By John Flynn, Open Lending President & CEO
As we enter 2020, we’re still dealing with many of the challenges of 2019 in auto financing. The statistics are well known- auto loans are a $1.1 trillion dollar business with delinquencies and loan values rising and loan terms increasing. Add to this auto sales flattening, growing used auto sales, regulatory requirements, economic uncertainty and changing customer behavior, so how should financial institutions function in the auto loan market?
Diversify Your Portfolio
Balance your institution’s risk and reward in its auto loan portfolio. Not only with vehicle types (SUV vs. passenger vehicle, new vs. used, etc.), but also balancing your portfolio across credit scores. While lower credit score customers will generate greater returns, the risk is also increased. Diversifying risk may include a solid base of prime and super prime loans, or alternative data and default insurance, such as that provided by Open Lending.
Processes and Compliance
Ensure your financial institution has the processes in place to ensure efficient evaluation of loan applications to better serve borrowers and keep your institution safe and sound. Strong processes will not only speed up the loan application process, but it will support and strengthen your compliance stance. Capture the right data just once from the applicant, and then reusing it whenever possible throughout the process will save time on data re-entry and prevent unnecessary errors.
Optical Character Recognition, or OCR, software, machine learning and AI were all huge topics of discussion in 2019, and they’ll continue to be so in 2020. Make sure your solutions leverage tech to not only make it easy for customers to enter data (i.e. taking a picture of a driver’s license populates name, address, phone number), but also minimize errors. Leveraging digital technology also minimizes the need for your employees to enter repetitive data into electronic systems, limiting the likelihood of input errors.
Data is extremely valuable in the 21st century. While you’ll need to easily share data between your systems and partner systems, ensure that everyone is compliant with standards and regulations. SOC Compliance and PCI standards are there to protect both financial institutions and consumers. Ensure your partners are compliant as well. Continually test systems, especially after updates in your or partner networks.
Consumer shopping behaviors are rapidly changing. The Financial Brand pointed out several disruptive companies and customer trends to be wary of in the coming year. For example, companies, such as Carvana, which sold almost 100,000 vehicles in 2018, not only leverage their website to sell vehicles, but also offer a single-stop shop to consumers for originating loans.
While millennials are buying more cars these days, it’s also important not to forsake older consumers. These buyers typically buy higher-priced vehicles and are lower risks due to their established credit.
Build Your Own Solution vs. Partnering
With the digital revolution, it’s become significantly more complex for retail financial institutions to compete. Taking your institution’s resources into consideration, outsourcing for specialization in auto lending, and particularly, nonprime auto lending, may be your key to success. The right partner will not only support your goals, but also will be able to provide solutions that check the boxes for regulatory compliance, security, customer understanding, and the right technology. Partner solutions, like Lenders Protection from Open Lending can be customized to meet your financial and consumer reach goals, as well as helping to ensure safety, soundness and compliance in your programs.