Disruption in Automotive Finance TechnologyBy Paul Stevens, Former CIO NETSOL Europe on 30-11--0001
The automotive finance industry is facing its biggest era of change since the advent of the internet, as customers' retail behaviors, expectations and preferences relentlessly evolve. Gone are the days when potential buyers made multiple visits to a franchise showroom before making a purchase, and looked to the dealer to sort out the finance for the car they liked. Now customers are much more likely to devote their time to searching online for the car they want, and not only going into the dealership to arrange a test drive to confirm their choice.
What they are increasingly seeking is a blended approach, whereby they are able to choose finance as flexibly and as easily as they can now decide on a particular choice of car. In a world where a vast amount of information about a car's performance is available instantly via websites, mobile apps and social media, the whole process of buying a vehicle is changing beyond recognition.
The Engine Customer Experience Survey 2015 points out that customer service also has a very obvious impact on the other key element of any car sale, namely the financing. The traditional motor finance customer journey is similar to that offered by many auto retailers, and shares many of the same features, namely:
- Limited access (little publicly available information about different types of lending options and ways to comparing them).
- Limited control (the dealer typically handles finance searches, with the customer having little input).
- Limited transparency (the consumer does not have much information about scoring criteria or different lending conditions).
- Limited choice (only a specific suite of finance product are on offer at each dealership).
Manufacturers and dealers have started to respond to this change, introducing concepts such as the virtual showroom, where potential buyers can assess and compare details of cars online and customize their choices. Independent website reviews and social media interactions now have as much - if not more - influence on a purchaser as the manufacturer's advertising and the dealer's recommendations.
But lenders, manufacturers and dealers need to be quick off the mark to ensure they harness the power of online systems and applications to create a powerful experience that will help them build close customer relationships.
After the dramatic slowdown that characterized the recession years, car sales are now well out of the doldrums. The Society of Motor Manufacturers (SMMT) stated that the figures for new car registration for August, showed a 9.6% increase to 79,060 units in the UK compared with August 2014.
Figures released by the Finance and Leasing Association (FLA) show the number of new cars bought by consumers on finance provided through dealerships increased by 13% in July, compared with the same month the previous year. The percentage of private new car sales financed by FLA members through dealerships in the 12 months to July 2015 reached 78.7%, up from 78.1% in the 12 months to June 2015.
However figures released in the first week of November by (SMMT) showed "UK new car registrations dropped for the first time in more than three and a half years as market growth levelled off in October 2015. 177,664 new cars were registered in the month, representing a slight decrease of 1.1% on last year's figure and following a record 43 consecutive months of growth."
It must be pointed out that the "year-to-date figures strongly demonstrate that the new car market is still very buoyant - 2,274,550 cars have been registered so far this year, 6.4% more than at this time in 2014, and the best year-to-date performance on record."
The point-of-sale consumer used car finance market also showed continued growth, with new business volumes up by 9% compared with July 2014. The trend for greater demand for auto finance is not just confined to the UK market. Latest data from Experian's State of the Automotive Finance Market report covering US trends shows that during the second quarter of 2015, consumers continued to select leasing as a popular option, as 31.4% of all new vehicles financed were leases, up from 30.2% the prior year.
Over the same period, used vehicle financing hit at an all-time high of 55.5%, compared with 53.8% the previous year. The total percentage of new vehicles financed in the second quarter of 2015 reached a record high of 85.8%, compared with 85% a year earlier.
Technology Savvy Customers
One trend that is becoming very apparent is that the consumer behavior towards car buying has undergone a major transformation. The established route was linear: several trips into a dealership to look at different models and discuss options, followed by a purchasing decision at the same outlet and then a sale, with or without finance.
Deviation from the set approach was rare and difficult, because information was so limited - where else could the would-be buyer find out about the car models and finance options available?
Unfortunately it seems lenders, manufacturers and dealers are finding it hard to adapt to the rapidly changing consumers' approach towards car buying and financing. Even though a seamless web experience could be a strong influence on customer's choice, so far car manufacturers have failed to prioritize this.
