Nearly two thirds of all Americans have smartphones, and nine of every 10 use the internet, according to a Pew Research study. Yet, online auto lending hasn’t kept pace with this tech revolution. Lenders remain mired in old legacy systems that aren’t equipped for the times, and smaller finance companies are struggling to catch up, multiple sources told Auto Finance News.
This year, some of the biggest players in the auto finance space made large investments into digital lending. Bank of America launched a direct lending platform; Chase Auto Finance expanded the auto capabilities of its mobile app; Ally Financial Inc. launched direct lending platform ClearLane; and a host of captives made partnerships with fintech platforms to push more sales.
“The biggest banks with large budgets can usually accomplish digital lending or direct lending on their own — they are going to run a large team and spend several million dollars to do it, and they will usually pull it off,” Andy Ivankovich, chief executive of iLendX, told AFN. “The others — 5,000 banks and 6,000 credit unions — are struggling big time right now.”
There’s no one-size-fits-all solution for any company out there, Ivankovich added. Lenders big and small are turning to multiple service providers to accomplish long-term projects.
“Smaller lenders want to be cutting-edge from a technology standpoint, but they are working with limited budgets, so in a lot of cases they have to find an industry utility that will help them spread costs across multiple institutions,” said Craig Schleicher, senior manager at PwC. “The question for them is, How can they cost-effectively offer a solution that’s competitive with the technology the larger institutions put in place?”
Technology implementation is an issue that’s not limited to small companies, either. Toyota Financial Services, for example, is 18 months into implementing a new system across its internal, consumer, and dealer communications system.
“As of today, I have at least five different system integration companies working on the same platform,” Gordon McGrath, division information officer with Toyota Financial Services, told AFN. “We’re able to do that because we have a vision of where we want to get to, and different organizations have different expertise in different areas, whether it’s the front-end user interface or the backend integration.”
There are different challenges and considerations at every level of the industry, and while budgets dictate a lot of those decisions, it doesn’t have to be the endgame. Whether it’s e-contracting, implementing a new loan origination system, or improving communications, lenders of all sizes have options to tackle the rapidly changing technological landscape.
Working With Small Budgets
Smaller lenders in the space have been “kicking the can” when it comes to investments in technology, due to the challenges and large budgets needed to do it correctly, iLendX’s Ivankovich said.
Community banks previously left online lending to the fintechs and big banks, he added. However, they have recently realized there is value to keeping their customer at the bank across all consumer loan products and keeping some “stickiness” with their brand.
“One third of your customer base is getting an auto product from someone else,” Ivankovich said. “Why not make that part of your central strategy as a bank to say, ‘I’m going to offer this product and do it digitally.’ But it’s a broader strategy to say, ‘Not only for auto; I’m going to do it for unsecured lending, for home equity, for credit card, and I’ll deepen households,’ where in the past they didn’t have to worry about it as much.”
Budgets will always be the biggest limiting factor, but there are ways around that. “There are a range of systems that can really enhance their underwriting capabilities, pricing capabilities, and ability to provide a good experience or their dealer partners,” PwC’s Schleicher said. “We see that smaller lenders are looking into new loan origination system providers, new internal efficiency solutions, and a lot of them are deploying low-cost options for reducing manual processes, such as robotic process automation (RPA).”
These robotic systems mirror a regular computer desktop and automate a lot of the loan processing that typically has to be done manually. Lenders can use it for credit decisioning, contract funding, collections and servicing, and find various uses at just about every level of operations.
On average, implementing RPA is 33% cheaper than hiring a non-U.S. service and 10% cheaper than hiring a U.S. source, according to a white paper prepared by PwC. Return on investment is commonly more than 300%.
Yet, budgets are not the only challenge. Staffing requirements can often hinder technology implementation. “Smaller lenders are having trouble competing for talent because a lot of the skill sets they need in advanced analytics are the same skill sets that are in demand in big tech and other industries,” Schleicher said.
Even when you work with an outside provider and consultant, as San Antonio-based Broadway Bank did, there is still an investment in training. iLendX provided Broadway Bank many of the necessary high-skilled developers, but the lender still needed to provide training for its people.
“If we tried to develop [an online origination system] ourselves, it would be an astronomical cost per loan, versus doing it with someone who has done it with other companies,” David Bohne, president and chief executive of Broadway Bank, told AFN. “The biggest investment was mindset. Changing from a physical world to a digital process, looking at compliance through that lens, looking at the customer experience through that lens, and looking at control was a lot different than our traditional way of thinking.”
Often, it’s the company culture that needs to change to make these projects work. The traditional motives of profitability elsewhere in the business can make digital initiatives fall apart, Ivankovich said.
“What [lenders] end up doing is they take their eye off the ball. I hear this all the time: ‘Commercial is the bread and butter for us, so don’t take our eye off it,’” he said. “They move over to another high-priority project mid-flight, and it slows down their digital strategy. The commitment has to be all the way up to the CEO and even the board.”
