consistent pattern: Two lenders with identical 8.5% portfolio yields often see vastly different bottom-line results six months later. The difference? How comprehensively they measure true profitability. 

The Current State: What Most Lenders Measure

Standard Metrics & Their Value 

Currently, most auto lenders track the following essential metrics: 

• Portfolio yield and net interest margin 

• Delinquency rates and charge-offs 

• Origination volume and market share 

• Cost of funds and operational efficiency 

These metrics provide valuable insights, but they often exist in isolation, missing critical connections that determine actual profitability. 

The Dealer Incentive Complexity 

We've seen multiple examples of organizations handling dealer incentives well versus poorly, highlighting why this component is fundamental to get right. In today's market, higher average vehicle prices have made flat payments more enticing for dealers because they can secure larger payments without relying on rate markups that might deter buyers. A $500-750 flat on today's higher-priced vehicles is less noticeable to customers than achieving the same dealer compensation through rate markup 

The problem for lenders: These flats devastate profitability on your best credit tiers and today's higher loan sizes amplify the damage. A 1.5% flat on a $40,000 loan equals $600, making your largest, theoretically most profitable loans precisely where flats hurt most. 

Real-world example: A regional lender discovered their A-tier customers (750+ FICO) receiving 4.99% rates plus $625 dealer flats were actually generating -0.3% returns after full cost allocation. Meanwhile, their B-tier segment at 7.99% with $250 flats yielded 2.1% margins. 

The Breadth Principle: Connecting the Full Picture

Four Pillars of Comprehensive Profitability 

Based on our experience across implementations, successful profitability measurement requires: 

1. Funds Transfer Pricing (FTP) - Table stakes, but execution varies widely 
2. Risk-Adjusted Returns - Beyond simple delinquency rates to segment-specific loss curves 
3. Dealer Incentive Architecture - The make-or-break component many overlook 
4. Operational Cost Allocation - True per-loan servicing and origination costs 

The key insight: It's more important to capture all components reasonably well than to perfect any single calculation while missing others. 

The Integration Challenge 

We often see organizations where the following is true: 

• Sales celebrates hitting 120% of volume targets 

• Risk maintains sub-2% delinquency rates 

• Finance discovers 40% of loans are unprofitable after true cost allocation 

This disconnect occurs when teams optimize their metrics in isolation without understanding the full profitability equation. Nobody connected dealer flat payments + operational costs + segment-specific loss rates. 

Finding Your Optimal Complexity Level 

The Goldilocks Principle in Practice 

Through our implementations, we've learned that profitability models fail at both extremes: 

Too Simple: A lender using spreadsheet averages across all segments. Example: An outlier lender offering 4% rates when market sits at 6%. After 2% cost of funds + 1.5% operational costs + $375 dealer flats = negative 1.2% actual return. 

Too Complex: A regional bank's 47-variable model requiring daily updates from six departments, pricing on RAROC (Risk-Adjusted Return on Capital). Result: Operational nightmare that becomes unmaintainable. 

Just Right: Models sophisticated enough to capture key relationships while remaining operationally sustainable. This is where Nomis's 20 plus years of experience becomes invaluable. We've seen firsthand what works and what doesn't across diverse organizations. 

Aligning with Organizational Thinking 

A critical principle we've developed: Your profitability measurement for pricing shouldn't be incongruent with how your organization already thinks about profitability. Creating a unique framework for optimization often fails because it doesn't integrate with existing decision-making processes. 

Instead, we help organizations evolve their current profitability thinking, identifying which components are solid and which need enhancement. This approach ensures buy-in and sustainability. 

Hidden Profitability Dynamics 

The Extended Term Reality 

Surface-level analysis might suggest 84-month loans outperform shorter terms due to higher interest collected over time. But without lifecycle modeling, you could be missing critical factors: 

• Elevated default risk in the later months 

• Compounding servicing costs over extended periods 

• Vehicle depreciation outpacing loan amortization 

• The reality: What appears profitable at origination may be generating significant losses you won't see for years 

This is where misunderstanding the full breadth of portfolio performance becomes dangerous. By the time these losses materialize, you've already written thousands of similar loans. 

