Dan Berce, chief executive of GM Financial, sits down for a fireside chat at the 2017 Auto Finance Summit. (Photo by William Hoffman)
Captive financial companies are often at the forefront of technology as they are able to tap the manufacturer’s offers to deliver sales, and this year has been no exception.
Buzz around autonomous cars has pushed captives to think more about mobility services, slowing sales have inspired companies to invest in alternative credit scoring models, and a flood of off-lease vehicles is putting pressure on the new-vehicle market.
Here are six industry trends impacting captives and how some are reacting.
1. Off-Lease Volume
Leasing penetration across the industry soared above 30% this year — an all-time high — and that’s of course largely driven by the captives. Although lenders have enjoyed the increased volume over the past three years, those vehicles are now coming back to the market.
“Our key goal for General Motors Financial Co. is to survive the residual value onslaught as supply is going to keep through until 2019,” GMF Chief Executive Dan Berce said at the 2017 Auto Finance Summit. “It used to be that credit risk was the thing that kept us up most at night, and now it’s [residual value risk].”
One of the ways GMF plans to tackle the problem is through technological upgrades so that the lender’s system can better understand, for example, when one spouse has a GM lease and the other has a loan, Berce said.
Similarly, Toyota Financial Services is working to improve its systems so that consumers don’t have to resubmit all their information when they come to the dealership to renew their lease, Matt Haydon, the company’s group manager of retail transformation, told AFN back in February.
“We have a lot of off-lease [volume], and we have a lot of opportunities with new Toyota and Lexus products coming out this year,” Haydon said. “Digitally, we would like to move a lot of our capabilities forward, so that you, as a customer, don’t start over.”
2. Reigning In Charge-Offs
With more volume comes more charge-offs and delinquencies, and Hyundai Capital America is utilizing data to mitigate those impacts.
“One of the challenges a lot of captives and independents are having right now is in the collection space,” Bill Miller, senior director of collections and recovery for Hyundai Capital, said during a presentation at AFS 2017. “We’re not collecting on accounts we originated yesterday or even first quarter this year, we’re collecting on accounts we originated a year or two-and-a-half years ago. Those are the accounts we’re working on and a lot of people are forecasting high losses this year and next year because of some of — what you might call — the sins of the past.”
In the past year, many lenders have tightened up underwriting policies, but those earlier loans — especially from 2015 — have a higher severity, Miller said. One way to mitigate is to identify specific consumers whose vehicles can be repossessed earlier in the recovery process.
“If you’re sending out your notice very early in the process you may have an opportunity to repossess earlier,” he said. “If I have someone I’m working with — whether it’s a good customer or not — if they are moving into two payments past due and you don’t have the ability to contact them [because] they are a ‘do not contact,’ many are looking to advance the repo timing on those accounts. If you don’t have the ability to reach out to [the ‘do not contact’ customers] over time you’re just delaying the inevitable.”
Ford’s booth attracts a wide range of attendees at the 2017 NADA Conference and Expo (Photo by William Hoffman)
3. Alternative Credit Scoring
A primary goal for all captives is to drive sales to the OEM. However, with sales falling off from its peak last year, lenders are seeking new ways to drive sales.
One way to do that is by better identifying the risk associated with thin-files and millennials who don’t have a deep credit background.
In August, Ford Motor Credit Co. and ZestFinance announced the results of a study that measured the effectiveness of machine learning to better predict risk in auto financing and potentially expand auto financing for Americans with limited credit histories and millennials. To that end, Ford Credit is developing plans to implement machine learning credit approval models to enhance its lending practices as a result of the study, according to a company press release.
Additionally, Ford Credit and ZestFinance found that machine learning-based underwriting could reduce future credit losses and even improve approval rates for qualified consumers, while maintaining consistent underwriting standards, according to the release.
According to the Consumer Financial Protection Bureau, one in 10 American adults have no credit record, making them difficult and often impossible to underwrite using traditional methods. “This includes millions of millennials who are also part of the fastest-growing segment of new car buyers,” Ford said in a previous statement.
In September, the U.K. branch of Toyota Financial partnered with Aire, an alternative credit scoring startup, to implement a similar machine learning model for its underwriting. The program is slated to come to the U.S. in the first half of 2018.
4. Mobility Services
There’s no shortage of OEMs and captives investing in ridesharing and alternative ownership models.
Ford Motor Credit Co. acquired the monthly subscription service Canvas, General Motors Co. was the first to market with a luxury subscription service called Book by Cadillac, Porsche Passport is the most expensive service of the bunch with a $2,000 per month price tag for unlimited access to different models in its fleet, Volkswagen Group launched Audi on Demand earlier this year, and Care by Volvo is slated for launch in 2018.
For captives, this shift is going to mean a greater focus on fleet lending and management, GMF’s Berce said.
“There is no hype [around mobility] it’s all real,” Berce said. “Disruption in the auto finance industry is inevitable and it doesn’t mean that consumer purchases of vehicles will go away forever and everyone will shift right to ridesharing, but especially in urban areas we’re going to see more of a sharing economy. … The transformation for us is we’re going to be doing more fleet financing. So when GM puts autonomous vehicles in Manhattan we’ll be the owners of the fleet, we’ll be the financiers of the fleet, we will have a consumer interface that is different.”
5. Toyota’s Compliance Training
New technology is fun but captives can’t take their eyes off the basics either.
TFS detailed how it’s improving its compliance training through gamification during a panel at the Auto Finance Risk & Compliance Summit earlier this year. The idea is to make these compliance sessions more fun so that employees can better absorb the information.
So far, the captive has only implemented it for its privacy module, but given the early success they expect to expand it in the future, said Linda Iannone, former chief compliance officer for TFS.
“What it does is it makes you feel like you’re playing a video game as you’re going through the training,” she previously told AFN. “There is a lot of movement on the screen, it’s very interactive, and there is scoring as you are answering the questions and going through the modules. So far, it has been pretty effective, and we want to take this approach to our other training.”
6. Daimler’s Blockchain Initiatives
Blockchain is the centralized technology that powers cryptocurrencies such as Bitcoin, and there are a few lenders who think it will have implications in the auto finance realm.
For example, because there is no centralized arbiter of information, a dealership could see when a vehicle needs maintenance and at the same time a lender could utilize that data to adjust its residual models.
Daimler AG joined the Hyperledger Project earlier this year, which combines the efforts of several industries working on blockchain technology. Similarly, Toyota’s financing arm joined the R3 blockchain consortium in 2016 to explore the possibilities of the technology.
“Being a part of Hyperledger allows us to collaborate with a global network of experts in order to build the cross-industry blockchain standard, for customers, supply chain, digital services, financial services, and financing tools,” Kurt Schäfer, head of treasury at Daimler AG, said in a statement. “We look forward to joining this community.”