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ComplianceFinanceOctober 24, 2021

The automotive industry’s next mile: What auto lenders need to know now

The automotive industry is once again in flux. Will electric-vehicle upstarts challenge industry leaders? Will autonomous-vehicle pioneers overcome technical hurdles?

One trend is clear, however: Shifts in customer expectations and buying behaviors propelled by the Covid-19 crisis are here to stay.

That fact has significant implications for auto lenders. In particular, bank and nonbank originators of auto loans need to reexamine and fine-tune the way they use digital technology to partner with dealers and better serve customers.

Auto Finance Starts and Stalls

For auto sales and finance, 2021 presents a mixed picture. While 17% of auto consumers delayed purchases in 2020 because of the pandemic, 66% didn’t alter their buying timeline, and 17% actually bought sooner than planned.1 It’s not surprising, then, that while global light-vehicle sales declined 15% year over year in 2020, sales are pegged to rise 8% in 2021 and return to 2019 levels by 2023.2

But pandemic-related disruptions of supply chains caught carmakers flatfooted, leading to low new-vehicle inventories. Only 40% of franchise dealers believe inventory will return to pre-pandemic levels in 2021, and 23% anticipate they’ll be negatively affected by low wholesale inventory.3

Yet the pandemic taught many dealers they don’t need to maintain high inventories. U.S. consumers now seem as willing as their European counterparts to wait weeks or months to take delivery. As a result, dealers no longer expect to keep large numbers of vehicles on the lot – or offer incentives to move them.4

Digitizing the Car-Buying Experience

Another key shift in consumer behavior is their embrace of remote, contactless buying. A preference that began during the pandemic is expected to persist long-term. Nearly two-thirds of car shoppers say they want to conduct more of the buying process online compared to when they last purchased a vehicle. Their top reason? Saving time.5

That aspiration has implications for both dealers and auto lenders. Buyers spend nearly half their time at the dealership on negotiations and paperwork. Filling out paperwork and contracts is their top dealership frustration.6

To ease that frustration, consumers are looking for digital buying experiences. For example, they want to go online to calculate monthly credit (53%), apply for financing (50%), select finance and insurance (F&I) products (41%), and review and sign the final contract (23%). In fact, three-quarters are open to conducting the buying process entirely online.7

In response, 78% of franchise dealers say they’re willing to make changes to processes to meet customer expectations. In fact, 69% added at least one digital step because of Covid-19. The top three processes added were test-drive home delivery, purchased-vehicle home delivery, and online credit application.8

Going forward, 80% of franchise dealers plan to move more of the purchase process online in the next 1 to 2 years. They’ll have to in order to remain competitive. Some 42% of dealers believe car buying will be online-only in 5 years.9 And 74% say that if they don’t adopt digital retailing, they won’t be able to survive.10

Digital Solutions for Auto Finance Success

The demand for digitized car buying has a huge effect on dealers, of course, but it also has implications for auto lenders. Both bank and nonbank loan originators need to provide consumers – and equip dealers – with digitally enabled remote and contactless F&I experiences.

Auto lenders that want to digitize experiences to meet customer demands should seek out solutions that transform the lending process end to end. In particular, look for a platform that enables:

eSignatures – eSignature capability is becoming table stakes for auto lenders. Just as Amazon’s endless aisle and two-day delivery raised the bar for every retailer, the prevalence of remote transactions across retail segments means buyers expect them when signing their auto loan or lease. In fact, the National Retail Federation has identified touch-free technology as a Top 10 trend for 2021.11

eContracting – An eContract is a contract, such as an auto loan, that’s created and executed electronically. A growing number of online auto dealers – including Carvana, Vroom, CarGurus, and Capital One’s Auto Navigator – use eContracts exclusively.

An effective eContracting solution extends loan origination and dealer management systems for complete automation of the vehicle financing process. It should enable you to start digital and stay digital throughout the life of the loan.

“We expect eContracts to increase and become more substantive in subprime pools,” S&P Global Ratings reports. The agency also says that “issuers have told us that eContracts could promote better adherence to company policies, because the contracts often cannot be moved forward in the system if there is missing documentation.”12

Securitization – A powerful advantage of an eContract kept and managed in a secure eVault is the ability to streamline securitization and sale of the asset-backed security (ABS). By speeding delivery of eContracts to the secondary market, an effective eAsset management solution decreases loan dwell time and increases capital efficiency. It also empowers you tap into a broad digital ecosystem of secondary-market partners – including warehouse lenders, custodians, servicers, and investors.

As investor appetite for auto-debt instruments grows, innovative lenders are reaping rewards. For instance, eOriginal client Carvana, a leader in online-only used-car sales, conducted two auto ABS deals in March 2021 totaling $881 million.13

The automotive industry might hold some uncertainty in 2021 and beyond. But auto lenders that embrace digitization will not only strengthen dealer partnerships and meet changing consumer expectations. They’ll also position themselves to better respond to unforeseen market developments.

1 “2021 Global Automotive Consumer Study,” Deloitte, 2021
2 “Top 10 Global Automotive Trends, 2021,” Forbes, January 2021
3 “Six Predictions for the 2021 Automotive Market,” Cox Automotive, 2021
4 “How the Pandemic Could Have a Long-term Effect on the Way You Buy a Car,” NBC News, May 2021
5 “Digitization of End-to-End Retail,” Cox Automotive, January 2021
6 “2020 Cox Automotive Car Buyer Journey,” Cox Automotive, 2020
7, 8, 9 “Digitization of End-to-End Retail,” Cox Automotive, January 2021
10 “Six Predictions for the 2021 Automotive Market,” Cox Automotive, 2021
11 “Retail in 2021: What Will Endure and What’s Going to Change?” NRF, December 2020
12 “Subprime Auto Loan ABS Tracker: Losses Have Improved, But Uncertainty Remains,” S&P Global Ratings, May 2021
13 “Carvana Injects $881M Into ABS Market With Two Deals,” Auto Finance News, March 2021

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