Since the modern consumer is looking for ways to minimize dealer interaction, they prefer to have made their choice before actually going to the dealership; reducing the visit to just ratifying and making sure the product meets their needs.
It is important that manufacturers and dealerships focus on their customer experience as areas of servicing and repairs are a very profitable part of the business and developing good customer relations will enable firms to create brand loyalty. Once this brand loyalty is established these customers will not feel the need to look to the competition as long as the quality of your product and the service offered remains at the same level.
The customer service challenge is being given an additional boost by the so-called Millennial generation; those born in the period 1982- 2000, who have grown up into adulthood with smartphones giving them readily available online access in their pocket at all times.
For this group, the preferred method of making a purchase is to look online first and, crucially, to start to make payments and funds transfer via their mobile as well.
According to the J.D. Power 2015 New Autoshopper Study, more than half (51%) of new-vehicle internet shoppers use a mobile device - tablet or smartphone - to digitally conduct automotive research on the internet to help them find the right vehicle, at the right dealer for the right price.
It found that online research was increasingly being used to check out not just the vehicle on offer, but the finance options as well, and that speed of response, access to wide sources of information and a seamless customer experience were all critical elements.
Recent research from Deloitte shows that the adoption of payment through smart devices is expected to take-off faster in the UK than it has done in the US, because there are more smartphone devices in circulation in comparison, coupled with an established mobile payments culture.
Deloitte's fifth annual Mobile Consumer report (UK) also found that over a third of young people (34% of 18-34 year-olds) are interested in using mobile payments, along with a fifth (20%) of 55-75 year-olds.
It says the accessibility of sales terminals that have contactless readers, combined with smartphone users' general awareness over contactless technology, will further drive the acceptance of mobile payments in the UK. For many, a purse or wallet's only role is to store credit cards. Subsuming these cards into a phone is a logical next step.
Millennials are likely to be the first to move towards using mobile devices for payment. As this generation of would-be car buyers starts to shop around for a vehicle and for financing, they are likely to produce a sea change in the market.
Recent findings from the US-based research team at Edmunds underlines that the younger generation will continue to want to purchase a car of their own. Indeed, according to the same research, Millennial car buyers are opting to lease their vehicles at a higher rate than the overall car buying population. The finding suggests that Millennials are more willing than older adults to sacrifice the long-term financial benefits of car ownership to get into bigger or more luxurious vehicles that are typically more affordable through leasing.
According to Edmunds' analysis of car registration data, leasing accounted for 28.9% of all new car purchases by Millennials (age 18-34) in 2015. The percentage exceeds the industry-wide lease penetration rate of 26.7%, and reflects a 46% increase in leasing by Millennials over the last five years. By comparison, the share of leasing among all car shoppers has increased 41.7% during that period.
Research by TransUnion refuted the claims that younger people are increasingly less inclined towards buying cars, rather it was found that the Millennial generation is the fastest-growing segment of auto loan consumers.
The credit reporting agency's latest auto market report shows that Millennials represented 27% of total auto loan originations in 2014, up from 16% of total originations in 2009. Millennials' total outstanding auto balances have increased 23% in the past year, the highest of any age group. Average opening loan balances for this generation grew 4.1% year over year, up from US$17,942 in 2013 to US$18,678 in 2014.
According to Experian, Millennials are taking out more auto loans than the generation before them did. It says auto loans made up 14% of all newly opened accounts for Millennials in the last half of 2014, compared with 1% of newly opened accounts for members of Generation X in the last half of 1998, when they were at a comparable age.
Technology is changing the global automotive landscape at a phenomenal pace, from driverless cars to unmanned digital dealerships. In particular, technology is enabling customers to have more control of the buying situation than ever before.
Consumers now want to have access to information which they can browse at their leisure. They are then seeking a personalized buying experience, where the supplier is able to use all the data gleaned from earlier online interactions to tailor the sale. Done well, this process encourages the buyer to bond with the dealer, the lender and the manufacturer, who can all use technology to push attractive new offers and resolve any queries quickly.
Technology has not only transformed the way lenders mitigate risks and how payments are managed, but has also aided consumers in both the decision making and application processes.
