Back to ownership: How the pandemic changed mobility

Cars lined up at stoplights or on highways, packed subways, people on sidewalks waving down rides: Until March 2020, these sights were commonplace. When the COVID-19 pandemic hit the U.S., transportation changed. Cities went on lockdown, residents were forced to stay indoors for weeks, and social distancing rules became the norm across the country.

As the U.S. braces for a potential second wave of national lockdowns, personal vehicle ownership has become more important than ever for consumers who place extra emphasis on being mobile. Couple this with the recent exodus from major metropolitan areas amid new work-from-home freedoms, and consumer mobility habits and desires are sure to remain changed into the near future. This is especially true as COVID cases continue to rise while the nation awaits widespread inoculation.

Consumers shifted back to ownership in 2020 as alternatives such as rideshare services and  public transit became risky. “[COVID] is a paradigm-shifting event, and now personal transportation, whether you own it or you rent it, is going to be a thing for some time,” Brian Allan, senior vice president of strategic partnerships at HyreCar, told Auto Finance News.

I’ll drive, thanks

Car ownership has become more enticing as people spend less on gas and parking in a work-from-home world, Allan said. “Car dealers, especially in metropolitan areas, have really done well as people who didn’t own a car now are buying new and used cars,” he said.

Lenders such as Chase Auto, Capital One Auto Finance and Ally Financial saw increased originations in the third quarter of 2020, and sales of new and used cars are expected to continue their success this year. Auto originations are projected to jump 8% year over year, an addition of 6.85 million new accounts, in the first quarter. By the second quarter, 7.4 million new accounts are projected, an increase of 14.6% YoY, according to TransUnion’s 2021 consumer credit forecast.

Still, the makeup of vehicle ownership is currently reflecting lenders’ cautious underwriting standards. Lenders are leaning more toward the prime consumer, and those consumers are taking out longer-term loans.

In fact, the share of subprime financing for new and used vehicles fell 170 basis points YoY to 16.6%, nearly reaching Great Recession lows. Share of deep subprime continued a multiyear decline and reached a record low in the third quarter, falling 109 bps YoY to 2.63%, said Melinda Zabritski, senior director of automotive financial services for Experian. Auto loans are expected in 2021 to continue favoring the prime and above prime risk tiers, Matt Komos, TransUnion’s vice president of research and consulting, told AFN.

With more people owning cars, the need for ride-share services has declined. Ride-hailing had been growing in popularity the last few years as a viable option for transportation without ownership, especially among younger generations and city dwellers. However, as consumers moved away from ride-sharing and ride-hailing amid virus concerns, companies like Lyft and Uber saw their mobility revenue shrink.

At Lyft, the number of active riders in the third quarter declined 44% YoY to 12.5 million, and the company logged a 48% YoY decrease in revenue to $499.7 million. Similarly, Uber’s number of monthly unique consumers requesting a ride or delivery declined 24% YoY in the third quarter to 78 million, according to the company’s earnings report. Mobility revenue declined 53% YoY to $1.4 billion. By contrast, delivery revenue grew 125% YoY to $1.5 billion.

Ride-sharing and -hailing providers have pivoted to delivery as fewer people hit the road and more consumers look for groceries and meals to arrive at their front door.

“Consumers are quickly becoming accustomed to the magic of having anything delivered to the door in half an hour, much like the magic of having a car show up in a few minutes,” Uber Chief Executive Dara Khosrowshahi said on the third-quarter earnings call.

Delivery has been the savior for companies like HyreCar, Uber, Lyft and rental companies who traditionally have relied on business travel, Allan added. “That new opportunity has exponentially increased, especially with these strict lockdowns,” he said. “This has been the bright spot that’s keeping them going.”

Ride-hailing, though, is crawling back. Uber and Lyft saw a slight increase in bookings in the third quarter. Active riders on Lyft’s platform increased by 44% from the second quarter, and similarly Uber saw the company’s number of monthly users increase by 42% on a sequential basis.

Despite the pandemic setbacks, these companies still believe ride-hailing has an important part to play in mobility and car ownership, Lyft Chief Executive Logan Green said on the third-quarter earnings call. “Each generation after the next is less interested in getting their license. They’re less interested in owning a car. We think all of those structural elements to our industry will continue playing out,” Green said.

Still, many in the industry believe that consumer adoption will not return to pre-pandemic levels.

Ride-hailing is likely to recover to about 70% of where it was pre-COVID, largely due to consumers returning to restaurants, bars and other activities that promote not having to drive a car, Allan said. “We will get a good recovery from ride-hailing, because of all the reasons that ride-hailing was used before the pandemic,” he said. “It’s not going to return to 100%.”

Buy, not lease

OEMs, for one, are helping usher along consumers’ increased desire for personal mobility with subvented financing rates, a trend widely acknowledged to have helped car sales post an unexpected recovery. In fact, dealership shutdowns in March and April 2020 spurred automakers to encourage demand by offering 0% financing and 72- and 84-month loan terms, Eric Lyman, chief industry analyst for TrueCar ALG, told AFN. That, in turn, has pushed the demand for leasing down, he said.

“It significantly changed the monthly payment premium between lease and loan,” Lyman said. “When you shift incentive spending into the financing channel, it’s only natural that leasing is going to suffer.”

