Six Trends Transforming the Auto Finance Landscape

I recently hosted a webinar, sponsored by AFSA, titled “The Future of Automotive Finance.” It was an interesting conversation with Steve Greenfield from Automotive Ventures, and my colleague Matt Stanley, vice president of Decisions Science at FICO. We covered a lot of ground discussing the most consequential opportunities and threats facing auto lenders today.  

What came through loud and clear was the need for comprehensive risk evaluation has never been more critical. Artificial intelligence, shifting consumer preferences, and global uncertainties are re-shaping the automotive industry, and lenders are facing a myriad of challenges, but more importantly, a plethora of opportunities too. The ability to navigate this complex terrain relies heavily on the ability to assess the risks involved and the capacity to develop and execute profitable growth.    

I’m highlighting below six significant trends that we covered, but I’d strongly recommend watching the full webinar, here: https://youtu.be/qzNF6KlVvoY?si=gCxSNqKKufvdk9HJ.  

1. Financing Over the Air (OTA) Updates

The market growth of EVs will drive financing opportunities around OTA enhancements. 

A technology common on cell phones, computers, tablets, and smart TVs, is making its way into the auto industry. Over-the-Air (OTA) updates are transmitted wirelessly, typically through a Wi-Fi or cellular network, to a vehicle's software system. When the car manufacturer develops a new software patch or feature, it can send it directly to the vehicle, rather than having to bring the car into a dealership for a manual update. 

OTA updates range from minor bug fixes and adjustments to improve the overall performance of a car, to significant software changes that can enhance the functionality of a vehicle. For example, they can provide upgrades for brakes, advanced driver assistance systems (ADAS), and even electric vehicle (EVs) upgrades for charging and mileage. 

2. Offer Optimization Will Provide Increasingly More Flexible Financing Options to Consumers

New technology allows automotive lenders to be more competitive with their offers. 

Advanced analytics can enable lenders to offer meaningful choice in the financing terms, in near real-time for borrowers, while still maintaining control over risk. These software analytics allow auto lenders to leverage existing credit and pricing policies to ensure that all offers made comply with risk appetite and margin requirements. Using sophisticated mathematical optimization algorithms, lenders can very quickly search through hundreds of thousands of offers to identify the ones that are the best fit for their customer. A typical lender might specify 3-5 options per application, perhaps one that looks to minimize the down payment, another that looks to minimize the monthly payment while keeping the down payment the same as the initial request, and a third that seeks to maximize the amount financed to support back-end add-ons. These systems run in real time and can lead to dramatically higher booking rates and lower underwriting costs. 

3. Car Feature Subscriptions Will Play a Bigger Role in Auto Sales and Financing

More agile financing solutions will be needed to manage new and future EV features. 

Subscriptions will play an increasingly larger role in automotive sales and financing in the U.S. Subscriptions fall into two buckets; first, vehicle financing subscriptions, which have not taken off, and second, feature subscriptions, which are becoming more popular as consumers understand they only have to pay for the car features they need during the months that they use them. For example, features around performance and horsepower to help with acceleration; software improvements to expand EV range; cold weather packages that unlock heated seats or battery upgrades.   

4. The Cost of Owning and Maintaining an Electric Vehicle Will Continue to Evolve 

Traditional automotive repair costs will likely be replaced with the financing of protection plans.  

EVs hold a lot of promise but also a lot of uncertainties for the industry. Since this first generation of EVs had a lot more recalls, the cars will be in the shop more as the legacy automakers work out the kinks. But after this transition phase, the average EV is going to have much longer service intervals than their internal combustion counterparts. Far fewer moving parts fail, and no oil changes or spark plugs that need regular service.  

Residual values are going to be tough to forecast on the waves of new EVs that hit the market. This is likely to create volatility in used EV prices, depending on how much demand we have as these EVs come back into the market.  

The good news is that finance and insurance providers are initially seeing strong attach-rates for protection products. Which isn’t too surprising given the sheer amount of technology that’s being baked into these new cars. Think about when you bought your last iPhone. These devices have gotten so expensive, you’d be silly not to opt in for the monthly insurance plan. The average consumer is going to be fearful of the cost of fixing these sophisticated iPhones on wheels -- when something does inevitably break. 

5. The Need for Agile, Data-Driven Decisioning Across the Customer Lifecycle Will Only Grow

The automotive industry will likely move from a single origination transaction to ongoing risk assessment. 

We’re rapidly moving toward a world in which lenders in the automotive sector need to be prepared to make almost continuous decisions about each borrower.  It used to be the case that 95% of the “action” was at the point of origination.  The trajectory of each customer was largely locked in by the time the keys were handed over to the buyer.  That won’t be the case with the rise of subscriptions and OTA upgrades/updates.  Lenders need to be ready to re-underwrite each customer perhaps dozens of times.  This will require more agile decisioning systems, more continuous risk assessments, and a ton of creativity on the part of lenders.  It will make purchasing relevant data more attractive over the life of the relationship and require more frequent assessments of risk.  

6. Vehicle Connectivity Will Dramatically Change Customer Communications

EV head units will likely become another channel for ongoing engagement with consumers.  

Historically, the industry has really been weak in terms of keeping in touch with, and nurturing a relationship with, the consumer after purchase. There hasn’t been a lot of loyalty back to the dealer for service, especially after the end of the warranty period. 

Vehicle connectivity uniquely provides the opportunity to “flip the script” on this equation. The car should recognize when it needs service, and then recommend when and where to get that service done. Much of the communication with the customer should be through the head unit (the main screen) in the vehicle. And both automakers and dealers will have a tremendous amount of consumer and vehicle data to leverage into dramatically better (and closer) experiences throughout the ownership experience.