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June 17, 2020

The auto finance industry, which for a long time had been on cruise control, has of late been passing through speed bumps, and now with the COVID-19 situation, the industry has almost come to a screeching halt. How does the road ahead look, specifically for the personal use segment? Certainly, it will be an unknow terrain for the industry and the route companies take will depend on the ‘driving’ conditions – duration of the pandemic, extent of damage to the economy, the speed of recovery, and most importantly, consumer behavior post the crisis.

As of today, we can see caution signs and perhaps a few detours, which are:

Demand-side challenges

  • The uncertainty around income and employment will force consumers to postpone new car purchase or lease.
  • OEMs will delay new product launches due to supply chain disruption and lower demand perception, forcing consumers who are relatively less financially impacted to postpone their buying decision.
  • Social distancing and work-from-home norms will reduce the need to be mobile and hence reduce the demand for cars on the whole.
  • Fleet and rental companies have surplus cars and their demand for new cars will also remain subdued.

Liquidity constraints

Apart from lower demand for auto financing, we also see liquidity crunch at the auto financiers’ end due to the moratorium offered to existing borrowers or lessees. Many auto lenders have a significant portion of subprime loans in their portfolio and will have to deal with defaults and loan losses that are more likely to arise. Auto lenders who have issued asset-backed securities have been struck with a double-body blow. While on one hand, with the investors offloading the bonds, auto finance companies will find it difficult to issue new bonds constraining their funding; on the other, many auto financiers must continue servicing their investors despite not receiving payments on the underlying loans.

But, as all clouds have a silver lining, there is some hope for the industry – we do see a few opportunities shaping up for auto financiers. Expiring leases present an opportunity for extension or renewal. In an attempt to weather lower fresh sales, offers to incentivize customers will lead to rise in personal contract financing. Social distancing standards will drive the need for independent personal mobility. Customers who were using ride-shares and public transportation will likely switch to personal transport. This will increase the demand for cars, specifically the small cost-effective yet fuel-efficient ones.

OEMs and dealers are staring at a large inventory across segments. Mounting pressure to clear the inventory will result in deep discounts, bundling of services or OEM-driven moratoriums. This can lead to increased opportunity to finance customers with stable income.

The road ahead will be a mix of rough terrain and freeways – lenders need to be flexible to adapt to the situation and switch to the appropriate drive mode:

‘Economy mode’ in challenging times

  • Reduce costs and effort by enabling auto lenders to restructure lease contracts digitally, offer flexible payment option though digital channels, and offer digital grounding and end of term functions
  • Reduce onboarding costs with identity verification through face recognition and motion analytics
  • Analytics for efficient underwriting process 

‘Sports mode’ to tap growth opportunities when the market responds

  • Enable digital channels and tools for the customers to interact with virtual advisors who can assist customers with their queries
  • Leverage gamification, virtual show rooms, digital reality to bring the dealer showrooms to customers’ homes
  • Digital origination, e-contracting to enable end-to-end car buying process completely online

‘Off road mode’ to explore new opportunities

Post the pandemic, we are looking at a new beginning that will open up new avenues and call for adopting new business models. For example, auto lenders could expand their role from being mere financiers to complete mobility solution providers. In addition to provide financing facility, they could also explore other modes of car usage like rentals and subscriptions by partaking in an ecosystem of sorts. Another opportunity could be brought about with the shift to electric and autonomous cars. It would not be sufficient for auto lenders to merely finance electric cars; they could also explore new usership models by providing an ecosystem of energy companies providing charging station facilities, battery leasing models, sharing or utilization platform, enabling green technology, and so on. 

Buckle up for the drive ahead

The road ahead for auto lenders looks hazy at this point in time. The COVID –19 crisis is set to change consumer behavior drastically, and that means, paradigm shifts in business models across industries. The way auto lenders chooses to respond to the challenges and opportunities presented by the prevailing crisis will determine their success in the short, medium, and longer term. Auto lenders will need to manage and mitigate known and unknown risks by keeping customers at the center of their strategies and build resilient operations to drive those. They will need to invest in innovation that is purpose-driven and aligns with the changing customer behavior, industry dynamics, and sustainability goals. The road ahead is exciting for sure; selecting the right drive mode and having the right driving and navigation skill will ensure a profitable sustenance for auto lenders.

Harish Kumar Dhilip Kumar is a functional consultant with TCS' Banking, Financial Services, and Insurance (BFSI) business unit. He has more than 12 years of experience with expertise in the commercial and consumer lending space. Kumar has previously worked with leading multinational banks in lending domain. He has an MBA in Operations and Analytics from the Great Lakes Institute of Management, Chennai, India, and a Bachelor's degree in Industrial Engineering from the University of Kerala, India.


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