Sometimes you have to get a “maybe” before you get a “yes”. It’s about the long road to acceptance of new methods in well-established markets with well-rehearsed channels and dominant players. Auto finance presented such a challenge, but ultimately fintech made inroads. Below, we look at how Fintech is disrupting auto financing and refinancing and transforming the market in several areas, including access to credit, speed and efficiency of transactions, and transparency.
Creditworthiness redefined
Underwriting is a key area that is getting a facelift as fintechs use artificial intelligence (AI) and alternative data to qualify borrowers. By integrating non-traditional payment data (such as bank account/cash flow, lease payment history, professional licenses, or education information) into the underwriting decision, lenders are able to Assess risk more accurately and, in turn, borrowers can get a better deal on the rate.
The expansion of credit to underserved communities has been an added benefit of fintech entering the automotive space. Addiction to FICO scoring system has been criticized for leaving many potential borrowers with thin or no credit records. In fact, a CFPB report found that “Blacks and Hispanics are more likely than Whites or Asians to be credit blind or to have unrated credit histories,” even though many of these consumers could make payments reliably and should have better access to credit.
However, regulators are monitoring whether AI-based models introduce a bias into their formulas that could marginalize certain groups of people. Concerns have been raised around “educational redlining” and how using certain aspects of education data for credit decisions could have a disparate impact on underrepresented communities.
The pandemic was the first real test for many of these new AI models, but whether they accurately predicted credit risk is clouded by the presence of significant government consumer assistance during the pandemic. pandemic period. Many of these models and their assumptions could soon be tested again if the economy turns.
Transparency: the consumer’s advantage
The acceptance of online shopping has, to some extent, commoditized the auto dealership, as consumers can locate their favorite vehicle and purchase it anywhere in the United States. Fintechs have focused on making the process easier, creating price comparison tools and platforms that allow borrowers to have transparency on lending options.
Some platforms even allow borrowers to see dealer inventory in real time (essential at this time of supply chain issues) and adjust loan terms based on their price sensitivity (allowing to add a insurance or support product).
With a platform like Upstart Automotive retail, customers working with a dealership can apply to different lenders on the platform and tailor their application to their needs. In turn, lenders who may not have established independent relationships with dealers may have the ability to access dealers (and therefore customers) that they may not have reached through themselves without the platform. Michia Rohrssen, vice president and general manager of Upstart, also notes that “dealers cannot markup Upstart loans, so the buy rate is the sell rate. But with the best underwriting of Upstart, they can still make a financially beneficial deal for the consumer and the dealer.” Upstart is also developing a software product that allows dealers to sell directly from the manufacturer, with the consumer being able to create a “direct build” vehicle to that consumer’s specifications.
Fintech’s impact is felt long after the initial sale and funding. With an automotive refinancing platform like Caribou(available directly on their website or on a comparison platform like SoFi’s Lantern), borrowers can see what their refinancing options would be and choose the most profitable offer. This new technology has required educating consumers about its benefits. As Kevin Bennett, CEO of Caribou, notes, “A lot of people don’t know they can refinance their car, like they can their mortgage, but we can show them that it’s possible to save money on their biggest or second biggest asset.”
Beyond raising awareness, new technology must keep its promises. Here, notes Bennett, “historically the process has been difficult for consumers going to the DMV or the bank branch, but we’re leveraging technology and scale to make it easy.”
As demonstrated by Caribou which reached a valuation of $1.1 billion in its recent financing, the post-closing consumer relationship presents even more opportunities for Fintech to shape ancillary services markets.
Speed and efficiency
A challenge for Fintech in the automotive space is that when it comes to shopping online, customers have become accustomed to instant transactions. If buying or financing a vehicle requires multiple interactions or if at any time the consumer encounters resistance, they may walk away altogether.
Several fintechs are tackling the problem, working to make the process transparent and flexible for the consumer (which helps the dealer and lender close deals). For example, TransUnion digital retail platform, Auto Payment Shopper, provides consumers with real-time vehicle inventory. They can filter the selection based on the vehicles they have been prequalified for. Prequalification also allows borrowers of all credit levels to see their options in a realistic and positive way.
These products are designed to move the process forward as quickly as possible. AI-powered car insurance comparison app claims its car insurance process only takes 45 seconds and that it reduced the auto refinance process from 19 days to less than 48 hours.
The reality is that many fintech product offerings are intended to be used in conjunction with dealers, not in competition with them. For example, the TransUnion platform and another of Carsaver/CUNA Mutual Group “post interest rates incorporating the dealer’s reservenot buy fares, and also allow customers to shop and select F&I products from a dealership. »
Even traditional lenders are using Fintech products to speed up their loan processing. Ally Financial uses Informed.IQ’s artificial intelligence product to verify identity, employment and income. The pandemic has spurred the use of electronic contracts and electronic signatures in automatic transactions, moving the process forward.
Fraud prevention
Fintech has also helped reduce fraud. Many auto finance companies and lenders rely on Point Predictive’s AI product, Auto Cheat Manager, to combat fraud. Using data from a consortium of auto lenders, it can generate a fraud risk score for an auto loan application. Point Predictive was able to identify fake employers, false payslips and falsified information provided in loan applications. By using machine learning, anti-fraud programs can recognize questionable patterns in large volumes of data.
Look forward
In this time of rising consumer costs and impending recession, Fintech is playing a vital role in helping to facilitate faster and more efficient transactions. As Rohrssen notes, “It’s essential to reduce system costs and provide consumers with more information and options than they had before. Better decision-making can offset rising vehicle prices. and lack of vehicle supply.” Similarly, Bennett says, “Rising interest rates don’t have the same effect on automobiles as they do on mortgages. The inefficiencies of traditional point-of-sale auto financing mean that refinancing remains a major savings for consumers.” “. If you want to learn more about the Fintech disruption of auto finance and hear Bennett and Rohrssen talk more about an even bigger transformation to come, please join us on Nexus Fintech (formerly LendIt Fintech) on May 26, where I will be hosting a panel discussion with these two leaders who are changing the way auto finance is done.
Nicole Serratore, an associate in Davis+Gilbert’s Insolvency + Finance practice group, contributed to this post.
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