Is there a future for digital auto lending at the bank?

 In Origination

Earlier this month, I bought a new car and was underwhelmed by the financial side of the experience.

After shopping online and never going into a dealership, my local bank was able to provide desirable financing via phone. But the underwhelming part came when I had to go into the bank to sign paperwork. Everyone talks about how the Millennials demand everything digitally. Millennials are not special. There is no generation differentiator in how consumers want to be treated. We all want our “delivery” preferences met. Result—convenience is king.

Future of Auto Lending
Lenders need systems of engagement at all points in the process that are digital—apply on a smartphone, review documents on a laptop, and check loan balances on a tablet. A fully online process would go something like this: fill out the application on a tablet (with the help of image capture) and be preapproved. Research cars online within that loan amount, test drive it (if desired), enter the VIN, and have the funds immediately sent to the seller. Finally, check a box in the application for automatic payments, pick the date for the funds to be withdrawn, and provide an e-signature. Never stepping foot in the branch nor the dealership.

Digital Auto Lending
What would it look like if banks offered fully online auto financing? The steps would include:

  • Provide an HTML 5 web application so consumers could apply for an auto loan without having to download anything. The application would incorporate image capture to streamline the process for the consumer and allow for documents (if needed) to be uploaded.
  • Utilize their standard authentication, risk, and compliance tools but add in device authentication (if needed) to determine whether to offer the consumer a car loan and the amount that would be preapproved.
  • Present the consumer with the offer of credit and provide the option of entering a trade-in value. The trade-in value would be deducted from the price of the car and factored into the final loan amount. The value of the trade-in could be validated in various ways such as a data call to Kelley Blue Book or National Automobile Dealers Association. The bank would then send an electronic promissory note to the seller.
  • Cross-sell a complimentary insurance or vehicle protection product to make the auto loan offering more competitive and deepen the relationship.
  • Have the buyer enter the VIN and purchase price directly into the application along with the seller’s information to allow for a payment transfer. The bank could route the final approval through DealerTrack, if desired. This would allow for out-of-band verification and assist in minimizing fraud.
  • Give the consumer the option to pick the day of the month for automatic withdrawal of their loan payment and assign the desired account.

Following this streamlined experience, the consumer could choose to go to the dealership to pick up the car and keys or have the car delivered to their home for a fee. According to’s 2015 Automotive Buyer Influence Study, new car buyers spend 16.9 hours in total shopping, with 70 percent of that time spent online. With customer engagement that high online, why not keep the entire process there?

Capital One is embracing the idea of digital auto lending. Consumers can apply to purchase or refinance a vehicle with Auto Navigator. The application still requires a dealership visit but allows consumers to apply online and personalize their offer terms. Approval comes within minutes and the applicant can take the offer to any of 12,000 eligible dealers, show the offer confirmation, and complete the financing by filling out the dealer’s credit application, and signing a contract.

Embracing Digital in Auto Lending
Internal policy will dictate whether or not a financial institution is ready to implement a fully online auto lending system. The technology exists to make this possible today. For example, companies such as Fiserv are able to deliver loan documents via mobile image capture. However, starting the sales process in the digital channel and directing the user to the appropriate venue (continuing self-service, transferring to the call center or branch, etc.) after understanding their needs and preferences is the wave of the future in banking. To satisfy consumers who want a fully digital process, banks need to utilize automated decisioning that can integrate with various service providers to manage risk. The risk isn’t increased in the digital channel, it just needs to be managed differently. Once a system like this is set up, it is easily duplicated to assist other lines of business.

Why should banks embrace digital loan approval? To take a piece of the auto lending pie. According to Aite Group, dealers deliver 85% of loans for new automobiles. That’s a big piece but dealers may not be the primary source for new car loans in the future. I don’t want to dismiss the emotional experience of car buying. Next to housing, a car is the second most important purchase and consumers don’t typically make large purchases sight unseen. But, consumer engagement is beginning to shift. Traditional services and products are being delivered digitally because it is convenient. Look at what has happened to taxis with Uber and bookstores with the Kindle. Nonbank auto finance companies will slowly eat away at market share if banks don’t act.

According to Equifax, automobile loans rose 5.2% to 4.1 million through February. The demand is there. Banks have the ability to offer convenience through a direct-to-consumer model.

As a lender, are you prepared for the next generation of auto lending? I hope so because it’s coming.

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