The coronavirus pandemic may be the catalyst that spurs lenders to dive into the untapped ocean of digital financing in a sink-or-swim scenario that could change the face of the industry.
When the coronavirus pandemic hit the United States in March, auto dealerships and manufacturing plants abruptly closed and digital platforms became the only medium available for dealer-customer interaction. Consumers wanting cars looked online and, while dealerships have been improving their digital products for years, COVID-19 has highlighted how this improvement is still lacking and how digital trends could forever change the customer-dealer-lender dynamic.
An ocean of potential
E-commerce auto sales account for less than 1% of all vehicle sales, but that could change as 97% of customers now research their vehicle purchases online. In fact, customers spend 60% of their car shopping experience time online, according to online used-car retailer Shift’s June investor presentation. Shift plans to go public through a reverse IPO process, in which Insurance Acquisition Corp. will formally acquire Shift in the third quarter.
When stores closed and dealerships shut down during the pandemic, it’s no surprise customers began to shift to online vehicle purchases, just as they’d done for other goods and services, such as clothes and groceries. Consumers spent $146.5 billion online with U.S. retailers in the first quarter, up 14.5% from the same period in 2019, and online sales are expected to grow in the second quarter as the pandemic continued, according to the most recent data tracked through March 31 from the U.S. Department of Commerce.
A Cox Automotive COVID-19 Impact Study found that 43% of people who bought cars since mid-March completed more steps online than in the past, and 71% of people who intend to buy a car want to do more of the process digitally compared with their last purchase. The study surveyed thousands of automotive dealers and U.S. consumers in March and April.
“With the right digital retailing solutions in place, lenders — including credit unions — can enable a digital browsing experience that can take a casual shopper and turn them into a pre-approved, contract-ready buyer for their dealer partners,” Tracy Fred, vice president of operations and CRM sales and service for Cox Automotive’s Dealer Software Solutions, told Auto Finance News.
Customers have for years been migrating toward online car buying as new tools emerged to make it easier to conduct their own research and make quicker decisions. The pandemic has sharpened that desire, forcing dealers and lenders who did not offer online shopping tools to embrace the digital world.
According to Autotrader’s April COVID-19 digital shopping study, “consumers have always wanted quicker interactions during their automotive experience, and now, with more online tools available to them such as scheduled test drives, pick-up and delivery, their willingness to complete the entire vehicle purchase online is accelerating exponentially.”
That acceleration should benefit online car retailers, such as Shift, Vroom and Carvana, which are all poised to capitalize on a pandemic-spurred increase in digital shopping. Shift sales were climbing back to pre-COVID levels in May with 683 units sold — close to the 698 units in February — after having fallen to 524 units in March and 508 units in April, according to the investor presentation. Shift saw a 75% year-over-year increase in F&I revenue in May to an average of $850 per vehicle.
Off to the races
The burst of online car sales seen during the pandemic isn’t expected to slow down as customers move away from in-person interactions amid a summertime rise in new COVID-19 cases. Shift estimates total sales to grow 108% from $194 million in 2020 to $402 million in 2021, and up to $850 million by 2022, spurred mainly by e-commerce. Customers can use Shift’s website to obtain an instant quote, request inspection and reconditioning of the vehicle, schedule an at-home test drive and finance their purchase. “We’ve fundamentally redone the way we offer our core service,” said Chief Executive Toby Russell.
Vroom is also seeing growth, with the average number of unique visitors to the website per month more than doubling YoY in the first quarter to 947,014, according to the company’s May S-1 filing.
E-commerce has been the lifeguard rescuing sales since the start of the pandemic. Vroom’s vehicle e-commerce revenue clocked in at $225.6 million in the first quarter, a 155% increase compared with the same reporting period in 2019, and the total number of e-commerce units sold during the quarter grew by 149% YoY to 7,930 units. Vroom sold 2,880 units in April, up 3.9% month over month and up 145% YoY, largely due to a shift in consumers buying online versus in dealerships. The company did not disclose F&I numbers, but offers financing through partners, including Chase Auto – with which Vroom has a private label financing arrangement, called Vroom Financial Services powered by Chase – Santander Consumer USA, Capital One Auto Finance, Ally Financial and TD Bank.
