digital process for auto lenders
ComplianceFinanceNovember 11, 2021

Diving in digital first: Key lessons from Auto Finance Summit 2021

At the end of October, Auto Finance Summit 2021 convened in Las Vegas, replacing last year’s digital-only format with face-to-face presentations, panel discussions, and networking opportunities. Yet the digital imperative is only intensifying.

In fact, the primary takeaway from this year’s event is that auto finance is now digital first – with manual, face-to-face options available largely to round out an end-to-end electronic finance experience.

Increasingly, auto lenders, dealers, and other stakeholders are investing in innovative digital capabilities and partnering with technology providers to strengthen their digital differentiators.

What other understandings did attendees walk away with? Insights emerged in four key areas:

1. Responding to Inventory Shortages

Tight inventories continue to constrain new-car sales. Primarily that’s driven by the semiconductor shortage. Even with chip plants running at full capacity, the situation is likely to worsen in 2022. Supply routes are likewise clogged, and global logistics issues might not be sorted out for another two years.

The seasonally adjusted annual rate (SAAR) will be about 14 million units for 2021, according to the Center for Automotive Research. That number might briefly dip but then climb to 16 million for 2022.

As a consequence, sales of used cars will remain strong, which is a positive for lenders. Used-car values will likely decrease in 2022, but the drop-off will be a slope, not a cliff.

Overall for 2021, low delinquencies, low losses and higher profits have been a boon to lenders. But the potential for rate hikes could mean increased competition for lending. In response, lenders plan to maintain profitability through higher efficiency, better customer experiences and, especially, investments in digital technology.

2. Looking for Growth in the Secondary Market

To buoy their growth outlooks, lenders are seeking opportunities in digital lending, direct-to-consumer lending, and buy here, pay here (BHPH) models. They’re also looking to securitization.

Asset-backed securities (ABS) have thrived in 2021, in terms of both dollar issuance and performance. Auto loan issuance is pegged to reach $90 billion for 2021, a 20% year-over-year (YOY) increase, according to S&P Global. Credit-enhancement levels began to return to 2019 levels, losses and delinquencies were near record lows, and recovery rates reached record highs.

The picture for auto lease ABS was even rosier, with September 2021 YOY volume up 61% to $26.1 billion. Return rates were low and residual gains strong.

Performance should begin to normalize in 2022 as government assistance fades, however. And lenders will want to watch the shift away from the London Interbank Bank Offered Rate (LIBOR), which will cease in June 2023. Regulators are strongly urging banks to stop entering into new LIBOR contracts.

The likely replacement will be the Secured Overnight Financing Rate (SOFR). Ford Motor Credit is out early on SOFR, closing on its first ABS funding facility priced based on SOFR, including a SOFR-based hedge.

3. Innovation Is Key to Digital

Increasingly, lenders are taking a digital-first approach to lending processes, from eSignatures to digital ABS. Ford Motor Credit, for instance, plans to rapidly expand eContracting from 50% of loans to 90%. But success depends on more than just digitization. It also hinges on innovation.

Innovation often begins with replacement of legacy technologies. A repeated observation from the 2021 Summit is that a legacy system isn’t necessarily an old system. Rather, it’s any technology that slows your ability to get ahead of the market or competition.

The pandemic aimed a spotlight at customer experience, with customers and dealers alike demanding more remote, self-service, and automated options. Customers and dealers want to get decisions faster, and they want an end-to-end eContracting process. They still want a relationship experience, but they want digital to make the relationship more satisfying.

Another pandemic lesson centers around speed. The Covid-19 crisis required lenders to quickly pivot to new ways of doing business. While most did so successfully, they also set high expectations for velocity. Customers expect both lenders and dealers to move quickly on the latest innovations.

To that end, don’t simply buy technology. Instead, build partnerships with technology providers who understand lending and offer purpose-built solutions to digitize your business. Also look for ways to partner with dealers – by integrating processes and expanding collaboration.

The goal is to both streamline your own processes and create greater speed and flexibility for customers. The resulting improvements in customer service are what ultimately will build market share.

4. Developing News: EV Financing Strategies

Finally, the 2021 Summit explored the emergence of electric vehicles (EVs) and even autonomous vehicles (AVs) as drivers of industry change. While sedan sales continue to decline and SUV sales continue to rise, EVs are increasingly entering the mix, especially as more SUVs are available as EVs. And with OEMs like GM committing to 30 new EV models globally by 2025, EVs are a force to be reckoned with.

EVs introduce new challenges – and, fortunately, new opportunities – for lenders. For instance, EV leasing has presented hurdles because of difficulties handling tax credits and calculating residuals as knowledge develops around battery life.

Ford Motor Credit, for one, has responded with an innovative new financing product. In place of a lease, Ford offers balloon financing that gives borrowers lower monthly payments. Customers have the same three options they would at the end of a lease: walk away (after a balloon payment), turn in the vehicle for a new one, or purchase the vehicle. The customer controls taking a tax credit, which they can claim or apply to the balance of the loan to reduce payments.

Attendees came away from Auto Finance Summit 2021 with cautious optimism. Consumer net worth is reaching all-time highs, largely driven by a strong stock market and housing values. Yet that confidence is leading them to carry debt at record levels. Still, unemployment rates continue to drop steeply toward 4%, so consumer demand should remain strong.

The key to success going forward will be responding to the expectations of customers, dealers, investors and other stakeholders for digital-first processes and experiences. The right investments now will position lenders for growth and profitability, no matter what the future holds.

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