It's time for Tesla to start a bank

Photo: Justin Chin/ Bloomberg/ Getty Images.

Tesla has a mysterious, Elon-Musk-tweet-driven announcement coming on October 17. We have have no real idea what’s in store, but I made an educated guess: the Model Y prototype — a crossover SUV version of the the Model 3 mass-market sedan that’s due to arrive late next year.

But some other ideas are out there: a major update to Autopilot, Tesla’s semi-self-driving system; some new infotainment tech; improved battery packs.

But what about this one: Tesla will start a bank.

Tesla doesn’t currently engage in what’s called in the industry “captive lending.” Most other major automaker do.

This means that when you go to a dealership to buy or lease a vehicle, the automaker that the dealer is franchised by can arrange your financing. (Dealer can also seek financing from regular banks that do auto lending.)

This is a wonderful business. I often say that dealers don’t sell cars — they sell car loans. This is because a captive-finance arm of an automaker can borrow funds at a very low rate, then turn around and write loans at a higher rate, collecting the difference. 

In the process, nobody had to bolt or weld anything.

(Captive lenders are really banks in the traditional sense. The use the credit markets to obtain funding, rather than taking deposits from customers.)

At the moment, Tesla works with two bank partners to arrange loans on its rather expensive vehicles. From what I hear — and I ask Tesla about this often — the automaker is happy with this setup.

But as it moves toward production of half a million vehicles per year — up from what should be about 90,000 this year — it doesn’t make sense for Tesla to leave those potential loan profits on the table. 

Another factor is that even though the Model 3, for which there are currently around 375,000 advance orders, will be Tesla’s cheapest car at $35,000 (before tax credits), many buyers will be classic financing customers. They won’t have $35,000 in pocket lying around. 

And already this year, Tesla hit a funding limit with one of its financing partners, leading the company to move those customers toward leasing. Obviously, it would be better long-term if Tesla could make these determinations on its own.

In the dealership model, buyers can arrange outside financing and come in with their loan already effectively in place. But Tesla wants to do direct sales, so having “Tesla Financial” would promote a more seamless process as the company really starts to grow sales. What’s more, it’s not like financial services are completely foreign to Musk. After all, he was a co-founder of PayPal. 

 In his tweet this past weekend, Musk said a “product” would be unveiled on Oct. 17. You could call a bank a “product,” so I’m going to conjecture that he’s being clever. But ok, he probably won’t pull the sheet off a bank. Even if he should, one of these days.

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