In Q3 2020, the percentage of new vehicles leased declined year-over-year to 26.2% from 30.3% as consumers moved away from leasing, Experian’s Zabritski said during a Dec. 3, 2020 finance market report webcast.

This decline is a break from the norm, as leasing has been growing in popularity for the last 10 years as customers recognize it as a viable alternative to traditional ownership, Lyman said.

Leasing trends are shifting, largely due to a decrease in how often consumers are using their cars, resulting in a larger market share of shorter-mileage options. From the start of the pandemic, as commuters moved to home offices, the industry saw about a 5% shift between 36-month leases with 10,000 and 12,000 miles per year, J.D. Power’s Srini Rajagopalan, head of East Coast consulting operations, told AFN in November.

In October, 10,000-mile leases accounted for about 40.2% of total U.S. leases and 12,000-mile leases accounted for 39.9%, Rajagopalan said. Back in February, 12,000-mile leases were preferred.

By comparison, 36-month leases with 7,500 miles per year made up about 5% of all U.S. leases at the time, with 15,000-mile leases making up the lion’s share. Still, leasing is likely to bounce back to pre-COVID levels later this year as automakers reduce incentives amid improving inventory and car sales, Lyman said. “Leasing is still a viable option in the marketplace. There’s no reason to assume that consumers aren’t going to want that option going forward like they have in the last few years,” he noted.

To subscribe, or not to subscribe

Prior to the pandemic, subscription services were expected to shake up ownership models as consumers increasingly ditched the long-term commitment associated with an auto loan or lease, especially in larger urban areas.

Traditionally, subscription programs have focused on low commitment, bundled products that allow consumers the flexibility to hop from one model to the next. But, at times, that convenience came with a price tag. Mercedes-Benz, for example, launched a new option in its Mercedes-Benz Collection late February last year as a fourth tier of its high-end subscription service that consisted exclusively of its luxury AMG model. Monthly payments started at a staggering $3,595.

That product has since been discontinued. The German automaker ended its two-year subscription program in July due to low demand, according to a company release. Prices for that service started at $1,095 per month.

Still, subscription services are not going by the wayside. Rather, the face of subscription is changing.

Cue Scott Painter’s latest initiative, fintech NextCar, a subscription service that allows users to pay a monthly usage fee on used vehicles. The model connects prospective vehicle buyers with subscription options at the dealership with alternative models of ownership and offers instant verification. Painter is a founder and former chief executive of subscription service and leasing app Fair.

Aside from the hefty ticket price, subscriptions on new cars suffer from depreciation, which is not an issue for used vehicles, Painter told AFN. Subscription models on used cars can be beneficial to both auto dealers and companies that make the programs possible with instant-verification technology.

“Subscriptions are inevitable. As cars become more connected, more autonomous, and electric, the notion of mobility-on-demand is going to be everywhere,” Painter said. “Subscriptions are the perfect business model to create shorter-term access to mobility.”

Already, auto financiers are taking note. On Dec. 17, Westlake Financial Services and NextCar signed a letter of intent to form a partnership through which Westlake will provide NextCar a $400 million debt facility to purchase the vehicles consumers take out under subscription, Painter said. NextCar will keep the asset on its balance sheet and resell it back to the dealer when the subscription terminates. He noted that this structure allows NextCar to provide appealing flexibility to consumers.

NextCar aims to help subscription service providers like Fair — as well as dealers — create profitable programs, Painter said.

In the end, subscriptions offer a path to mobility, especially in our current economic climate, HyreCar’s Allan said. “It’s going to be an opportunity — unemployed people who won’t be able to buy a car will be able to subscribe to a car,” he said. “[Fair] is doing really well because they offer, in essence, a monthly lease for payments that are lower than a purchase, and they’re not asking the customer for a commitment.”

Mobility and vehicle ownership, whether through traditional installment contracts, leases or other alternatives like subscription services, remains a top priority for U.S. consumers. And traditional ownership is poised to be stronger than ever, despite any resurgence of ride-hailing or subscription services the future may bring.

AI-powered asset management fintech Pagaya entered auto in December through a partnership with Flagship Credit Acceptance and Foursight Capital to purchase loans underwritten using its technology, and the company sees immense opportunity in the space.

“Mobility is key in the economic well-being of consumers,” said Robert McDonald, Pagaya’s general manager of auto finance. “There are a number of studies that tell you that to really benefit in an upward trajectory from an economic standpoint as a consumer, mobility is a key element, and quite frankly, I think the pandemic put a great spotlight on it.

“The pandemic also showed that shared resources, at times, may not be in the best interest of overall health and safety,” McDonald said. “This is where you’ve seen used-car demand pick up, new-car demand pick up. You’ve seen movement out of urban centers to suburban outskirts which, quite frankly, reinforces the need for vehicle ownership.”

“Is that a temporary phenomenon, or a permanent phenomenon?” McDonald said. “Time will tell.”

Auto Finance Innovation Summit, the premier event for technology in auto finance, returns March 16-17, 2021, as a virtual experience. The virtual experience will offer the quality networking and education of past events, all through an online platform. To learn more about the 2021 event and register, visit www.AutoFinanceInnovation.com.