With a single click on an online platform, customers can obtain price quotes, lease quotes, trade-in values, loan pay-off information and financing options.
Increasingly, online finance platforms are linking to credit checking agencies such as Equifax, facilitating a method of obtaining finance pre-approval which ensures that would-be buyers avoid applying with lenders who are unlikely to approve their application and therefore safeguard their credit ratings. With this process, credit agencies perform a "soft search" of the potential buyer's credit. This gives shoppers an idea of what they qualify for, all the better to narrow their search and helpthem find a vehicle.
Enabling consumers to check their potential suitability for a particular finance product before a full credit check is carried out, the soft search is now heavily used by brokers and finance comparison websites in both the US and UK markets. It works by retrieving information from several sources such as the electoral roll and then matches this against a broker's panel of lenders and the criteria that applies to each of these.
By doing this, the soft search enables brokers to determine the most suitable lender and the likelihood of an acceptance. Crucially, it is not visible to other lenders who carry out a soft search or full credit check, and will show as a quotation search, so will not impact on any future credit scoring processes.
For dealers, this has important implications. The ability of customers to now qualify for ballpark credit in advance - in particular buyers who fall into marginal categories and may have challenging credit to work with - means drastic cuts in time spent trying to qualify them.
This translates into less time spent by the customer waiting in a dealership while due diligence is performed. It is also reflected in dramatically shortened time frames that dealers will have to spend trying to get customers into vehicles they may wind up not qualifying for.
Technology is important for lenders, too. Via the online platform, customers can take greater control of the buying experience by keying in monthly payment budgets and receiving electronic offers. Telematics and "black boxes" installed into vehicles can provide data on how the car is being used which, combined with the driver's payment history, allows lenders to better assess risk and thus fine tune loans.
As a result, transparency is the new sales methodology. Online platforms allow buyers and dealerships to communicate messages and provide insights as never before. No longer is a dealership website purely informational - providing prices and options and images for customers to pore over - they should also be transactional, where dealerships can engage customers early in the game.
Of course, dealers have traditionally had the advantage over lenders in that they have the customer in front of them in the showroom when discussing finance, which has allowed them to pick up on issues and develop a deeper relationship with the buyer.
To remain relevant in what is a highly competitive market, funders need to elevate the consumer buying experience beyond expectations so that they, too, have a strong bond with the consumer. Even though the majority of consumers today take several months to go from need realization to actually buying a car, they have higher expectations in terms of response times, communication methods and service levels; this is especially true for the younger generation, because of the availability of technology.
For funders this means developing apps, an online presence and a series of tools which will make it easy for individuals to seek finance information initially, and make payments or inquiries later on. This sounds a simple proposition in principle, but is proving much harder to put into practice for many lenders, who frequently face challenges such as legacy systems which may not support online or mobile applications, and a workforce which has grown used to a particular approach.
However, recent business history is littered with examples of companies which tried to ignore the inevitable changes technology was making in their core market. They lagged behind in the "adapt or die" race wherein failing to innovate and graduating to a new business model as compared to their obsolete one which led them to lose out in the long run. Consumer entertainment supplier Blockbuster is a case in point, illustrating what can happen when the obvious need to change is ignored.
Get into the driving seat. For auto finance professionals, the challenge is clear: a wave of technology change is coming, and in order to avoid being dragged under, they need to take action to get on top of the opportunities. Lenders, dealers and manufacturers need to think hard - and fast - about how they plan to integrate their systems, so they can link together all elements in the customer sales and financing processes seamlessly. That means bringing together all the information held internally about prospects, sales, quotes and finance offers, and combining this with "big data" available from other sources, including social media, on customers' preferences and buying trends.
There will be questions about who owns the data, and some customers will have concerns about the data security and possible breeches of privacy. The industry will need to adapt and go above and beyond the minimum regulatory guidelines to make sure that customers are completely satisfied.
For the auto finance industry to thrive, manufacturers need to develop easy to use, intuitive apps and online facilities which create a compelling customer experience. Lenders need to make sure that there attention is not diverted away from the bigger and more important picture, the customer's end-to-end journey.
Paul Stevens, Former CIO NETSOL Europe
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