For auto lenders, last year's challenges are today's opportunities

For the auto finance industry, the pandemic has presented its fair share of challenges. But it's also sped up digitization, improved focus on the customer, and highlighted the importance of building resilience into the business model. Smart auto finance companies will be looking to advance in each of these areas at every stage of the finance journey.

Early in the pandemic, call volumes skyrocketed as customers contacted auto finance companies with concerns about everything from rates to repayment to repossession. Meanwhile, auto finance companies had to simultaneously adjust on-premise staffing levels to protect employee health and hurriedly construct work-from-home infrastructure. Based on our observations, these combined factors meant that call waiting times for customers initially increased to up to an hour. Auto finance companies' early responses worked well. They addressed inquiries with digital solutions (such as live auto-chat), redeployed back-office staff to their call centers, and engaged third-party providers to offer surge support. This helped solve simple problems more quickly and enabled seasoned agents to handle trickier issues. But these emergency responses also offer a playbook for a more efficient future that can strengthen auto finance companies' business models.

Firstly, increased use of digital technologies in the back office (for example, robotic process automation to perform rote tasks, such as processing customer identification details) and in the online storefront (such as self-serve platforms) will aid with volume volatility, which we expect to continue for some time to come. Digital will also deliver reduced operating costs and more rapidly serve customers who, increasingly, have more power and more choice.

Second, new volume forecasting models powered by sophisticated analytics will help auto finance companies better predict – and prepare for – future fluctuations in customer contact.

Finally, auto finance companies have learned that cloud is the foundation upon which they can build true digital transformation. Exceptional and innovative customer and employee experiences – backed by AI, analytics, and automation – cannot be realized at speed and scale without it. Building a strong cloud foundation now will pay off long into the future.

Coronavirus required many auto finance companies to expedite the rollout of remote solutions, such as e-signing or remote vehicle inspection. But there are hints that these emergency digital solutions will become table stakes going forward. For example, Volkswagen Financial Services announced its ambition to grow its contract volume by more than 30% by 2025 and double the number of customer touchpoints through a strong digital and direct-to-consumer channel within its existing business model.

Successful auto finance companies will advance financing in other ways too. For example, they will use both structured and unstructured data alongside digital and analytics to develop a 360-degree view of each customer's financial commitments and habits. This will allow them to offer tailored finance solutions. And it may even inform new company-wide financing strategies, such as usage-based finance and product offerings that bundle vehicles with services or add-ons such as insurance, roadside rescue, or third-party navigation systems.

Though it is hyper-efficient and more flexible, digital finance also carries different types of risks. Auto lenders will need strong systemic controls for the credit decisioning and underwriting processes that underpin flexible lending. And they will need intelligent detection and prevention technology to capture new forms of fraud, such as synthetic identify fraud, which occurs when criminals combine fake and real information, such as Social Security numbers and names, to create entirely new identities that enable them to access financing solutions. Point Predictive, an automotive fraud solutions provider, estimates that synthetic identify fraud has cost the auto finance industry $2 million per month since the start of the pandemic.

COVID-19 truly disrupted collections. According to a Lightico survey, as early as March 2020, more than half of customers had concerns about loan repayment. As governments released support, auto financiers quickly demonstrated empathy, extending loan terms and pausing repayment schedules. But as many companies and individuals continue to experience financial difficulty, auto lenders need to find a way to sustain empathy in a volatile market, reduce their exposure to risky customers, and build resilience into their business models.

A 360-degree digital view of customers will help here too. Finance companies can offer personalized collections strategies to improve the likelihood of repayment and sustain goodwill. And they can also head off potential default, with automated back-office processes that segment customers by risk and use data-triggered events to suggest the ideal time to deploy high-touch contact strategies, such as discussing loan restructuring.

The secondhand car market, with its subprime borrowers and uncertain residual values, has traditionally been a higher-risk segment for auto finance companies. But this market now offers a huge growth opportunity. Demand for used cars is high. Between March and May 2020, online auto platform Carvana reported an 80% increase in sales. And the secondhand supply tap is fully open too, with millions of nearly new lease vehicles coming to market soon, increased repossessions and unscheduled returns, and rental companies liquidating fleets.

Auto financiers will need to focus on two key areas to capture secondhand market share. First, they will need better remarketing platforms, with sophisticated digital pricing tools driven by analytics. Second, they will need to invest in machine learning and artificial intelligence (AI) to forecast residual value more accurately. Competition in the segment is increasing as original equipment manufacturers see an opportunity to develop channels for certified pre-owned vehicles. For example, the used car platform Heycar, which has started its rollout across key markets in Europe and is enjoying significant growth, helps to keep a larger share of used car customers and revenues within the automotive manufacturer groups and their dealer partners.

Economic recovery will take time. So auto financiers need to stay focused on the trends that have emerged, such as working from home, volume volatility, and financially stretched customers. And they also need to build for the future. Progression toward new mobility models has only stalled, not broken down. So financiers must plan to use digital technologies, AI, and machine learning enterprise-wide. This will build a resilient business model by cutting costs, delivering products and services that help retain customers, and reducing risk from defaults and fraud. And they need to take advantage of the demand for secondhand vehicles while finding a way to reduce risk from subprime borrowers. But the cornerstone of any strategy must be empathy. Investment in new technologies and ideas will not matter if auto lenders do not meet their customers where they are and offer them the empathetic, personal, and efficient experiences that they get from retail and now demand from finance too.

This article was co-authored by Jason Osborne, global head of auto finance, Genpact, and Kanta Mishra, auto finance practice leader, Genpact. A version of this article first appeared in Auto Fin Journal.