The last half a decade has witnessed the evolution of payday lending from a marketplace ruled by old-school lenders into a space for promoting credit at lower cost from a fresh strain of technology and data-driven lenders. Like payday lending, which evolved to cater to the needs of the under-banked in a better manner, auto lending is also expected to change to fulfill the requirements of non-prime customers. Although the industry is large and growing, it is not so comfortable in terms of consumer financial experiences. New business models, technology and regulations signify a huge opportunity for entrepreneurial thinkers and incumbents to build a more competent and more transparent marketplace.
Five years down the line you may expect the following:
1. Fresh risk scoring technologies would bring down the price for the rates of the greatest subprime loan by 50%. The effects of machine learning, neural networks and big data are about to alter the rules prevalent in auto finance. Just take into account what Yodlee would be capable of doing for lenders (which it has already started to in the area of consumer finance), or how convenient access to payroll data, with the help of companies such as FairLoan, could affect the economics with respect to both the borrower and the lender.
2. Wal-Mart will become the largest auto financier of the nation. More or less every loan is made through the auto dealers. New categories of dealers would be available on the block, as has been seen in a number of other financial services. Organizations such as Wal-Mart, with Costco and Sears rapidly catching up, are all set to challenge the conventional distribution models pertaining to auto, and modulate the scale and mandate to opt for doing so at everyday low rates.
3. Repos to be reduced by 80% through enhanced loan servicing. Client engagement through social platforms would become the least of it, but significant. Cars would be like utilities capable of being shut off in case payments are excessively late, and with no remediation arrangement. Employment data and ongoing cash-flow analysis would offer lenders real-time information regarding job loss, along with the capability of developing a fresh payment plan before it gets too late.
4. Mutual consumption would impact loan terms in case of 10% of loans. There is no need to keep waiting for the self-directed Google car for letting the effects of the “shared economy” reach the domain of auto finance. Side-Car, Lyft, Uber, and others already offer superior means to distribute this major buy that spends 90% of the life parked, dormant. The world is solely a deal away with regards to lenders binding themselves within the payment platforms of Braintree and such others which render clients increased transparency and convenience along with low lender risk.
5. Cell phones would virtually inform every auto purchase. Consider that today we check with our cell phone regarding 80% of purchases, and that more than 10% of BHPH clients are super-prime and prime. As is the case in almost every other purchase, the Smartphone would bring down information asymmetries in this domain too.