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  1. Analysis
July 25, 2022

Fintech’s path to automation and decisioning

The evolving automotive retail landscape is changing, prompting financial directors and their teams to leverage new technologies that improve their automation and decisioning, writes Darren Greenyer, director of Aryza Lending Solutions. 

Despite many automotive dealers hoping for a more positive year in 2022, soaring inflation and the ongoing cost of living crisis are a poignant reminder that there may be some challenging years ahead for the motor finance sector.

The past three years have presented an incredibly challenging financial environment for most, if not all, UK industries and individuals alike.

Darren Greenyer

According to the Office for National Statistics, consumer price inflation has sharply risen in recent months, increasing by nearly 10 per cent over the last year – with inflation largely driven by the rising costs of food, transport and housing, water, electricity, gas and other fuels. As a result, around 60 per cent of adults report spending less on non-essential items as a means of budgeting and coping with the crisis. 

For the motor industry specifically, global supply chain issues have seen the wholesale price of crude oil rise at an exponential rate, driving up the cost of petrol and diesel for both consumers and suppliers. 

The global semiconductor chip shortage has and will continue to make a serious dent in the vehicle supply chain, seriously damaging British car sales throughout this year and next. 

With the average vehicle requiring between 1,500 and 3,000 semiconductor chips, used in everything from power steering to brake sensors and entertainment systems – the worldwide shortage has led to many manufacturers cutting or suspending production, in turn pushing up the prices of both new and used cars amid demand shortages. 

To add to this, a recent report from the UK Parliament’s Public Accounts Committee points to a clear increase in costs, paperwork, and border delays for UK businesses since Brexit. International shipping has never been a simple process, but with the Covid-19 pandemic impacts, fractured supply chains and Brexit complications, consumer trends are changing.

With drivers facing waits up to several months for a new car to be built and delivered, many are turning to the used and second-hand car market, purchasing vehicles without enduring the long lead times. 

However, now an appreciating asset, the increased demand for used cars is being met with supply limitations – particularly in areas with enforced Clean Air Zone and ULEZ regulations.

Loan-to-value challenges: automation and decisioning

There are two variables in any motor finance underwrite – the customer and the asset. Although the impacts of the cost-of-living crisis must be factored into stress testing, plenty of data is available on customers. By contrast, the asset is a far more turbulent variable.

With assets seeing inflated price increases, used car finance companies are, in theory at least, lending more. For example, if your policy is to lend at 75% Loan-to-Value (LTV), an asset worth £10,000 18 months ago would result in a loan of £7,500, whereas if it is now worth £15,000, that is a loan of £11,250.

While that is not an issue if the customer can afford it, complications arise if used car prices crash, suddenly devaluing and reducing the asset’s value, and the loan-to-value instantly increases.

Using the £15,000 example, with an LTV lend of £11,250, if the price of the vehicle drops by 20% the asset is now worth £12,000 but you have lent £11,250 – your LTV is now 94%. 

Customers getting into payment difficulties is unfortunately an increasingly likely outcome in today’s economic environment, meaning that automotive used car finance companies’ risk of making a loss, as a result of the recoverable asset being worth less, significantly increases.

Despite the growing complications for both the new and used car markets, new figures released by the Finance & Leasing Association (FLA) revealed that in the first four months of 2022, consumer car finance new business volumes have grown 15 per cent higher than the same period last year.

In the first four months of 2022, the latest reports found new business volumes in the consumer new car finance market were 15 per cent higher than the previous year, and 20 per cent higher in the consumer used car finance market.

To compete in this unique and rapidly-shifting retail landscape, dealership financial directors are looking toward consumer-focused digital systems – placing their customers at the heart of the purchasing model while delivering bespoke customer services.

Innovation: automation and decisioning

The automotive industry continues to deliver advances in innovation and digital services, with huge amounts of focus being placed on marketing and sales departments. In recent years, the car buying process has been analysed and adapted, accelerating the adoption of online capabilities to keep up with changing consumer buying habits.

While many assume that maintaining strong customer relationships falls to the marketing and sales team, the payment processes, lending and affordability checks are of equal importance – and, despite rapid innovations in other parts of the business, a vast number of a dealership’s auto finance remains off-line – paper-based and manual.

Meanwhile, driven both by the increasing number of millennial and Gen-Z buyers and by the day-to-day ease of digital interactions, consumer expectations are changing. 

Young, tech-savvy buyers are shifting the location where major financial decisions are made. The growth of fintech capability, and availability, means consumers expect to manage their finances from the palm of their hand. According to EY, potential car buyers are increasingly keen to avoid in-person financial admin, with two-thirds of consumers saying they’d prefer to secure financing online.

Automating the auto finance loan process and embracing fintech is one way that dealers can begin implementing widespread digital transformation, and maintain strong financial performance while providing customer satisfaction.

Bespoke solutions

From acquisition and selecting the right plan through to ongoing lending book management, and dealing with payment plans and arrears strategies, all stages of the customer journey can be efficiently improved by end-to-end, highly configurable solutions. 

The auto finance space offers an opportunity for both dealers and lenders to leverage technology, usher in a new era of financial transparency and turn their financing experience into a competitive advantage.

UK used car prices record sixth consecutive monthly fall in 2022

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