The auto financing industry is transitioning to meet the demands of its customers yet again. In the last few decades, significant changes have occurred with auto manufacturers in regards to auto financing. In the 1980s, when auto loan interest rates rose to 16 percent and higher, major car manufacturers helped consumers finance vehicles directly at much lower rates through their own captive finance companies, sometimes even offering zero percent financing. These same finance companies evolved into lease operators by the 2000s, as banks and other lenders left the market.
Today digitalization is disrupting the end-to-end loan service model for all auto lenders, leveling the playing field for captives, banks, credit unions, and other lenders. Borrowers now also demand more flexibility and greater service from auto lenders, which is driving a parallel trend of personalized lending and leasing services. Rising vehicle prices have lengthened the average span of an auto loan, while novel ownership models like auto subscriptions have also emerged to deal with these higher prices. As the auto lending sector evolves, lenders need to evaluate the services they provide to their customers and how they can utilize new technologies to engage them.
Digitizing the End-To-End Loan Service Model
Lenders have seen digital technology reduce operational costs while also enabling them to improve services to their customers. Though much of this change has occurred in areas that directly affect borrowers, no part of the process has been left unaffected. While transforming loan originations, servicing, and even collections, digitalization has also affected leasing and driven new consumer services.
Today, digital transformation is central to a lender’s success, streamlining the lending process. Lenders are personalizing their services and making their platforms easier to navigate, as auto finance customers have shown a desire to conduct more of their business online. While these changes are creating challenges to which lenders must adapt, they offer new opportunities as well. Though the cost of new technologies may cause some lenders to balk, it’s this technology that will drive future growth.
New Approaches Within the End-To-End Loan Service Model
Technology is just one aspect of how lenders approach an end-to-end loan service model. Lenders need to also focus on creating a positive experience for their customers. Though fintech is a key aspect of this, lenders must also consider what borrowers want. By allowing greater flexibility in contract management, for example, a lender is more likely to have customers return the next time they need a loan or lease. Developing partnerships with companies that offer both technical capabilities and expertise in the industry will also help lenders provide more and better services to their customers.
Auto lenders should approach end-to-end lending in a manner that:
- Constantly improves technical capabilities to decrease the time it takes for decisions to be made.
- Create individualized service offers based on an analysis of the customer’s data.
- Integrate products and services to support borrowers’ needs.
- Optimize management of a loan throughout its lifecycle.
- Retain customers and maintain their loyalty by ensuring decision-making is data-driven and transparent.
- Utilize simple-to-use digital interfaces and architecture that make loan applications and dealing with the lender easier.
Today, the initial stages of purchasing a vehicle have gone largely online, while fintech has made the auto finance industry more consumer-centric. In many ways, lenders need to act more like tech companies, innovating to provide the products and services that benefit their customers.
Originations
Increasingly, auto lenders are using cloud-based loan origination software platforms to streamline the process for applicants. As loan originations represent the initial stage of the end-to-end loan service model, lenders need to prioritize this first step. Loan originations also profoundly affect customer experience, so having a transparent process is integral. This is especially true given the sensitive nature of the data gathered during the originations process.
While automating the originations process makes it easier for applicants, digital transformation also helps make it more efficient for lenders. Automation can assist with compliance issues, document verification, risk assessment and other back-office tasks. As the auto market changes, so too should auto finance companies, assuming new business models to cope with these changes.
Loan Servicing
While technology certainly plays a part, another significant development among auto lenders involves transferring non-core functions like loan servicing to third-party providers, especially customer care. Managed Servicing gives lenders not just the technology but also the expertise needed to grow their portfolios.
Areas in which Managed Servicing providers can assist with loan servicing include:
- Communications: A key aspect of customer care is the ability to easily contact and have questions answered while also resolving issues about such things as repayments or loan terms.
- Payments: The easier and more convenient payment portals are, the less likely borrowers are to miss a payment. A Managed Servicing vendor who can provide technical payment tools and customer support is invaluable to lenders as it keeps borrowers happy.
- Delinquencies: Technology can help identify immediately when an account isn’t paid, allowing quick intervention. The seasoned and professional staff of a Managed Servicing provider can help resolve this issue with the customer to bring the account back into good standing.
- Collections and repossessions: When a resolution can’t be reached once an account has become delinquent, a Managed Servicing provider can assist with the process of collections or repossession.
- Title management: When a lease term ends, a third-party provider can help manage vehicle titles to ensure everything is in order.
When it comes to servicing, an end-to-end loan service model should focus on keeping the customer happy. For this reason, lenders need to utilize a vendor for non-core services while also upgrading their digital tools.
Leasing Services and Auto Subscriptions
Numerous trends are occurring in the auto leasing sector as well. According to consultancy firm Frost & Sullivan, these include connectivity within vehicle fleets, digital retailing, and electric vehicle leasing. All of these are likely to provide new revenue streams for lease financing companies, including by providing their customers with additional services.
Auto leasing companies should:
- Expand their portfolios by providing leases for electric vehicles.
- Offer unconventional and affordable lease solutions that include flexible lease periods, greater vehicle selection, and the ability to swap out their leased vehicles.
- Provide support services for electric vehicles, such as lending for charging stations and powertrains, along with payment cards to load electricity.
- Utilize digital channels that include direct marketing through mobile devices to attract more tech-savvy customers.
A newer, more flexible type of leasing known as auto subscriptions is also growing in popularity, and it’s seeing more growth than the end-to-end loan service model. Subscriptions are typically prepaid and target the business-to-consumer market. Offering shorter contracts, auto subscriptions provide greater flexibility, and some even include insurance and vehicle maintenance.
Collections
Collecting delinquent payments can be as simple as sending a text message or email to borrowers, notifying them that a payment is late. Such digital interventions help delinquent borrowers self-correct and cost considerably less than an agent phoning the person directly to discuss their account and late payment. As with any other part of an end-to-end loan service model, customer experience is a priority, and preventing delinquencies is definitely preferable to dealing with them.
To help prevent delinquencies, lenders can:
- Notify borrowers in real-time when funds have been received.
- Offer multiple payment options to make payment easier.
- Pre-qualify a borrower for debt relief or restructuring based on risk assessment.
- Provide customers real-time information to their mobile devices or online concerning account status and payments.
- Remind borrowers of an upcoming payment, including the amount and the date due.
Digital strategies for collections must include fintech. Data analytics also plays an important role. With a data-centric approach, lenders can quickly decide whether a delinquent borrower just needs an automated nudge directing them towards tools to self-correct, or whether a more forceful approach is necessary.
Digital collection solutions additionally reduce a lender’s dependence on external collection agencies. It also helps resolve delinquency issues in a more customer-friendly manner. And when it comes to such a sensitive area in an end-to-end loan service model, lenders that put the customer first are more likely to result in return business..
Getting Started
defi SOLUTIONS offers a total solution for a lender’s complete loan or lease lifecycle. Partnering with captives, banks, credit unions, and finance companies, defi’s market-leading solution helps lenders exceed borrower expectations. From digital engagement through the complete lending process, defi sets new standards for flexibility, configurability, and scalability in originations and servicing (by your experts or ours) with its end-to-end loan service model. defi SOLUTIONS has the backing of Warburg Pincus, Bain Capital Ventures, and Fiserv. For more information, please visit www.defisolutions.com.
