What’s luring fintechs into auto lending?

In the past month, fintechs Upgrade and Upstart announced plans to branch out from unsecured personal loans into auto finance, citing investment and growth opportunities in the auto lending space. Industry analysts believe that low regulatory compliance and the need to expand their credit offering to existing customers in order to turn a profit is making fintechs gravitate toward auto finance. Personal lenders entering the auto lending space is nothing new. Ally Financial , Lending Club and Prosper were the the first few fintechs to penetrate the auto lending market, according to Ashley Fickel, consumer financial services automotive industry litigator at Dykema , a law firm that serves financial institutions . “Despite economic uncertainty, auto lending is a robust space, which fintechs can serve very well,” Fickel said. “Consumers were getting auto financing online before as well, but the pandemic has accelerated the adoption of online auto lending.” A need to diversify With social distancing in place, people are looking to finance online rather than at dealerships. Two out of three people are more likely to buy vehicles online due to COVID-19 pandemic, according to a recent Autotrader study. “The rise of fintech came in the last financial crisis where they were able to serve the underbanked community at lower rates due to their cost-efficient tech platform,” Fickle said, adding that the COVID-19 pandemic will likely force many personal lenders to pivot and diversify their credit offerings to expand their businesses. While fintechs have created a huge borrower base over time, they are struggling to stay profitable and are now looking to monetize their platforms “by adding different lending categories,” said Rutger van Faassen, vice president of consumer lending at Informa Financial Intelligence . “Fintechs realized that unsecured lending wasn't sort of the end-all-be-all and they had to sort of diversify,” Van Faassen said. Fintechs have been looking for alternate lending verticals to penetrate as a way to offer more products like a “one stop shop” and create lifelong customers by tending to their credit needs, he added. Informa has been seeing in its data that “unsecured lending is down quite a bit, but auto lending is coming back quite dramatically since the end of the lockdown,” Van Faassen said. While diversifying credit offerings might be the next course of action for many fintechs, ascertaining which credit verticals to target will remain a challenge for them, according to Robert Savoie, a partner at McGlinchey , a law firm specializing in consumer financial services compliance . “The natural pivot for fintechs based on timing is when they have reached a point where they have maxed out their market share in unsecured personal loans,” Savoie said . “When they look to pivot into a new sector, direct auto secured lending makes a lot of sense due to the significant overlap of the regulatory framework between direct unsecured loans and direct auto secured loans, which necessarily requires fewer resources to develop as a second product as compared to other verticals, such as mortgages and student loans.” The Department of Education originates 90% of the student loans, giving the government complete control over all student loans and how they are administered, leaving little room for growth and real estate lending is “a highly competitive and regulated space,” Savoie said. A natural progression While a direct auto secured loan is secured by an asset, the vehicle itself, it’s not too different from a direct unsecured personal loan, at least when compared to more complex products, Savoie explained. “When you think about direct lending, in many cases, the laws that already govern the fintechs on a multistate basis are usually the same laws that will govern them for direct auto secured lending, with the primary differences being focused on the security interest and collateral recovery” Savoie said. “Moreover, a lot of fintechs have back-end banking partners, so they have a partner to share the regulatory burden.” For fintechs that do not originate loans themselves, “the synergy between direct unsecured loans and direct auto loans allows them to utilize much of the technology platform they have already built to facilitate loan originations without friction and at a lower cost,” Savoie said. “Which again makes it a more attractive credit vertical when compared to mortgage loans or open-end credit,” he added. With more fintechs entering the auto lending space, Van Faassen believes they will experience a sudden, but short-lived, boom in auto loan originations. “Auto lending is a very crowded space and the more fintech enters the space, the less market size they will be able to capture,” Van Faassen said. “To stay relevant, many fintechs have to look for other credit verticals, like insurance and health financing, to penetrate.” Auto Finance Summit, the premier industry event, returns October 20-22, 2020, as a virtual experience. The virtual experience will offer the same quality networking and education as past events, all through an online platform. To learn more about the 2020 event and register, visit www.AutoFinanceSummit.com .

What’s luring fintechs into auto lending?

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