It’s time for financial institutions to look beyond direct and indirect auto financing

Has the change in customer’s car buying behavior helped improve the situation for them?

Customer’s car purchase behavior has distinctly changed over the years. They are digitally more aware about potential vehicle choices, are well versed with associated costs and necessarily seek social validation from experts, peers and close contacts. Mobile first as a research & transaction option and less dependency on dealer visits prior to vehicle decision making are catching up fast especially amongst millenniums. However other critical activities and ones that require physical interaction such as final car selection (especially for used vehicle), financing and deal closure have remained more or less stagnant. Customers continue to depend significantly on car dealerships for test driving, to help them get financing, for purchasing add-on’s and finally to close out the car deal. Here are some associated data points of interest.

  • With average Americans owning 8-12 cars in their lifetime, most invariably end up spending almost 3 years of their lifetime going through a car purchase process and a significant part of which (i.e. around 80% of the research) is now via digital channels
  • More than 60% of auto purchase customers globally depend on auto financing & most are affordability led. Further the average financing interest comprises of 7-9% of the total vehicle acquisition costs. However none of the customer’s leading car purchase decision criteria include financing terms
  • Of the thirteen key car purchase journey milestones, only three have positive customer emotions associated with them. These positive milestones are the initial car purchase decision, vehicle validation with friends and the actual car delivery

It is clear that customer expectations have now moved well beyond having easy access to prospective vehicle & financial product listings as well as expert and peer views. Customers now desire personalized guidance and seamless execution capabilities spanning their entire auto purchase journey keeping their financial wellness and automotive needs in the forefront. In fact as per a recent Accenture report, 75 percent of the survey respondents said that if given the opportunity, they would consider making their entire car-buying process online, including financing, price negotiation, back office paperwork and vehicle home delivery. However in reality what most customers still encounter is confusion due to multiple vehicle choices (with more than 1000 vehicle model derivatives to consider), multiple consideration sets (there being on an average 18 information sources that are typically researched on) and approximately 12-16 challenging weeks of disconnected digital & physical journey elements.

How do the existing ecosystems players stack up in terms of meeting customer expectations?

Existing players that provide automotive and finance services to end customers during their car acquisition phase can be plotted on a customer value proposition matrix (refer to the figure below). Dealers and car brokers take customers through the tough journey of selecting, financing and purchasing a car and in return extract significant price for fulfilling customer’s needs. Aggregators and e-commerce players’ offer digitally mature services but are constrained by the limited overall value that they provide across the car purchase journey. Most traditional auto lenders are represented via their channel partners and in spite of fulfilling a critical financing need, are still perceived to offer the lowest value amongst all the ecosystem players.

While there are many strong contenders who aspire to be within the coveted “anticipatory” quadrant as per the below value proposition matrix, each of the above mentioned players cover only a part of the car purchase customer journey and deliver a limited value proposition for the rest. The new age automotive marketplaces and Fintech’s are however directly positioning themselves within the anticipatory quadrant and should not be ignored by the existing ecosystem players for the sheer value that they bring to the table.

However as per our assessment, the entity that has the best opportunity to aim for the larger share of automotive revenues are indeed the auto lenders. The lenders have a unique advantage of knowing their customer’s identity, transaction linked behavior & potential affordability for a car purchase transaction. Along with partners (both traditional as well as fintechs), they can use their inherent strengths to solve the biggest automotive pain for their customers, which remains the seamless acquisition of a car. The trust earned can enable them to not only grow their auto financing market share but also front end their customer’s auto associated requirements in the future. As a result they can choose to position themselves as a serious contender for a much larger share of the USD 1 trillion automotive economy, a 2020 figure predicted by leading automotive analysts.

Are financial institutions on the right path?

Traditionally lenders have focused on aggressive dealer channel management activities, tying up their dealer floorplan & retail lending businesses together, and tightening critical dealer supporting business processes, so as to extract the maximum value from their dealer partners. More recently, they have started partnering with information aggregators in order to showcase vehicle inventories to their customers and in return garner finance leads. However significant changes in consumer behavior & expectations, increased competition from P2P lenders/ automotive marketplaces/ B2C automotive fintech players such as Zuto, Carvana, Beepi, Shift etc. and potential threat from specialized data & ecommerce entities is bound to shake things up in this space very soon.

While most auto lenders have been on the digital journey for some time, they have primarily focused on gaining the digital operations advantage by rethinking the way their processes work within their existing constraints. The constraints have been with regards to people (i.e. their structures, locations, inherent knowledge etc.), business processes that emanate from the way internal line of business have been defined (i.e. indirect lending, direct lending, risk, operations etc.) and finally on account of existing technology, a large part of which is legacy. The present digital push initiated by most financial institutions has so far had limited customer impact and the same can be attributed to most digital engagements not belonging to the visionary quadrant within the digital competency matrix.

Automotive financial institutions need to move away from the mindset of creating new products into making experiences better for their customers. One of the clear solutions could be by adopting a digital customer journey platform that reimagines end customer’s auto purchase process by brining all required services together by integrating with partner dealer’s vehicle listings & a wider data ecosystem including car data. As the customer’s journey is both aspirational and affordability led, the journey platform can offer a personalized financial guidance to them by meshing individual’s affordability across all key aspects of the purchase journey, keeping their car buying and financial persona in mind. The platform would put customers completely in control wherein they could start, stop and resume the journey just like they would do in the physical world. Lenders on their part would be required to seamlessly integrate their existing physical and technology assets into the customer journey platform & move into the realm of value added services in order to build the most important and missing element in their customer’s auto purchase journey i.e. trust.

Adoption of the customer journey platform would most likely lead lenders into a zone of “hybrid auto financing”, one that seamlessly connects both direct & indirect financing and takes their loan acquisition business to the next level. Financial institutions would benefit by way of reduced operating costs which are significantly high and comprise 4-6% of the consumer APR at this point of time. The value extracted can be ploughed back partly into improving lender’s profitability as well as towards reducing interest burden for end customers. End customers would also have a much more seamless, transparent and enjoyable auto purchase experience. Partner dealerships would have an alternate marketing mechanism for their vehicle inventories and by using insights generated via the journey platform, they would sell more and faster.

It is hence a question of time before hybrid financing becomes mainstream for automotive lenders and more digitally progressive institutions are already thinking in that direction.

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