Perfect storm moment for automotive finance

Current auto purchase ecosystem across major global markets is confusing for the customer and challenging for financial institutions

There have been conflicting signs in the recent past around the projected pace of growth in auto lending. Auto experts are now coming to a view that while new car sales will grow significantly (i.e. to 125 million by 2025), the car usage and ownership patterns might change. Overall, the projected trends augurs well for financial institutions that are into automotive lending.

Today, an average car purchase journey for a customer lasts around 25 days and invariably begins via an established digital channel, wherein customers research and compare shortlisted cars, apart from verifying their availability and pricing. Some of the key problems that they face include:

• Distributed car research content across multiple service providers
• Lack of trusted guidance from the ecosystem players
• Transaction time at dealerships of approximately 3-4 hours, and the “One-size-fits-all” approach taken up by most FIs leading to a poor financing experience
• Lack of transparency across financial products offered and their pricing

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Traditionally most customers seek guidance on automotive finance while or post shortlisting prospective vehicles, which is a low down in the customer’s purchase cycle. Hence the challenges for financial institutions (FIs) into auto lending are also significant and are as following:

• Indirect financing via dealerships forms bulk of the auto finance contracts globally (i.e. upwards of 75%). Hence FIs have a low level of engagement with most customers during their car acquisition experience
• Overall cost of acquisition is relatively high, with an average dealer reserve being upwards of 120 bps, multiple application rewrites, low conversion of less than 20% and archaic operations thereby leading to significant operating costs.
• In the US, more than 80% of contracts are originated by dealers that assigned them to more than 20 financial institutions. Hence FIs have a significant dependency on partner dealers to acquire a new business
• The percentage of banking customers that hold an auto loan product from their primary banks is in single digits. Hence much more needs to be done by FIs in order to tap existing customers
• Intense scrutiny and fines levied by regulators on account of financial challenges faced by customers emanating from indirect lending mechanism

Closely look at the issues that the dealer partners of financial institution’s (FIs) face.

• Digital is causing dealer’s customer visits per purchase to drop by 60%
• Their average deal closing ratio is less than 15%
• Marketing costs per vehicle are high i.e. at upwards of USD 600
• Average profit margin closely linked to vehicle turnover of approximately 35 days is less than 5% in most markets
• The overall customer satisfaction level if low and especially for the affordability led segment
• The projected negative impact due to rising adoption of car sharing is expected to be significant especially around used car transactions

The above clearly indicates that dealers would need to aim for higher profitability by acquiring customers more seamlessly and cost effectively.

Implications for the industry

Over the years, consumers have come to realize the advantages of leveraging extensive digital research (i.e. currently at an average of 18-20 hours) before setting foot into a dealership. One would have interpreted the trend to result in an improvement of the overall customer satisfaction levels, however the reality is far from that. Significant emotional low points still exist for customers across the car purchase cycle including the clutter while researching for the car and the confusion once they decide to step into the car dealership. While customers clearly see the importance of car dealerships, their expectation are in the form of a more personalized approach that helps them meet their needs more seamlessly. Sensing an opportunity, many dealerships have now started financing on their own, peer to peer lenders have aggressively started targeting this segment, car sharing companies are providing alternates to owning and innovative B2C fintech models have sprung up to enable seamless financing. Hence the relevancy of traditional FIs in this financial product category is presently being threatened.

The future of automotive financing is bright for entities that become a car purchase guide for the customer

We at vLendRight believe that financial institutions (FIs) are the most qualified to offer a seamless “customer journey platform”, one that enables partnerships and offers an end-to-end connected car buying experience to the end customer. This platform can help FIs

• Move into the realm of value added services much upfront in the customer’s car purchase journey by fulfilling the customer’s car research and validation needs
• Take a financial guidance led customer centric approach, which is a key motivator and decision factor for more than 50% of the car purchase population globally
• Enable their customers to seamlessly own an automotive asset, for which significant prudence is in any case done at the their end

The above can be a starting point for financial institutions to re-imagine the customer’s auto purchase journey by making themselves as the guide rails of the value ecosystem.

vLendRight as a platform will help banks gain market share in auto finance and also reinforce their brand of “customer first banking”. The solution will help partner dealers with a robust sales enablement and forecasting platform to drive both the volume and speed of inventory turnover.