Three reasons auto lenders should embrace fintechs now

The world of automobile financing is changing fast. Not only is it set to grow at 6% per year and reach $300 billion by 2026, but it's also getting upended by new business models. These include fintechs, which will help make the industry more efficient and dynamic.

Already, Wall Street has taken notice. For instance, Goldman Sachs recently helped Caribou (formerly MotoRefi) – an auto fintech that partners with a network of lenders and finds the best lender matches within its network for each applicant – raise $115 million in an oversubscribed Series C funding round. This brings the total that the fledgling enterprise has raised from investors to $190 million since its 2016 inception. Why are financiers so interested? As auto financing becomes increasingly digitized, with a greater reliance on advanced technologies such as artificial intelligence, fintechs will become a key part of the auto lending ecosystem. They will speed up the processing of loan applications and reduce costs for auto lenders and consumers.

So, auto finance companies that work with fintechs to aid their auto lending will take the lion's share of the business. Still, some traditional lenders serving would-be car buyers find it hard to embrace fintechs. But those that cannot change or are too slow to do so will likely suffer. Here are three reasons why it's time for auto lenders to start embracing fintechs now:

Auto lenders may worry that new fintech technologies do not easily fit into the legacy technology they or their partners use. Reconfiguring the legacy technology across the entire customer lifecycle – from origination to resale – can take a long time and cost a lot of money. And lenders might expect resistance from their various partners along this lifecycle – such as dealers, customer servicing partners, and auction houses – as well as internal stakeholders who don't want the customer experience interrupted even as newer technologies have become integrated.

However, legacy technology can still be renovated and more easily than you may think:

• First, a growing ecosystem facilitates change across technology, analytics, and customer experience. For example, Vindex Systems provides business-to-business services, including CCTV security, number plate identification, and access control technology, such as electronic door keys. Auto finance players can integrate such services into their existing systems and workflows.
• Second, recognizing that change is both inevitable and necessary, many prominent industry players have already paved the way by implementing change themselves. For example, with its Auto Navigator car sales platform, Capital One has been a pioneer in bridging the digital gap. Competition between companies should help ramp up even more innovation because those firms that don't keep up may lose customers.
• Third, existing systems can stay in place and be upgraded progressively. The process works like heart bypass surgery, which doesn't involve removing a blocked artery. Rather, it diverts blood through a different route. In the same way, modern workflows can wrap around established enterprise workflow platforms.

Some auto finance executives may view working with fintechs as too risky. They may have concerns about a fintech's liquidity, product quality, or compliance.

Many startups are susceptible to investors pulling the plug on funding. So, auto lenders may have concerns that, if this were to happen, they would be left without a critical service provider. Or they may have concerns that quality or compliance issues with a fintech's technology offering could become existential threats to its long-term viability.

But there is one way to mitigate all of these risks at the same time. Instead of licensing a fintech's software directly, an auto lender can work through a transformation and delivery partner. In this case, the partner will assess the fintech's financial stability as well as the quality, acceptability, and compliance of its technology solution. In addition, the onus for continuity of service will then lie with the transformation and delivery partner. For example, using a reseller model, the fintech software will appear in the legal contracts between the partner and the lender, and the software placed in digital escrow. The partner then has an obligation to keep a copy of the software core code in an independent storage location. That way, even if the fintech firm goes bust, the software is still available to the auto lender on an ongoing basis.

Change is often time-consuming and resource intensive. With so many competing business pressures, how does an auto lender find the time and money to devote to assessing and adopting rapidly available fintech solutions at scale?

There is a relatively simple answer that doesn't involve incremental investment. While introducing a fintech into their ecosystem, auto lenders can engage a partner to manage specific processes, such as loan processing, and compensate that partner based on predefined outcomes, such as reduced cost per application.

For example, a company processing its own loan requests at a cost of $100 per application could hire a partner to process them at $50 per application. The time and monetary savings can then be reinvested in the pursuit of innovation.

Change is great. It's changing that's hard. But it's also necessary, especially when new technologies revolutionize an industry.

When it comes to engaging with fintechs, emerging ecosystem players, industry leaders, and progressive approaches to renovation have shown that legacy software need not be an impediment to change for auto lenders. Engaging a transformation and delivery partner between the lender and the fintech can help reduce the perceived or actual risks of working with a fintech. And partnering with a service provider to achieve specific outcome-based requirements can deliver efficiencies and help fund innovation.

The world is changing. To win in this new environment, auto lenders need to capitalize on innovations that fintechs have already developed. These simple solutions can show the way forward for those struggling to make a change in an industry that's undergoing a technological revolution.

This article first appeared in Auto Finance Journal. It was authored by Kanta Mishra, global practice leader, auto finance, Genpact, and Alex Bray, global practice leader, fintech strategy, Genpact.