The ground is shifting under the auto lending market as it looks at how to incorporate electric vehicles into its financing structures. While the future of personal transport is undeniably electrical, vehicle lending markets have been slow to grasp this change. While the green technology driving the burgeoning market for electric vehicles has made waves, consumer lenders also need to update their own technology to profit from the inevitable need for financing in the electric vehicle sector.
By 2024, the average cost over the first four years of electric vehicle ownership will match that of the cost of owning a gas-powered vehicle. Though vehicles with electric motors are less expensive over their lifetimes compared to those powered by internal combustion engines, financing for electric vehicles hasn’t kept pace with technological developments. This presents opportunities for auto lenders, as most consumers will require financing to enter the electric vehicle market.
The Future is Electrical: Vehicle Lending Markets Embrace Sustainability
Even with recent supply chain problems due to the COVID pandemic, by 2021 sales for electric vehicles doubled to more than 6.6 million, which was nearly 9 percent of the total global market. Electric vehicle sales are expected to quadruple between 2020-2026, with an average annual growth rate of over 23 percent and a worldwide market worth approximately $1 trillion.
This shift involves more than just switching between vehicles that are fueled or electrical. Vehicle lending markets need to look at auto financing from a customer-centric perspective. Auto lenders should approach this new and growing market with more innovative technological solutions. Flexibility and digitalization are vital in supporting purchasers of electric vehicles with effective financing that rewards customer loyalty and meets borrowers’ needs.
Auto lenders looking to get into the market need to consider:
- Acquiring and analyzing data to leverage creative solutions by utilizing artificial intelligence (AI) and machine learning technologies to allow lenders to deliver more individualized products and services, along with detecting fraud and making better-informed credit decisions.
- Changing how business is done, by switching from a focus on one-time sales to one that incorporates recurring revenue streams over a vehicle’s lifetime, which can be accomplished by combining add-on services like bundled amenities, car subscriptions, co-ownership models, and insurance.
- Developing new ways to connect with service providers regarding specialist technologies, providing options for scalability, lowering costs and more flexible financing options.
Much of this requires investment in IT capabilities, for which the right business process outsourcing (BPO) solutions offer economical answers. To effectively enter the electrical vehicle lending market, lenders need to move away from outdated systems and procedures and embrace innovation.
What’s Driving the Electric Vehicle Market?
The first vehicles used for personal transport that weren’t hauled by animals or that didn’t run on rails were electrical. Vehicle lending markets weren’t around when the first full-sized electric car was built in 1832, with rechargeable electric automobiles developed commercially in London in 1884. Ferdinand Porsche’s first vehicle in 1898 ran entirely on electricity, and in 1900 he incorporated an internal combustion engine to create the world’s first hybrid vehicle. In fact, from 1900-1912, electric vehicles made up a third of all vehicles on the road in the United States. Then, in 1908, Henry Ford’s mass production techniques and affordable Model T proved to be the demise of the emerging electric vehicle industry.
How times have changed. A number of different issues are now driving the rebirth of electric automobiles, and lenders need to take notice in order to capitalize on this quickly evolving lending market. The problem with conventional cars featuring internal combustion engines that run on carbon-based fuels is two-fold: there is only a limited amount of fossil fuels, and burning these fossil fuels contributes to climate change. Add to that the lower maintenance costs and electric vehicles look to be in a solid position to replace the vast majority of gas-powered vehicles over the next few decades.
Reasons the electric vehicle is expanding so rapidly include:
- Cleaner Environment
Environmental impact is a key reason why consumers are choosing electric vehicles. With no tailpipes, they don’t emit any exhaust, thus reducing pollution.
- Lower Running Costs
Electric vehicles cost much less to drive than vehicles that use fuel. They’re also much less expensive to service, and due to fewer moving parts, they tend to need less maintenance.
- Offers Better Driving Experience
Electric vehicles accelerate more quickly while using regenerative braking to help recharge their batteries during operation. Most electric vehicles also have a lower center of gravity, which improves comfort, handling, and safety.
- Government Subsidies
Many governments globally encourage switching to electric vehicles by offering subsidies for those who purchase them, as well as for businesses that introduce charging points in both residential and commercial environments.
- Limiting Noise Pollution
Electric vehicles operate much more quietly than those that run on internal combustion or diesel engines.
- Resale Values
While currently small for vehicles that are electrical, vehicle lending markets need also to consider their value when sold secondhand. Due to their low maintenance costs, electric vehicles are likely to have higher resale values than conventional ones.
Data-Driven Financing for Electric Vehicles
The future of personal transport is data-driven as well as electrical. Vehicle lending markets must acknowledge the changing nature of the auto lending industry and the fact that more sustainable electric and hybrid models will replace gas-powered vehicles. In this rapidly changing environment, data is key to making informed decisions for both borrowers and lenders.
The significant growth in electric vehicle sales presents substantial opportunities for both consumer lenders and dealerships alike. However, serious challenges involving financing exist as well. The consumer lending industry lacks sufficient expertise in data analytics, including fundamental technological aspects involved in analytics like AI and machine learning. Auto lenders should utilize data from various sources to glean insights into how best to approach the electric vehicle lending market. Along with the broader shift towards digitalization, electric vehicles are at the cusp of this change.
Indirect Lending: How defi SOLUTIONS Can Help Dealerships
Similar to other sectors, the auto market is generally shifting from a focus on ownership to use of a vehicle. With this change in expectations, defi SOLUTIONS can help auto dealerships provide a purchasing experience for buyers that goes beyond what they previously provided.
Lenders should understand that dealers want indirect lending experiences that:
- Allow quick restructuring of existing deals that can be customized to offer alternative options for financing.
- Enable dealers through a simple query to match motivated customers with rates and programs that best suit their needs.
- Offer user interfaces that are intuitive and easy to use, showing rates and programs specifically customized for the dealers’ customers.
While lenders and dealers can’t predict exact outcomes, data gathered from conventional auto sales can be used to develop strategies for creating rates and programs for electric vehicle buyers. This entails developing strategic partnerships with companies like defi SOLUTIONS that allow dealers and lenders to incorporate value-added services into any purchase or lease.
defi SOLUTIONS provides configurable loan origination systems, loan management and serving, analytics and reporting, along with a wide range of technology-enabled BPO services. With the electrical vehicle lending market expanding rapidly, defi SOLUTIONS encourages lenders not to remain limited by outdated technology but rather to realize the technological solutions defi can provide. Contact our team today or register for a demo.