Expanding the Lender’s Options
As financial institutions get larger, the same problems remain, but larger budgets provide more options.
“They have more budget, but not all the budget to make the changes they would like to make,” Schleicher said, adding that the company has to actively prioritize digital initiatives over some of the traditional moneymakers at the bank.
AAA Bank, for example, was able to institute an online origination and refinance platform that today is bringing in “a couple hundred” originations per month. It took 18 months to develop the platform, and AAA hired a dozen part-time employees to see the project through and provide maintenance.
“We were lucky because we didn’t have a lot of legacy systems that were impacted so we could start at ground zero,” Jeff Vander Linden, AAA’s chief lending officer told AFN. “At the end of the day, it’s something we can market at scale with very minimal hard resources.”
Whereas smaller companies have few options to hire talent from the technology sector, midsized companies will be able to attract some experts with analytics and systems prowess — but it’s still an uphill battle.
“It’s a challenge, and I don’t know that anyone has found a perfect solution, but we’ve seen that job descriptions and responsibilities are changing with analytics being democratized and brought into more positions,” Schleicher said. “Hopefully, analytics teams are being empowered to play a more strategic role by giving them more of a seat at the table.”
Companies in this mid-range tier likely don’t have the resources to build a digital platform from the ground up. However, they can hire other experts to work alongside third-party consultants.
Midsized institutions also tend to have more legacy systems to deal with, and they don’t always have the budget to gut it all and start over. Adding application programming interfaces (APIs) on top of those existing systems can dramatically improve operations without breaking the bank, Martin Prescher, managing director in PwC’s consumer finance group, told AFN.
For example, many lenders already accept credit applications from online sources, even if they don’t have a digital origination system themselves. “There is a way to build APIs on top of your IT systems to be able to use that data you have and be able to do advanced analytics on that data without ripping out your whole IT infrastructure,” Prescher said.
Regional banks in this mid-tier aren’t investing in mobility programs and autonomous vehicle technology like the captives and large banks are today, but the demands of the industry are going to force them to invest soon, Schleicher said.
“It’s a struggle for the mid-tier banks to justify that [mobility] expense, but we see them working at it more and more because their dealer partners are seeing change and preparing for it,” he said. “At the end of the day, for an indirect lender their dealer partner is their most critical business partner.”
Build or Buy?
Naturally, larger financial institutions have been able to sink more money into developing online platforms, but the added size also brings bigger problems.
Toyota Financial Services acutely felt those issues when it realized it was taking two to three years to implement significant change on its legacy systems. “You spend the first six months just planning the requirements, a year of development and testing. And then by the time you roll it out, expectations have already changed and shifted,” McGrath said. “It forced us to think differently.”
In response, McGrath and his team built a new customer relationship management (CRM) system, and in the past year has effectively sunsetted its old legacy system and moved 4,000 team members onto the new platform. “It keeps track of every conversation or touchpoint we have with every Toyota Financial Services customer,” he said. “We introduced a new delivery method centered on agile principles where we want to roll out our technology in a more iterative and incremental way.”
TFS updates the platform monthly; it has made 20 enhancements since rolling out the system to team members a year ago. Previously, the captive might have waited five years to make platform changes after a big rollout.
“There’s been a cultural change, too,” McGrath said. “Our team members stopped asking for system enhancements because they knew it would be two or three years before they ever saw anything. Now that we’re doing monthly releases, they are way more engaged and submitting suggestions in terms of how to make the platform better and service our customers better. We’re turning around those enhancements into production within two to three months at the longest.”
Now that the platform has rolled out to team members, TFS is looking to expand it to dealer partners and to customers through an online portal. That product is currently in a “production” phase for website integration and the captive is currently working with 25 dealers through a pilot program. “Our goal is to keep rolling out new functionality on a quarterly basis for our dealers and customers,” McGrath said. “It’s a matter of prioritizing which initiatives we want to work on next.”
Another change Toyota instituted was a shift to a cloud-based infrastructure, which has long been overdue in the financial services sector, Schleicher said. “I’d say the entire banking system was slower to adopt cloud-based systems because of compliance issues,” he said.
For the largest players in the space, it comes down to whether they want to build or buy. Even when the budgets are available captives and large banks still often choose to purchase those capabilities. But when a company builds, the added investment does afford them more control, Schleicher said. This is especially true at TFS, where the OEM’s mobility and autonomous initiatives led by its “strategic initiatives team” are front of mind.
“The pace of change is bringing the strategic initiatives team closer to the day-to-day than ever before,” McGrath said. “It’s not like something that’s five years in the future we need to plan for. These are expectations that are right around the corner in the 12-to-18-month time horizon, and we have the tools to react to that faster than ever before.”Like This Post