The uncertainty of the economy and the impact of the pandemic on unemployment and the financial health of borrowers have been huge challenges for banks and consumer lenders. Nowhere is this more apparent than in indirect auto lending, a market in which lenders compete for new and used car loans through dealership financing networks.
As consumers and enterprises increasingly adopt digital technology, (i.e. Quicken Loans for mortgages, Carvana for auto, LendingTree for consumer lending) competition for personal financing has become fierce. Even with the growth of direct financing, there is still a significant number of consumers who seek financing through the auto dealership channel. In 2020, 85 percent of all auto financing was coordinated through the dealer network. While demand for direct financing will certainly continue to increase as more self-service tools become available for consumers – in the meantime – this shift is impacting borrower expectations for the customer experience through the dealer network.
For starters, digital technology is driving faster review and approval processes, giving borrowers near-immediate access to the least expensive option for loan and lease financing. The dealer network is finding that a digital interface combined with strict risk criteria is key to building a solid auto loan portfolio. At the same time, lenders are embracing artificial intelligence and machine learning to access borrower details and rating agency data to evaluate and manage risk in their portfolios. Access to and analysis of data in real time is key for the lender to remain competitive.
Digitizing auto lending programs
To improve the customer experience, lenders are quickly modernizing their auto lending programs to embrace other digital capabilities. In most cases, this means rethinking the operational frameworks of their origination, loan servicing and collection systems. An important benefit is that borrowers can access loan data and make modifications to personal details without the need to contact customer service. The streamlined process reduces service issues, lowers the volume of customer service calls, leads to higher customer satisfaction scores and reduces costs.
Lenders, including banks and service providers, have established key performance indicators (KPIs) that track performance for their programs against industry standards and past program performance. Typical KPIs that identify program performance for loan origination include pull-through rates, decision-to-close-time cycle and customer acquisition costs.
Pull-through rate, for example, measures the total number of funded loans as a proportion of the number of applications received in a given period. The industry standard pull-through rate is 75 percent. Best-in-class rates, which push past 90 percent, can be tied directly to the speed of approval through the dealer network. Lenders that continuously monitor performance against these metrics can identify gaps in their operations and take advantage of opportunities to improve.
Auto lending service provider ecosystem
Another trend we see in the market is a growing inclination on the part of lenders to outsource certain technology or business functions to service providers to drive down costs and provide additional business value. Service providers bring scale, domain expertise and, in some cases, proprietary software solutions to help banks and non-bank financial institutions achieve efficiency in the various components of the indirect auto financing cycle.
One example of such a partnership is a Tier 2 bank that relies on a service provider application to support loan servicing. The application enables borrowers to inquire about payment status and notify the lender on address changes. By partnering with the provider, the bank has reduced contact center calls and improved its client experience.
Indirect auto lending is a hot market. New and disruptive market entrants and increasing consumer expectations are forcing traditional lenders to adopt technology in the quest for greater efficiency and improved customer experience. Building capability and embracing a broad partner ecosystem will enable lenders to manage risk and maximize returns.
ISG has conducted extensive research in the indirect auto lending arena. We can provide insights on the efficacy of KPIs, the benefits of different outsourcing models and the specifics of a wide range of service provider capabilities. We help lenders review their auto lending programs and find ways to improve digital adoption to remain competitive in today’s dynamic economy.