Last week’s Auto Finance Innovation Summit brought the nation’s top lending and leasing executives together to discuss the changing role technology plays in the customer journey. And while many agreed that antiquated legacy systems pose a barrier to innovation, the increased use of data and analytics, connected car technology, and auto finance’s role in electric vehicle adoption present significant opportunities for the industry to leverage technology.
But how should lenders start thinking about EV batteries as they relate to residual values, and what barriers might auto financiers encounter as they try to leverage data and analytics? In this episode of the Weekly Wrap, Associate Editor Amanda Harris, Chief Executive JJ Hornblass and Editor Joey Pizzolato discuss last week’s top stories, and what’s in store for the coming week.
Auto Finance Risk Summit, the premier event for risk and compliance in auto finance, returns May 11-12, 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.AutoFinanceRiskSummit.com.
Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain.
Hi, everyone. I’m JJ Hornblass and welcome to the roadmap from auto finance news since 1996, the nation’s leading news source on automotive lending and leasing. This is our weekly wrap for what’s happening in auto finance for March 20 to 2021 for beginning a thanks to our advertisers Alfa, Dealertrack, defi Solutions, Market Scan, PointPredictive, State National, Strook and Strook and Lavan, and Westlake financial for their continuing support. Thank you to them. And a good day to Joey Pizzolato and Amanda Harris, from the auto finance news team, who will be joining us for this episode. First is some general economic news. us home sales fell 6.6% last month. As supply remain tight sales of previously owned homes slid in February, as the number of homes for sale held at an all time low, and home prices continued to climb. Federal Reserve Chairman Jerome Powell said today on Monday the 22nd that the US Central Bank is actively exploring the launch of a fully digital dollar. But that adoption, but he added that adoption of a digital dollar will require congressional support. And finally, the Federal Reserve said it was ending a year long reprieve that had eased capital requirements for big banks. Fridays decision means banks will lose the temporary ability to exclude treasuries and deposits held at Central Bank, from the lenders, so called supplementary leverage ratio. This will likely leave less money for lending and now to our lending market, which is the auto finance market. We had last week, our auto finance Innovation Summit. Both Amanda and Joey were active participants in presenting that to the industry. So thank you to both you did a wonderful job. I wanted to start by maybe for each of you to to point to the two three things that you heard that really stuck out, and that you thought was most noteworthy. Maybe Joey, you want to kick that discussion off? You know,Joey Pizzolato 02:56
I’ll let Amanda kick it off. And I’ll take the second round.Amanda Harris 03:02
Yeah, you know, for me was a running theme of, you know, their auto lenders and people in the industry just kind of having to think of innovation in different way. You know, for a long time, it was just being innovative MIT, you know, just having maybe new technology or you know, something like that, or doing something a little different. You know, now with the pandemic kind of changing everything and more and more going online, it really changes the way they think about technology and how much of a role it has to play, especially when it comes to customer experience. So that’s kind of was a running theme that we saw. And said I was interesting, I loved the the Innovation Challenge. I thought that was good to kind of see some of the new technologies that are coming up in this space. Our winner really kind of showed that refinance is a big thing on people’s minds. Yeah, so just kind of interesting to see how it’s being talked about now in the light of what’s going on.Joey Pizzolato 04:00
So absolutely agree with Amanda this through line of Technology’s role in customer experience, and that customer journey through every step of the retail process was definitely kind of top of mind. Two of the other things that I thought were really interesting point to something that the auto finance industry is going to have to start paying more attention to, you know, in the coming weeks, months years, would be you know, the that in vehicle connected car technologies. Um, there’s a huge opportunity for lenders in that space to leverage data, which was another big kind of talking point during the conference, data’s data analytics application. So that industry will provide invaluable insight about you know, borrowers habits, that can then be used for marketing for, you know, lease extensions, and even underwriting if you wanted to go that far. One thing we saw was, you know, Daniel Chu, the chief executive and founder of trust Color they they use that that secondary alternative data, when deciding how to underwrite new borrowers in place pairing, pairing the new