Florida-based luxury car subscription service Revolve is planning an expansion to Texas and California in 2019 as well as the introduction of “a few more” lower-priced tiers, Chief Executive Asoka Veeravagu told Auto Finance News.
Revolve curates a list of vehicles for which its luxury-car-enthusiast consumer base can subscribe.
“South Florida is one of the top five luxury-car markets in the country, it has a high lease penetration rate, and some of the brands have their best-performing dealerships in this market,” Veeravagu said. “We felt it was an ideal market to launch and incubate this model and now that we have learnings and proven success here the idea is to start migrating to other markets that have a similar type of car culture.”
Subscriptions to Revolve include insurance, maintenance, servicing, a white glove concierge service and start at $1,900 a month for vehicles with an MSRP of $80,000 to $110,000. It tops out at $2,600 per month for vehicles with an MSRP of $110,000 to $160,000.
Veeravagu is well aware the program isn’t cheap, and he doesn’t intend to be the most affordable on the market, but there are plans to bring down the cost a bit.
“Shortly, we’ll be expanding with a few more tiers below where we are, but we wanted to hone the model and build this as a premium experience first at this higher end and then over time build down into lower price points,” he said. “We know that car lovers, and automotive enthusiasts exist across the spectrum of price points it’s just about what can they afford.”
Many players have entered the subscription space in the past year, and Veeravagu believes there’s plenty of the room in the market for multiple subscription services.
“We’re excited to see others like the OEMs continue to announce programs because that just further reinforces that subscription is a good model,” he said. “Dealers getting in is good too because consumers go to the dealer to shop for cars, and now they are getting buy, lease, and subscribe as a new option, which builds awareness for companies like ours.”
Lenders are focusing their fraud departments on dealership activities lately, but lenders “discount the quantity and the scale of identity fraud and synthetic fraud that may be hitting them,” Geoff Miller, head of global fraud and identity solutions for TransUnion, told Auto Finance News.
Outstanding suspected synthetic balances increased 5.2% year over year through 2Q18 to $621 million, according to TransUnion. Synthetic fraud only makes up 0.05% of the industry’s $1.2 trillion auto balances recorded through the second quarter, but in a thinning margin business, lenders are fighting to eliminate these losses.
“Consumers are stealing identities, creating false identities, and going out and buying vehicles,” Miller said. The rise in consumer fraud is largely due to processes being completely digital. “It’s great, but it’s a riskier, faceless channel,” Miller added.
The issue for lenders is how to maintain a competitive edge in the digital space without sacrificing the consumer experience. Lenders can put many processes in place to prevent fraud, such as making the application long or having users answer numerous identity questions, but the result creates a “terrible user experience,” Miller said.
“Consumers get frustrated and say, ‘oh my gosh, this process is too long.’ So they abandon it,” Miller said. Now, consumer fraud is starting to get considerable traction with auto lenders as they start to understand the problem, and TransUnion is working on helping lenders develop less tedious fraud protection processes. “The loans that [lenders] think are synthetic may not go bad today,” Miller said, “but they will go bad eventually.”
Reading some of the headlines from major media outlets, it might seem as though auto finance companies didn’t understand the importance of verifying income and employment information provided by applicants. Everything was written from auto finance companies being fraudsters to the auto industry being the harbinger for the next recession. However, the headlines largely got it wrong.
It’s time for a fresh perspective based on the facts. Most auto finance companies are using sophisticated verifications tools to help them determine with confidence that an applicant will be able to repay a vehicle installment contract. In fact, according to a recent Equifax report, auto finance companies are verifying income and employment at record levels and have seen a significant increase in usage year-over-year significantly since 2012.
For example, in 2017 automakers sold 17.2 million vehicles. This is the first time the industry has cleared the 17 million mark for three consecutive years, according to IHS Market. Based on reporting from The Work Number database — one of the largest central sources for employer-provided employment and income data — the number of auto verification requests for income and employment was nearly 29 million at the end of 2017. That’s nearly 30 million requests for income and employment information in a market that sold more than 17 million vehicles. Auto finance companies are, indeed, verifying information provided by consumers.
