Sometimes you have to get a “maybe” before you can get a “yes.” That’s apropos of the long path to acceptance of new methods in well-established markets with well-worn channels and dominant players. Auto finance has presented such a challenge, but, finally, Fintech has made inroads. Below, we look at how Fintech is disrupting auto financing and refinancing and transforming the market in multiple areas, including access to credit, speed and efficiency of transactions, and transparency.
Underwriting is a key area that is receiving a makeover as Fintechs are using artificial intelligence (AI) and alternative data to qualify borrowers. By bringing in non-traditional payment data (such as bank account/cash flow, rental payment history, professional licensing or education information) to the underwriting decision, lenders are able to more accurately price risk and, in turn, borrowers can strike a better deal on the rate.
The expansion of credit to underserved communities has been an additional benefit of Fintech’s entry in the auto space. Reliance on the FICO score system has been criticized because it leaves many potential borrowers with thin or nonexistent credit files. In fact, a CFPB report found that “Blacks and Hispanics are more likely than Whites or Asians to be credit invisible or to have unscored credit records” even though many of these consumers might reliably make payments and should have better access to credit.
Regulators are watching, however, whether AI-driven models bake a bias into their formulas that can marginalize certain groups of people. Concerns have been raised around “educational redlining” and how using aspects of education data for credit decisions could have a disparate impact on underrepresented communities.
The pandemic has been the first real test for many of these new AI models, but whether they have been accurately predicting credit risk is clouded by the presence of significant government assistance to consumers during the pandemic period. Many of these models and their assumptions may soon be tested again if the economy turns.
Transparency: The Consumer’s Advantage
The acceptance of online shopping has commoditized the auto dealer to some extent, as consumers can locate their preferred vehicle and purchase anywhere in the United States. Fintechs have focused on facilitating the process, creating price comparison tools and platforms that allow borrowers transparency into lending options.
Some platforms even allow borrowers to see real-time dealer inventory (critical in this moment of supply chain issues) and adjust the lending terms to suit their price sensitivity (allowing for adding in insurance or supporting product).
With a platform like Upstart’s Auto Retail, customers working with a dealership can submit an application to various lenders on the platform and tailor their request to their needs. In turn, lenders who may not have forged independent relationships with dealers may get a chance to access dealerships (and therefore customers) they may not otherwise have reached on their own without the platform. Michia Rohrssen, VP and GM at Upstart also notes that “dealers cannot mark-up Upstart loans so the buy rate is the sell rate. But with Upstart’s better underwriting they can still make a deal that is financially beneficial to consumer and dealer.” Upstart is also developing a software product that allows dealerships to sell directly from the manufacturer with the consumer getting to create a “direct-build” vehicle meeting that consumer’s specifications.
Fintech’s impact is being felt well past the sale and initial financing. With an auto refinance platform like Caribou’s (available directly through their website or on a comparison platform like SoFi’s Lantern), borrowers can see what their refinance options would be and choose the most cost-effective deal. Such new technology has required educating consumers on its benefits. As Kevin Bennett, Caribou’s CEO notes, “A lot of folks aren’t aware that they can refinance their car, as they can their mortgage, but we can show them it’s possible to save money on their largest or second largest asset.”
Beyond gaining awareness, the new technology must deliver on its promises. Here, Bennett notes, “historically the process has been difficult for consumers with trips to the DMV or bank branch, but we’re leveraging technology and scale to make it easy.”
As demonstrated by Caribou hitting a $1.1b valuation in its recent financing, the relationship with the consumer post-closing presents even more opportunity for Fintech to shape markets for ancillary services.
Speed and Efficiency
A challenge for Fintech in the auto space is that when it comes to online shopping customers have become accustomed to instant transactions. If a vehicle purchase or financing takes multiple interactions or if at any point the consumer meets resistance, they might walk away altogether.
Several Fintechs are addressing the issue, focusing on making the process seamless and flexible for the consumer (which helps the dealership and the lender to get deals done). For example, TransUnion’s digital retail platform, Auto Payment Shopper, provides consumers with real-time inventory on vehicles. They can filter the selection based on the vehicles for which they have been pre-qualified. Pre-qualification also allows borrowers of all credit levels to realistically and positively see their options.
These products are designed to move the process along as quickly as possible. One AI-based car insurance comparison app claims its car insurance process takes only 45 seconds and that it has reduced the auto refinance process from 19 days to less than 48 hours.
The reality is that many Fintech product offerings are meant to be used in conjunction with dealerships and not in competition with them. For instance, the TransUnion platform and another from Carsaver/CUNA Mutual Group “show interest rates incorporating dealer reserve, not buy rates, and also allow customers to shop and select a dealership's F&I products.”
Even mainstream lenders are using Fintech products to speed up their loan processing. Ally Financial uses Informed.IQ’s AI product to verify identity, employment and income. The pandemic has spurred the use of e-contracts and e-signatures in auto transactions, further moving the process along.
Fintech has also helped to decrease fraud. Many finance companies and auto lenders rely on Point Predictive’s AI product, Auto Fraud Manager, to address fraud. Using data from a consortium of auto lenders, it can generate a fraud risk score for an auto loan application. Point Predictive has been able to identify fake employers, forged paystubs and falsified information submitted in loan applications. By using machine learning, anti-fraud programs can recognize questionable patterns in large volumes of data.
In this moment of rising consumer costs and looming recession, Fintech is playing a vital role in helping to facilitate faster, more efficient transactions. As Rohrssen notes, “It’s critical to take costs out of the system and provide consumers with more information and options than they’ve had historically. Better decision-making can be an offset to higher vehicle prices and lack of vehicle supply.” Similarly, Bennett advises that “rising interest rates don’t have the same effect with autos as they do with mortgages. Inefficiencies in traditional auto financing at the point of purchase mean refinancing remains a major cost savings for consumers.” If you’d like to learn more about Fintech’s disruption of auto finance and hear Bennett and Rohrssen speak further on even greater transformation to come, please join us at Fintech Nexus (formerly LendIt Fintech) on May 26th, where I will be moderating a panel discussion with these two leaders who are changing the way auto finance is done.
Nicole Serratore, an attorney in the Insolvency + Finance Practice Group of Davis+Gilbert, assisted with this post.