By the end of may, the first privately owned Canadian bank plans to be in the loan business — the car loan business.

General Bank of Canada plans to become a niche bank, offering loans at rates that are competitive with the major banks. “We haven’t lent our first dollar yet, but we intend to be competitive in the marketplace,” says Don Wheaton, president and CEO of Edmonton-based The Wheaton Group of Cos., which owns the bank.

“We think we have a competitive advantage because we already have our distribution network. We already have the relationships in place,” he says. The Wheaton Group includes the largest franchised General Motors Corp. dealer network in Canada — 15 dealerships throughout Western Canada.

Their automobile buyer-clients can buy liability and collision insurance from another Wheaton company, Millennium Insurance Corp. And they can get creditor-life insurance from yet another Wheaton company, First Canadian Insurance Corp.

These policies are available at 1,500 other dealerships throughout Canada, on top of the Wheaton dealerships, says Wheaton.
The life company has been around for 17 years.

“We thought it was a natural expansion of what we’re doing now,” says Wheaton.
“We’ve been transacting the financing and placing it with other banks. Now we want to be one of the banks the consumer can consider when buying a car. We’ll fund the loan, rather than put it with one of the five major banks.”

Initially, the bank operation will be built up within the 15 Wheaton dealerships, but, as with the insurance offerings, Wheaton intends to expand its banking business out to the other 1,500 dealerships.

General Bank of Canada won’t have a public face. There will be no storefronts or Web site, he says. Instead, it will be a “back-office” bank with an initial staff of about 12 people to handle loan processing and collections.

This kind of niche banking business doesn’t hold a lot of appeal to the big banks, says Tanya Azarchs, managing director of New York-based Standard & Poor’s financial institution group.

The niche banks have to compete with the automobile company’s financing divisions, such as General Motors Acceptance Corp., she says. “All the big car companies have their own captive financing arms.”

The banks have to make a profit on the loan, she says, but when the captives are offering 0% financing, it’s pretty hard for the banks to compete with them.

Wheaton, however, is drawing on his experience with captive financing, and envisions a way to make his small bank profitable.

He says the captives usually involve 0% financing or money back, for example, $3,500. To get the 0% financing, he notes, the customer has to keep the automobile for the full-five year term of the loan.

Therefore, he says, customers are inclined to get bank financing and take the cash-back deal. That is where General Bank of Canada will step in.

Meanwhile, Azarchs raises other practical concerns, but Wheaton has ready responses.

A “top-notch credit approval system” requiring a lot of automation has to be put in place, she says. “Will they finance new cars or used cars or both?,” she asks, as that has an impact on the level of borrower creditworthiness that the bank will get involved with.

When borrowers default, the firm will need a good collection system and a way to enable re-sale of the vehicle.

Wheaton is not overly concerned. He feels confident that collections won’t be a problem. Neither will resale. The cars that have been repossessed can be sold on one of the Wheaton car lots. It cuts out a middleman expense that the major banks have in collection and resale situations.

The idea to expand into banking came up about two years ago, says Wheaton. A business plan was devised and, in January 2004, an application was made to the Office of the Superintendent of Financial Institutions.

OSFI reviewed the Wheaton business model. “It wants to approve players that have the wherewithal to carry their plans through to success,” says Wheaton. That has meant, for example, getting the right legal advice to prepare the OSFI application and the right IT advice to get their computer systems set up.

Otherwise, a minimum of $5 million is required to get a bank going. “We’ve got more than the minimum,” says Wheaton.