Clearly auto finance companies understand that the risk of not verifying income and employment on potential borrowers is too high. Also, they know that time is incredibly important to today’s car buyers and dealer personnel. Both groups tend to avoid hassles at all costs. Most consumers are opting for a car buying experience similar to the one they use when shopping for new clothes online or browsing for world news and other social happenings — frictionless, consistent and user-friendly interactions with businesses when they want it. Knowing these habits, lenders have implemented a similar fast-paced and transparent environment into the car-buying process.
Auto finance companies’ use of verification tools has allowed them to understand a potential buyer’s propensity to repay a loan earlier on in the car-buying process. This, in turn, has also allowed them to give approvals back to their dealers without stipulations and potentially avoid auto finance defaults that can happen if a borrower can no longer afford the designated car payment.
And then there’s the need for finance companies to verify based on the reality of the auto industry. The legend of the fake pay stub and applicants who overstate and understate their income, further point to the importance of verifying information.
First, the fake paystub is real, and it doesn’t seem to show signs of slowing down. There are even websites dedicated to helping consumers re-create their fantasy paycheck to get the vehicle they desire. And the worst part is these fake paystubs are so well done that they are passing some finance companies’ sniff test.
Secondly, whether consumers intentionally or unintentionally overstate or understate their income should be a moot point to auto finance companies as they are not forensic experts and shouldn’t have to be.
Even when offsetting for credit score, the higher a person’s verified income, the likelihood of default decreases. Also, job tenure can help predict repayment risk as consumers with job tenure one year or less are almost twice as likely to go delinquent (again, even with FICO score accounted for) as those with 10-plus years of tenure. You can see the type of dilemma that can unfold if income is not verified at the beginning of the car-buying process.
Verifications tools largely eliminate the need for auto finance companies to operate like the local grocer 50 years ago who knows everyone in town and kept a ledger of who will repay their monthly grocery bill, based on their family history and if they attend church regularly. Verifications are based on factual data provided directly from employers. Very simply, is the borrower employed and how much do they make?
Of course, verifications can be strengthened by adding in other data assessments such as the aforementioned job tenure, but salary information as well as alternative and trended data are also available. The latter forms of data push beyond traditional credit data to reveal more details about consumers, their payment behaviors and financial priorities. As a result, it can help lenders offer more specialized, customer-focused service, while also helping to better protect their bottom line against bad debt, write-offs and more. When you put the add-ons aside, verification by itself is the foundation for mitigating the affordability issue caused when applicants produce fake paystubs or understate or overstate their earning information. It’s largely becoming a table stake for the industry.
Prime Lenders Are Entering the VOI and VOE Space with Great Results
However, there is an imbalance in the verifications process that auto lenders can and should work to stabilize. Prime lenders are not verifying income and employment on their applicants and borrowers in the same way as their subprime brethren. While independent, monoline auto and dealer finance companies may provide to higher risk customers, usually ones with subprime credit scores so that higher interest rates make up delinquencies, banks, credit unions and captive lenders want very little risk and they typically lend to customers with prime credit scores (620 and higher).
On the surface, it makes sense, and prime customers are often a safer bet with prime lenders making the argument that a prime borrower’s credit score offers enough information so the risks of approving a loan for them is fairly low. But even prime lenders have battle scars from fraudulent or unaffordable loan activities. All it should take is one $30,000 mistake for a prime lender to realize that verifying income and employment is the right thing to do for their business, the industry and their customers. Instead of viewing verifications as a tool for the subprime market, it should be viewed as a standard practice for all lenders to tell a more complete picture of the borrower.
Accurate income and employment verifications improve the entirety of the car-shopping process for the finance company, the customer and also the dealer. With the most exact information accessed early on, finance companies are able to offer the appropriate auto financing packages to consumers.
To learn about four ways you can use income and employment verifications throughout your auto lending process, register for our webinar on October 2, “Verify to Clarify. Know More About Your Customers to Help Grown & Increase Your Portfolio Profitability.”
Lou Loquasto joined Equifax Automotive Services with 20 years of experience in the automotive industry. In his role, he is responsible for the team of auto industry veterans tasked with helping auto finance companies and dealers grow while minimizing expense and controlling risk. Prior to joining the company, he was a co-founder and served as chief marketing officer for Global Lending Services (GLS), a national non-prime auto finance company. Prior to GLS, Lou was the head of Lender Solutions at Black Book, responsible for developing products, data and analytics for auto lenders. Prior to that, he was VP- head of Marketing & Business Development and the Central Direct of the Consumer department while at Wells Fargo Auto Finance. Lou is active in the industry, speaking at conferences and serving on the boards of industry associations including as past president of the National Auto Finance Association.