“We anticipate that there will be enhanced opportunities arising from greater consumer acceptance of our business model as a result of the COVID-19 disruptions,” Vroom’s S-1 states. “In the post-pandemic environment, we expect to benefit from consumers’ increased desire for e-commerce solutions and contact-free delivery.”
Digital sales and financing are nothing new for many car retailers. Carvana has allowed customers to apply for financing completely online since 2013 and customers can get an estimated trade-in offer online, Director of Finance Matt Dundas told AFN.
“We believe the pandemic accelerated the trend toward more customers completing a vehicle purchase entirely online. Carvana has seen strong demand due the ability for customers to purchase a vehicle safely and easily from home with our Touchless Delivery experience,” Dundas said. “There is also feedback that consumers are reluctant to use public transportation and ride-sharing during the pandemic, and, for safety reasons, would prefer to own their own vehicle, which is increasing demand for used vehicles in the broader market.”
And it isn’t just online retailers who are embracing change amid the pandemic. General Motors is jumping into online sales with its Shop, Click and Drive program, allowing consumers to select a vehicle, estimate trade-in values, set up financing or lease options, and set up delivery of the car to their home or to a nearby showroom – all with a few clicks of a mouse. The program, however, is not managed through GM Financial, and a spokesperson with General Motors said the company does not comment on online buying services.
Time to sink or swim
While a move toward digital in the auto sales market has been slowly taking place for years, COVID-19 is hastening the change. During the pandemic, auto transactions beginning online spiked to 95%, up from their normal level of 80%, Martin Jenns, senior vice president for transformation with Assurant Global Automotive told AFN. As in-person sales return, Jenns said he expects online transactions to settle around 85%, pushing more dealers and lenders to enhance their digital experiences.
Assurant recently completed a study on the impact of COVID-19 on consumer behavior when it comes to purchasing cars online. The late-May survey garnered 951 participants from Assurant’s online community and found that “COVID is a catalyzing event for the digital experience,” Jenns said.
A growth in online car buying popularity is also evidenced in Google search trends. Searches for “online car buying” in mid-May were rated 92/100, in terms of level of interest, compared with searches for that term over a year period — and in mid-June they were rated at 100.
While dealers have increasingly added to their online capabilities, lenders aiming to remain current must follow suit. U.S. Bank, whose auto outstandings clocked in at $18.8 billion as of June 30, reported the amount of loan sales completed fully online grew to 46% in May, an 11% YoY increase, according to the company’s second-quarter earnings. The number of consumer transactions conducted on digital platforms also rose in May by 9% YoY to 76%, in part due to temporary branch closures and shelter-in-place orders, Chief Executive Andy Cecere said during the company’s earnings call. “We expect digital adoption by customers to stick even after the economy fully reopens,” he said.
The untapped online market presents vast potential for auto sales and financing. Of 25 auto lenders surveyed in mid-July by the digital document platform Lightico, 64% reported digital loan origination as their top future investment, and half said they are interested in offering remote origination and servicing options.
To survive the changing landscape, lenders must embrace the online market, either on their own or through partnerships with tech companies such as Lightico, said Brian Jones, chief executive of Gravity Lending, which offers automatic, digital refinancing for personal loans, including auto.
According to Jones, who participated in the Lightico study, generational changes hastened by the pandemic may harm lenders stuck with legacy platforms, as evidenced by a 300% increase in loan applications with Gravity since the pandemic started. “Consumers are not only willing to go the digital route, but it’s their preference and it’s only going to get more so,” he said.
As such, lenders must learn how best to present F&I products in a virtual platform and embrace the notion that customers will have to choose to buy the products versus being sold them in person, Assurant’s Jenns said.
“It’s a paradigm shift that is quite significant [and] clears the path for people to be more committed to engage with dealers in a virtual environment,” Jenns said.
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.