The Million Dollar Answer
Incorporating technology can be complicated, so when lenders attempt to add systems to existing infrastructure to stay ahead of the curve, the question becomes: how. Lenders have the option to build technology internally, absorb a preestablished startup, or collaborate with another company.
There are players out there that are creating technologies that help enable lenders’ goals — helping consumers get loans, Western Funding’s Murray said. As such, the likelihood of more merger-and-acquisition activity will grow in the near term. “There will definitely be acquisition targets from deeper-pocketed institutions that are maybe a little slower to react [to technology disruption],” he said. “Most of the time, it’s easier to buy it than to make it. If [another company] did it and does it well — why not?”
To be certain, lenders can benefit from acquiring or creating their own unique technologies, Volvo Financial’s Atchley said. But, it’s important to recognize the limitations that come with those journeys.
“It’s nice to have other companies in the industry look at the same tech you’re working on and see the value you see,” Atchley said. “That validation is a big portion, but you can’t be unique at everything. We need these partners to help us build something that’s at the top and best-in-class.”
Startups typically crop up based upon an idea that new technology will better address a market need, and they often come with unique perspectives and approaches, Nottage said. Investing in these organizations means lenders are advocating those ideas and methods.
But lenders should also be wary about what that investment looks like — full-on absorption may cancel out the objective of the partnership, Nottage said.
“Acquisition often forces the startup to adapt to the parent, altering its operation and innovation roadmaps to meet the need of the parent,” he said. “It’s difficult for acquirers to leave an organization alone and let it run its course without influence — intentional or unintentional.”
Additionally, outright acquisitions tend to pose challenges. “A lot of times, there is a leadership struggle up top and there are questions about how to proceed as one entity,” Edmunds’ Acevedo said. Partnerships, however, are typically beneficial for all involved. “That’s a big part of this latest crop of partnerships and joint ventures — to key in on that flexibility to allow synergy between the companies,” he said.
Volvo Financial has seen the benefits from the collaborative approach via its innovation lab. “There’s just a shot of energy that goes into your organization working with these [fintech] entrepreneurs,” Atchley said. “You’re trying to drive innovation within the business while having the speed of time to prototype technology that you would actually put in front of customers. It’s much faster than what we’ve historically been able to generate on our own.”
The captive takes collaboration to another level by reaching out to other auto lenders to gain insights on tackling innovation, Atchley said. “Volvo Financial has extended invitations to companies in the industry [that are] trying to solve the exact same challenges we’re trying to solve,” he said.
“Some lenders have more experience running these accelerators. Even before we started this program, we spent a lot of time having those discussions and learning,” he added.
And while it remains unclear how deep collaboration between lenders will run, keeping an open mind will benefit the industry as a whole.
“What the industry is seeing as far as these partnerships is intelligent,” Acevedo said. “In terms of really partnering with companies that can stand up to the rising tide — it is going to be a challenging next few years in auto finance.”