More than 250,000 people have asked Alexa, Amazon’s voice-controlled bot, for its hand in marriage, according to a report by New Scientist. It’s safe to say, Artificial Intelligence (AI) has gotten personal.
So, how can lenders use AI to create a more individualized lending experience?
Borrowing 101
Let’s start with product education. Frankly, loan products aren’t top-of-mind for most borrowers until they need a line of credit. Even then, they are typically focused on their current financial need. They want to know: what can I get right now?
Using AI tools, lenders can turn an initial product inquiry into a comprehensive product demonstration. Online, lenders can collect information about potential borrowers’ life goals, spending priorities, timelines and more – and then forecast products and needs across their lifetimes.
Consider this scenario:
Joe is a recent graduate contemplating renting or buying a home or a car. He visits a lender’s website, where an AI agent welcomes him. The chatbot asks Joe about his career and family goals, spending priorities and more.
As Joe enters his data, he can see the impact on his monthly budget, taxes and other finances over a range of years. Joe can also account for changes, like an increase in salary over time.
Using Joe’s personal information – not just what’s included on an application – the lender can recommend a product that would be a good fit for Joe today and forecast how the product would work for him as he gets married, adds a second home or starts a family.
Joe may spend hours “playing” on the lender’s site because he has the freedom and information to plan a very personal financial roadmap. The process is simple and on-demand, and the experience is extremely personal and engaging. But behind the scenes, complex variable mathematical modeling takes place.
Contrast that with the traditional model, in which a loan officer (who may be commission-based) would have to meet with a borrower to gather the same information, and then spend days or weeks developing a range of scenarios. It’s impractical, if not impossible. Using AI, borrowers get the information instantly and can see how different inputs (and products) impact their financial future.
The speed, ease, and personalization of the AI experience help Joe feel both empowered and connected to the lender. For the lender, product education is practically automated because the borrower initiated and managed the learning. As an added benefit, Joe enters the lending process with a firm understanding of his options, responsibilities, and outcomes.
New Borrowers
AI tools can gather, verify and evaluate enormous amounts of data – beyond what is captured on a traditional loan application. The key advantage here is scale: AI can manage more types of data and tremendous amounts of information. With more input, lenders can make better predictions about borrower behavior, and they may be able to confidently say “yes” to more borrowers with less cost and arguably better risk management.
Take first-time borrowers, like Joe from the earlier example. On paper, Joe’s risk seems steep: he has limited or no borrowing history, no long-term income and high amounts of student loan debt. Traditionally, this would make him high-risk for most loan types. So, he could be refused or presented with unappealing loan terms.
But now, using AI, a lender can incorporate other factors, like where a borrower lives and the industry he or she works in, to make a more calculated – but also more personal – lending decision. Accounting for a person’s academic degree, the field of work or metropolitan area, a lender may be able to calculate a lower degree of risk and extend more credit.
The possibilities are nearly endless: rental history is a likely data point, but social media activity or education could be, too. Lenders need to determine which data points are correlative (and not just coincidental) and to make sure they don’t unintentionally insert bias. But as long as data is highly digitally available, AI can execute on it. Fast.
Speed Matters
The ability to incorporate data into a borrower’s profile in microseconds can make all the difference between profitability and lost opportunity. Speed matters in many instances, like in auto lending, where borrowers intend to walk away with a vehicle and financing in a matter of hours. With AI, lenders can quickly extend credit to more borrowers while minimizing risk.
For example, an AI-assisted approval process may recommend a borrower for an auto loan, but at an interest rate or term that is unique to the borrower’s personal situation. Instead of simply denying a borrower, AI can be used to very quickly present individualized terms that protect the lender and are appropriate for the buyer.
Role of the Lender
In many ways, AI extends the role of the lender. Borrowers may begin to view their lender as an advisor or a consultant as they spend more time inputting personal information and playing out scenarios. AI can also become a marketable, distinguishing factor in a highly competitive market.
So, it’s decision time for lenders (unfortunately there’s no AI bot to make this call): do you want to offer borrowers personalized, AI-driven experiences through your brand and your platforms? Or, will you partner with an advisory company that does?
