How artificial intelligence can save the auto finance industry

"Operationalize servitization in auto finance." That's the awkward new phrase that tells us how to save our industry.

At first, the concept seems simple: car use is moving from an ownership model, with a single user for a single vehicle, to a service model, which offers users many options for access to mobility. But the deeper you go, the more complex this phrase becomes. After all, its implementation rests on technology that hasn't yet been fully adopted.

Artificial intelligence (AI) is a great example of this. I haven't come across a sector yet in which it hasn't been touted as a panacea. And auto finance is no different. Even before COVID-19 hit, traditional auto financing volumes were set to drop by 30% in 10 years. Today, auto financiers are under even more pressure. AI could really be a game changer for the industry, helping it navigate the crisis and build resilience for the future. But first, auto financiers must embrace it fully.

Car as asset becomes car as service

Consumers have already begun paying to access cars as a service, with variable terms and price offerings, and with the customer (rather than the asset) at the center of the experience. Think Uber and Lyft, for example. So, auto financiers can easily imagine this scenario. In fact, some auto finance companies are already moving to meet changing consumer needs in this way. And some are even using AI to do so, albeit in limited ways. But more complex AI applications will provide the higher margins the industry needs to sustain itself during this period of intense pressure, innovation, and development and to emerge stronger on the other side of the current crisis. These applications, though, are well outside of the industry's wheelhouse. I'm talking about things like real-time and location-based insurance, predictive maintenance, and so on.

Artificial intelligence: challenge and opportunity

AI is both a challenge and an opportunity for the auto finance industry. With AI, we can predict what additional services customers want and when they want them. We can make credit decisioning frictionless. We can even make driving easier and safer! And we have the advantage, because we have access to both the customer data and the assets that generate information.

But the industry has been caught napping. Companies like Google, Amazon, Facebook, and Apple (GAFA) are much more comfortable in this space. They are adept at delivering seamless customer experiences, digitally. They have the resources to invest in the iterative process of design. They can afford, financially, to make mistakes. And they care more about being best in class than first to market. If the auto finance industry doesn't capitalize on its current advantage, then GAFA will step in to give customers what they're looking for. The auto finance industry is a giant, lucrative, and vulnerable hunting ground for GAFA, and it will pick off traditional captives that don't evolve.

How the industry can get shifting

So how can the industry move to overcome its sluggishness and structural inefficiencies? I believe it can act now in three key ways:

1. Adapt – Auto finance companies must refine the business model to focus on the sale of high-margin products and services. Data analysis will help them to focus on utilization rather than depreciation. This will involve using AI to hone strategies that incentivize co-ownership.
2. Connect – As an industry, we do not have the expertise to do this alone. We must connect with those players that understand how to apply AI across the entire lifecycle of the asset and customer relationship. Partnerships are key. Captives will orchestrate to gain scale and manage the customer on behalf of the OEM.
3. Predict – The industry should use AI and its dynamic algorithms to predict customer needs and behaviors. The customer will become the center of a far more practical, usable, and effective experience.

The auto finance industry does not have long to capitalize on the native advantage it has in connectivity, automation, servitization, and electrification. It must get shifting, or watch big tech move in for the kill.

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