The Dealer Flat Evolution 

For example, a $30,000 loan at 4.5% looks profitable until you factor in the $500 dealer flat. Without connected intelligence, lenders don't realize these flats are eating into their spread. The challenge has intensified: higher vehicle prices mean dealers can secure larger flat payments without impacting buyers through rate markups, making flats increasingly attractive versus rate participation. 

The Competitive Mispricing Cascade

When unsophisticated competitors underprice, the market follows. You match their 5% rate to stay competitive, not knowing they're losing money. Price sensitivity analysis would show: only 15% of customers in that segment would not have converted. The other 85% would have accepted 6.2%. 

The Price Sensitivity Opportunity 

Profitability measurement becomes truly powerful when connected to price sensitivity analysis, like so: 

• Discovery: Your 720-740 FICO segment shows low price sensitivity (0.3% rate increase = 2% volume loss) 

• Meanwhile: Your 740-760 segment is highly sensitive (0.3% increase = 12% volume loss) 

• The twist: Price sensitivity analysis shows A-tier customers would accept 5.49% without defecting. This means you're leaving 50 basis points on the table for customers who aren't even price shopping 
• Application: Targeted pricing adjustments instead of uniform changes across all segments

The Nomis Approach

Discovery Through Implementation 

Our implementation process often reveals profitability insights organizations didn't know they were missing. This isn't about criticizing current practices, because the majority of lenders are thinking seriously about profitability. It's about enhancing and connecting existing intelligence. 

We guide organizations to their optimal complexity sweet spot, where analytical value exceeds operational burden. This might mean starting simpler than expected or adding specific components that dramatically improve accuracy. 

Scenario Testing in Action 

Common examples from our clients: 

• "What if we raise rates 25 basis points on low-sensitivity segments?" → $2.3M additional annual profit with 0.8% volume loss 

• "What if we lower dealer flats on super-prime loans?" → 15% volume loss costing $4.1M —clear "no" 

• "What if we extend our maximum terms to 84 months in our near-prime segment?" → Full lifecycle analysis prevents costly mistakes 

Through our software solutions, Nomis helps our clients transform profitability from guesswork to science. 

Price Optimization with Nomis Price Optimizer 

From Analysis to Action 

Understanding true profitability is essential, but the real value comes from acting on these insights. Nomis Price Optimizer (NPO) takes your comprehensive profitability framework and transforms it into optimal pricing decisions. 

NPO enables lenders to: 

• Test unlimited pricing scenarios before market implementation 

• Balance profitability objectives with volume targets 

• Optimize pricing across multiple dimensions simultaneously (rate, term, dealer incentives) 

• Respond dynamically to market changes while maintaining profitability guardrails 

• Create segment-specific strategies based on actual price sensitivity 

The platform integrates all the profitability components we've discussed (FTP, risk costs, dealer incentives and operational expenses) into a unified optimization engine that suggests pricing aligned with your strategic objectives. 

Your Profitability Evolution 

The Competitive Reality 

In today's market, sophisticated profitability analysis isn't just an advantage. It's just as much a defense against market distortions created by incomplete measurement. When dealer flats silently erode margins and extended terms hide future losses, comprehensive profitability intelligence becomes your early warning system. 

In a market where less sophisticated lenders can unknowingly destroy pricing discipline, sophisticated profitability analysis is your defense. Price sensitivity analysis ensures you're not leaving money on the table OR pricing yourself out of winnable segments. 

And remember: Sometimes the most profitable decision is walking away from a deal that doesn't meet your profitability thresholds. Disciplined lending beats volume-at-any-cost strategies over the long term. 

The Path Forward 

Success doesn't require infinite complexity or abandoning your current framework. It requires: 

• Connecting existing metrics into a complete picture 

• Identifying and filling measurement gaps 

• Aligning pricing decisions with true profitability 
• Maintaining operational sustainability
   

The Nomis Difference 

With over 20 years of experience implementing models and optimizing auto portfolios globally, we don't just build models, we: 

• Find your optimal complexity level through proven frameworks 

• Identify profitability gaps before they impact results 

• Connect price sensitivity with profitability for complete intelligence 

• Ensure your solution integrates with organizational thinking 
• Help identify where your profitability may be suspect before it impacts your bottom line 
  
  

Ready to evolve your profitability measurement? Contact us at sales@nomissolutions.com to discuss how your organization can see the complete picture. 

Written by: Jamie Cervetto, Director of Professional Services at Nomis Solutions