borrowers kind of credit profile or personal persona profile profile, to pass borrowers and the kind of loan performance that they’ve done. So that’s one area that I thought was really interesting. The second, and we only spoke about it for a little bit, but it would be electric vehicles. You know, we all know, electric vehicles have been kind of the shining star of, you know, the equities market during this this last year, a lot of money funneling towards them, we know the OEMs are making huge investments. And, you know, consumer adoption wallet isn’t still there. You know, it’s rising. We, we, we reported last week that it accounts for 6.7% of fat total finance vehicles. That’s over double what it was five years ago, and it’s poised to double again in the next five years, if not sooner. So one thing that we discussed was, you know, where the lender fits in, right, like, what what do they have to figure out and, in speaking with Bob Beatty, from GM financial, you know, there’s two, two segments of that, that I think lenders are gonna really have to start thinking about. And that would be one, the role of the battery in these cars, there’s a, you know, one thing that we’re kind of seeing, there’s a ton of battery manufacturers, and while they all sort of, you know, operate under this kind of standard lithium ion structure, you know, they are a little different. So one thing that Bob pointed to, was understanding the the length and lifetime of the battery and how that plays into residual values. And secondly, as it relates to EBS would be kind of the ancillary product stream, you know, there’s a huge opportunity for for auto finance ears to start tacking on things like home charging stations, into the financing of the vehicle. So understanding what that looks like in the grand scheme of things, as well as, you know, the lease versus retail kind of product mix, is it is it is it in the lenders best interest to, you know, lean on leasing, as opposed to retail it to get the best return on those residual values. So that was a very long winded answer to the, to the to two segments, I think that, you know, are really starting to kind of bud in auto finance, and we certainly will be paying more attention toJJ Hornblass 07:42
let’s deal with each of them in in separately. Yeah, let’s talk, we can talk about the batteries for a second. I mean, I think, I think one of the things that’s interesting to me, as you both know, I kind of follow the aviation industry, as well, in my spare time. And one of the things about aircraft values is that the majority of aircraft value is actually folded into the engines. And I wonder whether we’ll see that vehicle values will end up predominantly centering on the Battery, Battery, both both in terms of length of, you know, remaining efficacy, power efficiency range, it doesn’t matter, you know, what the, what kind of stereo system there is in the car, or even if you know what kind of in vehicle operating system there is in the car, if the battery can’t get you to the corner drugstore to get your milk. So, you know, I guess my question is, is like if you think about it in that prism, for each of you, how might you think differently about auto finance or residual values? If this ends up being so much more about the battery, or is the premise faulty? Um,Joey Pizzolato 09:37
so I would say it’s definitely not faulty at all. I can’t actually see a scenario in which you know, if if the battery electric vehicles do become kind of the the, the norm in consumer purchases, how the battery wouldn’t be rolled in and take into account when determining you know, that the residual The value of the vehicle. I mean, if you look at it and cell phones, for example, they’re they’re a good model, you know, you have certain phones that have all have horrible battery life. And that directly affects, you know, number one consumer purchases, but also the value the resale value of the device, you know, after it’s been used. So I can’t see a scenario in which that doesn’t play a very prominent role in determining the value of the vehicle.
JJ Hornblass 10:25
I imagine Did you feel like there are aspects of the, of how things are done today that you can point to that would really, you think would just change as a result of this sort of battery? Potentially batteries? centrality? Yeah. I
Amanda Harris 10:47
mean, one thing that I always keep thinking of is, you know, right now we look at mileage is kind of like the big telltale right now how how good your car is, and how much life It has left in it, you know, I drive a Toyota. So that doesn’t really matter to me. If you’re going to 500, right. But, yeah, I think that that’s really always been, you know, the, the thing that we look at how many miles you have, and that’s going to determine so much now with electric vehicles, it really is, how much battery life do you have left, you know, you could have a ton of miles on the car. But if that battery is really strong, and it is still has a lot of life, then that’s going to have a lot more value than that necessarily that that mileage number. So that could be the
age or age.
