Fair Financial Corp.'s quest to disrupt car ownership with subscriptions has ended after five years. The company now is considering bankruptcy to eliminate debt tied to the inventory needed for that vision.
Fair's next act will be as a vehicle retailing platform, CEO Brad Stewart announced last month, complete with a new name — Fair Technologies — and new plans.
The company's new life as an online retail site will eventually connect customers with leases, but "we just will offer them as a facilitator and not a balance sheet play," Stewart said. The site will first focus on used-car listings, the "easiest and biggest market," he said. Fair plans to offer free listings and even $250 to $750 payments to dealers per transaction, but sell financing and finance and insurance products to the customer itself.
Once a customer selects a vehicle, Fair will buy it from a dealer and then immediately sell it to the consumer, Stewart said. This momentary holding of an asset stands in contrast to the millions of dollars in inventory Fair required for short-term vehicle subscriptions.
Despite the new business model, Erik Gordon, a professor at the University of Michigan's Ross School of Business, is skeptical of Fair's prospects.
"They have nothing special to offer and F&I is a battle ground," Gordon wrote in an email. "There is a good chance they will do a Chapter 22" — slang for a company that files for bankruptcy twice.
Industry consultant Maryann Keller, owner of Maryann Keller & Associates, said the new idea wouldn't work. But Fair's status quo wasn't viable either, she said.
Keller said the notion of used-car subscriptions "categorically" didn't work. "How could they possibly be economic?" she said.
Economic issues
Fair's saga and Stewart's conclusions about the business illustrate challenges with vehicle subscriptions, a concept attempted but discarded by some dealers and automakers — such as Ford, which announced in 2019 it would sell its Canvas subscription business to Fair.
Shortly after the Canvas news, Fair founder Scott Painter stepped down as CEO, though he remains its chairman. Stewart, the former CEO of on-demand aviation provider XOJet, was named Fair CEO in mid-2020.
Fair halted subscription originations about five months ago, though some customers remain. "We still have our legacy book," Stewart said.
He estimated Fair's inventory contained about 5,000 to 10,000 vehicles, down from what Painter had called a "scaling moment" of 65,000 in 2019.
Fair's vision of short-term leasing "required it to raise a lot of debt," Stewart said. This debt needs to be eliminated for the company to proceed with its marketplace business model, he said. Chapter 11 bankruptcy would be an option, as would other restructuring plans and mergers, according to Fair.
Fair had at one time raised more than $1 billion, Stewart said. Asked about estimates of $500 million in debt and $450 million in equity, he called the true numbers lower. Fair owes SoftBank some $315 million in senior secured debt, with some additional debt associated with unsecured liabilities, he said.
Stewart projected the company would reach a decision on resolving the company's financial situation this fall. Fair seeks to launch its new site in the first quarter of 2022.
He estimated it could take $2 billion to $3 billion to reach scale in the leasing business "if you could." Or Fair could switch to a matchmaker role in the fashion of Uber or Instacart. The right path was "incredibly obvious," he said.
The old business model presented Fair with issues such as "irrationally high" customer acquisition costs and an inability to securitize the leases. Fair also had to charge an additional $75 to $100 per subscription to offset the vehicle's depreciation, the business' higher capital requirements and the amortization challenge posed by customers borrowing vehicles for short and often uncertain durations, he said.
Subscriptions also pose a demand and competitiveness challenge, according to Stewart. A consumer with good credit would find traditional automaker new-car leasing "extraordinarily competitive" — offering a better deal than even Fair could offer in some cases, Stewart said.
Consumers with poorer credit might find "a used-car lease makes a lot of sense," Stewart said. But car loans generally could be "very competitive" with what Fair would charge, he said.
An opportunity for vehicle subscriptions "absolutely" existed, but compared with other loan products, "I just don't think the market need for it is significant," Stewart said.
Keller agreed that subscriptions weren't competitive.
"The economics don't work," she said. "They never did."
NextCar bullish
However, Painter's new venture NextCar remains committed to subscriptions.
Some 100,000 deals at Fair "undoubtedly showed a product market fit and proof that humans love subscriptions," NextCar spokeswoman Shadee Malekafzali wrote in an email. "The mission at NextCar Holding is to scale vehicle subscriptions profitably."
Painter told Automotive News in October 2020 that NextCar intended to provide the inventory and support for subscription companies rather than be consumer-facing. However, Malekafzali wrote in an email Aug. 30 that NextCar "will own and operate a direct-to-consumer vehicle subscription channel as well as indirect channels in partnership with third-party marketplaces, as well as OEMs."
Malekafzali said NextCar would require capital for its subscription business and have a large balance sheet with vehicles held on the books. She said the company was "confident that we will be able to underwrite subscription vehicles as an asset class more efficiently, profitably and at scale."
"There's a big difference between being asset-light and infrastructure-light versus having a balance sheet as a lender," she continued. "Subscriptions can be operated in an asset-light way, and we are excited about partnering with the thousands of brick-and mortar dealers that have invested in that infrastructure and are looking for a more digital way to connect with their customers."
Malekafzali said NextCar's founders have found subscription terms predictable despite the flexibility the model offers customers.
"Consumers tend to settle into their cars to some degree," she wrote.
Other takes
Swapalease.com operations Executive Vice President Scot Hall, whose company arranges lease transfers but holds no inventory, said used-car leasing represented an "absolutely huge opportunity" for a business.
He agreed it would take a lot of capital, but said the new-vehicle leasing business did too.
"I'm not sure why that's even a negative," Hall said.
In addition, the vehicle value curve was "relatively flat" for used vehicles, with the worst of the depreciation having already occurred, he said.
However, Hall acknowledged that a short-term model such as Fair's old setup represented a "little bit different animal." Elements of a subscription business posed "harder questions for me to answer," he said.
Anshika Karamchandani, associate vice president of flexible access at Cox Automotive Mobility, didn't rule out vehicle subscriptions as a viable model.
"While we don't see traditional ownership going away, today's digital-first consumers are demanding a more personalized, modern transportation experience," Karamchandani said in a statement. "These emerging models are not for everyone but can be used to solve problems such as filling gaps between leases or providing a vehicle for shorter-term needs. Much like subscriptions to other on-demand products outside the automotive industry, some consumers are willing to pay a premium for convenience."
Lindsay VanHulle contributed to this report.
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