How Fintech Is Finally Disrupting Auto Finance – Fin Tech

Sometimes you have to get a “maybe” before you can get
a “yes.” That’s apropos of the long path to
acceptance of new methods in well-established markets with
well-worn channels and dominant players. Auto finance has presented
such a challenge, but, finally, Fintech has made inroads. Below, we
look at how Fintech is disrupting auto financing and refinancing
and transforming the market in multiple areas, including access to
credit, speed and efficiency of transactions, and transparency.

Creditworthiness Redefined

Underwriting is a key area that is receiving a makeover as
Fintechs are using artificial intelligence (AI) and alternative data to qualify borrowers. By
bringing in non-traditional payment data (such as bank account/cash
flow, rental payment history, professional licensing or education
information) to the underwriting decision, lenders are able to more
accurately price risk and, in turn, borrowers can strike a better
deal on the rate.

The expansion of credit to underserved communities has been an
additional benefit of Fintech’s entry in the auto space.
Reliance on the FICO score system has been criticized
because it leaves many potential borrowers with thin or nonexistent
credit files. In fact, a CFPB report found that “Blacks and
Hispanics are more likely than Whites or Asians to be credit
invisible or to have unscored credit records” even though many
of these consumers might reliably make payments and should have
better access to credit.

Regulators are watching, however, whether AI-driven models bake
a bias into their formulas that can marginalize certain groups of
people. Concerns have been raised around “educational redlining” and how
using aspects of education data for credit decisions could have a
disparate impact on underrepresented communities.

The pandemic has been the first real test for many of these new
AI models, but whether they have been accurately predicting credit
risk is clouded by the presence of significant government
assistance to consumers during the pandemic period. Many of these
models and their assumptions may soon be tested again if the
economy turns.

Transparency: The Consumer’s Advantage

The acceptance of online shopping has commoditized the auto
dealer to some extent, as consumers can locate their preferred
vehicle and purchase anywhere in the United States. Fintechs have
focused on facilitating the process, creating price comparison
tools and platforms that allow borrowers transparency into lending
options.

Some platforms even allow borrowers to see real-time dealer
inventory (critical in this moment of supply chain issues) and
adjust the lending terms to suit their price sensitivity (allowing
for adding in insurance or supporting product).

With a platform like Upstart’s Auto
Retail, customers working with a dealership can submit an
application to various lenders on the platform and tailor their
request to their needs. In turn, lenders who may not have forged
independent relationships with dealers may get a chance to access
dealerships (and therefore customers) they may not otherwise have
reached on their own without the platform. Michia Rohrssen, VP and
GM at Upstart also notes that “dealers cannot mark-up Upstart
loans so the buy rate is the sell rate. But with Upstart’s
better underwriting they can still make a deal that is financially
beneficial to consumer and dealer.” Upstart is also developing
a software product that allows dealerships to sell directly from
the manufacturer with the consumer getting to create a
“direct-build” vehicle meeting that consumer’s
specifications.

Fintech’s impact is being felt well past the sale and
initial financing. With an auto refinance platform like Caribou‘s (available directly through their
website or on a comparison platform like SoFi’s Lantern),
borrowers can see what their refinance options would be and choose
the most cost-effective deal. Such new technology has required
educating consumers on its benefits. As Kevin Bennett,
Caribou’s CEO notes, “A lot of folks aren’t aware that
they can refinance their car, as they can their mortgage, but we
can show them it’s possible to save money on their largest or
second largest asset.”

Beyond gaining awareness, the new technology must deliver on its
promises. Here, Bennett notes, “historically the process has
been difficult for consumers with trips to the DMV or bank branch,
but we’re leveraging technology and scale to make it
easy.”

As demonstrated by Caribou hitting a $1.1b valuation in its
recent financing, the relationship with the consumer post-closing
presents even more opportunity for Fintech to shape markets for
ancillary services.

Speed and Efficiency

A challenge for Fintech in the auto space is that when it comes
to online shopping customers have become accustomed to instant
transactions. If a vehicle purchase or financing takes multiple
interactions or if at any point the consumer meets resistance, they
might walk away altogether.

Several Fintechs are addressing the issue, focusing on making
the process seamless and flexible for the consumer (which helps the
dealership and the lender to get deals done). For example,
TransUnion’s digital retail platform, Auto Payment Shopper,
provides consumers with real-time inventory on vehicles. They can
filter the selection based on the vehicles for which they have been
pre-qualified. Pre-qualification also allows borrowers of all
credit levels to realistically and positively see their
options.

These products are designed to move the process along as quickly
as possible. One AI-based car insurance comparison app claims its
car insurance process takes only 45 seconds and that it has
reduced the auto refinance process from 19 days to less than 48
hours.

The reality is that many Fintech product offerings are meant to
be used in conjunction with dealerships and not in competition with
them. For instance, the TransUnion platform and another from
Carsaver/CUNA Mutual Group “show interest rates incorporating dealer reserve, not buy rates,
and also allow customers to shop and select a dealership’s
F&I products.”

Even mainstream lenders are using Fintech products to speed up
their loan processing. Ally Financial uses Informed.IQ’s AI
product to verify identity, employment and income. The
pandemic has spurred the use of e-contracts and e-signatures in
auto transactions, further moving the process along.

Fraud Prevention

Fintech has also helped to decrease fraud. Many finance
companies and auto lenders rely on Point Predictive’s AI
product, Auto Fraud Manager, to address fraud. Using
data from a consortium of auto lenders, it can generate a fraud
risk score for an auto loan application. Point Predictive has been
able to identify fake employers, forged paystubs and falsified
information submitted in loan applications. By using machine
learning, anti-fraud programs can recognize questionable patterns in large
volumes of data.

Looking Ahead

In this moment of rising consumer costs and looming recession,
Fintech is playing a vital role in helping to facilitate faster,
more efficient transactions. As Rohrssen notes, “It’s
critical to take costs out of the system and provide consumers with
more information and options than they’ve had historically.
Better decision-making can be an offset to higher vehicle prices
and lack of vehicle supply.” Similarly, Bennett advises that
“rising interest rates don’t have the same effect with
autos as they do with mortgages. Inefficiencies in traditional auto
financing at the point of purchase mean refinancing remains a major
cost savings for consumers.” If you’d like to learn more
about Fintech’s disruption of auto finance and hear Bennett and
Rohrssen speak further on even greater transformation to come,
please join us at Fintech Nexus (formerly LendIt Fintech) on
May 26th, where I will be moderating a panel discussion with these
two leaders who are changing the way auto finance is done.

Nicole Serratore, an attorney in the
Insolvency + Finance Practice Group of Davis+Gilbert, assisted with
this post.

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