Amanda Harris 11:31
Yeah. And then the other one, of course, is age of the car itself, which obviously plays a factor. Because you do have other materials that might break down a little faster without getting into my sciency brain. But the break down a little faster than maybe the better one Charles wood. So you have to factor that in. But I do think that’s going to become more of what is prominent in both consumers minds. And in lenders minds when they’re valuing that car versus kind of the normal parameters we used today. That’d be the one big change
I could see. Yeah,
JJ Hornblass 12:01
that’s a good thing. You have that science degree, Amanda. I knew you were going to be using it on the auto finance beat. I think the other question I had relates to another point that I think you raised Celli, which was in a sort of the data orientation for marketing. My question to, to both of you is, what kind of costs are we looking at, if you’re talking about a, you know, a different marketing model, which is what you’re you’re implying and what, you know, what this speaker spoke about last week, during the conference, we’re doing a different marketing model. Is this a cost? Is this a cost level that is going to be so significant that it will end up becoming something of a barrier to entry are a barrier to growth for certain lenders? Because it might be, you know, we had and just to put a finer free, finer point on the question, you know, it was the case. You know, prior to the previous presidential administration, that compliance was the main barrier to entry for for auto finance companies, auto finance, growth, auto finance, entrepreneurship, is data, that barrier to entry now.
Joey Pizzolato 13:40
So, I mean, I believe it, it potentially could be, but on the other hand, you know, in terms of just like cost, I would say no, it’s really just a matter of leveraging data that you’re already getting, and then reappropriating in a different way for more targeted ads. So I would think at the end of the day in you know, I don’t run an auto finance business, I’m not entirely sure but I would think at the end of the day, your cost to you know, customer acquisition would would actually go down because you’re utilizing data you’re already getting, analyzing it and then you know, repurchasing it out. That being said, you know, there is um, there is a lot of things as it relates to fair lending you dap, that that are really top of mind for the for the industry right now, considering the shift to this digital slash remote kind of structure that we have, that lenders will have to pay more attention to and as we all know, with additional compliance considerations comes additional cost. So, I think the long and short of it, I think, as any, the smaller lenders are gonna have a harder time kind of, you know, utilizing that extra data and analytics especially, If they’re going to incorporate it into their underwriting models, but the bigger players, you know, they shouldn’t have any trouble with this shift, I mean, we’re already seeing some of the bigger players like GM financial, they’re already doing this. And I would imagine, so is, you know, Toyota financial services, most of the banks,
Amanda Harris 15:19
there’s an and I’m just my thought, I think, initially, there might be more just because they’re gonna have to kind of balance, EBS and regular until one, either reviews go away, or these kind of take over. So it might be just the fact that this is kind of new still, you’re having to, to kind of factor these in on a smaller scale at first before it becomes like a big part of the business. So if that makes sense, you know, that they, I just kind of think you have to really like look at your processes, and figure out how these fit in. So that initial, there might be like an initial cost to coming up with the messaging and coming up with how to reach these customers, because this is still very new. And then once it becomes a bigger part of your business, obviously, then you’ll have maybe a team dedicated to that, or they’ll have already messaged is created. So I think there will be like an upfront, but then to Joe’s point, I don’t think it’ll be something that will be continuously, you know, super more costly than than what they’re doing now.
JJ Hornblass 16:22
Yeah, I’m not sure if I agree with the both of you. Okay. Well,
Joey Pizzolato 16:28
that’s, let’s hear it.
JJ Hornblass 16:31
I think that the, I think that the cost is, is going to come from the data scientist side, I think that human capital costs are and it’s not just the raw cost, it’s also the number that is getting getting the, at whatever cost even just half getting the resources. And because the specialization, and the requirements around the data analytics and applicability of the data are so specialized. That a I actually, you know, if you if you’ve got them, meaning, I mean, you heard what, what Robert McDonald said, right, like that we have from a Gaya you know, we have all these data scientists on our team that that is a that is a barrier that I think is only going to become steeper going forward. So I’m not sure if I agree with you both, but usually I’m wrong. So that’s, that should be a consolation to both of you. What do we have a plan for next week?
Joey Pizzolato 17:52
So this week, I have a report on the chip shortage, we finally are getting to do a report on that. That’s going to come tomorrow. But um, you know, just a little teaser. It’s not as bad for the captives and auto finance companies in the secondary market as it is for the OEMs. And, you know, I’ve got my reasons.
JJ Hornblass 18:16
Okay. Good. Good. Um, well, that I’m looking forward to reading that I’ve been very curious. And I hope you’ll all visit us at auto finance news dotnet to read not just that story coming up but others and and please rate the roadmap on your podcast platform of choice. We’ve very much enjoyed you being with us during this episode. Thank you for tuning in. We will see you next time on the roadmap.