Ignoring AI is not an option. Regardless of your approach, automation and personalization in personal finance will continue to grow. Your best bet is to grow with it. Your competitors certainly will.
Captives and lenders are feeling confident in the used-vehicle market, but some dealers are feeling the pressure as full-time used-vehicle retailers are making the space more competitive for franchise dealers, Paul Ritchie, president of Hagerstown Honda and Kia, told Auto Finance News.
“The dedicated full-time used-car lots, like CarMax, are starting to get into the franchise dealer side of the business as consumers favor used cars, and we have to work really hard to remain competitive,” Ritchie said.
Used-car retailers serve as significant competition because “they can buy all the cars that they want,” Saif Kadri, sales manager of Carson Nissan, told AFN. “That’s the problem with places like CarMax in the used market, and [used-car retailers] could potentially drive the values higher.”
If a franchise dealer goes to an auction, they have to pick and choose which cars they pay for, but used-car retailers have the advantage since they don’t have to be loyal to a specific brand. “I used to go to the auctions often,” Ritchie said. “And if [used-car retailers] are looking for off-lease cars, they don’t care what they pay for any used cars. They keep their hand up at the auction until they get the car.”
However, franchise dealerships do have the advantage of certified pre-owned programs coming from their captive finance arms, which help dealers manage their used-vehicle lots by providing a great landing spot for off-lease vehicles.
“[Honda and Kia] have been doing more CPO cars because customers are willing to pay the extra mile for that extra warranty and financing that the captives put out there,” Ritchie said. Another benefit to CPO programs is that it gives dealerships the chance to build loyalty with consumers. “A CPO owned Honda acts like a new Honda owner because they come back to us for service and they don’t go to the service station down the street.”
Though CPO programs are great for the used-car space, consumers aren’t buying new cars — and that isn’t exactly beneficial for the dealer trying to make a higher profit.
“For a 2018 Nissan Altima, [consumers] are looking at paying $20,000 – $23,000,” Kadri said. However, consumers have the option to purchase a 2016 Nissan Altima, but it’s $14,000 and certified pre-owned, and that’s where people see a lot of values in those cars. “The CPO market is huge right now — we can CPO [consumers’] cars, and that gives 7 years and 100,000 miles of warranty from the in-service date.”
While strong CPO programs provide certain benefits for the dealers selling used cars, dealers will always push to sell new vehicles because of the incentives that OEMs put on new models.
“If [a dealer] sells new cars, the factory will pay the dealer extra money,” Kadri said. “The OEM will say, ‘sell 125 new cars,’ and if the dealers do then, that’s extra profits.”
The online car retail and finance platform Shift Technologies secured a $140 million series-D funding round led by Lithia Motors Inc. last week. The funding includes a strategic partnership that will give the startup access to physical locations to scale its business, Toby Russell, co-chief executive of Shift, told AFN.
Shift enables consumers to shop online and have the car delivered to their home to test drive before completing the financing and paperwork from a mobile interface on site. In addition to increased access to capital, the partnership will enable Shift to access extra storage, logistics, data sharing, and pricing data through Lithia’s more than 200 stores across the country.
“As we talked to Lithia about what Shift needed to really scale was our need for physical real estate as a place to store cars,” Russell said. “Lithia’s stores have excess parking, and space for vehicles, and secure locations, which will be very useful in that regard.”
Based on early user feedback, Russell said he realized that an integrated, seamless finance experience needed to be a part of the company’s offering.
“Most people don’t walk around with $20,000 in their pockets and for good reasons both for capital needs and it’s just good capital management frankly,” he said. “We’ve developed a platform that will allow you to apply for and get a loan in real time on an iPad app that is carried by our drivers that come out to you.”
Consumers can choose to test drive the car first before applying for a loan, or they can treat it as a direct deal by seeking financing on Shift’s online platform first.
Following the issuance of new supervisory guidelines, the Consumer Financial Protection Bureau released a statement highlighting that the guidelines do not have the same force as laws — but that doesn’t mean lenders should not heed the warning, lawyers told AFN.
The statement emphasized that guidelines do not “have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance,” according to the statement released alongside other regulators in the industry.
“I didn’t pay that much attention to it because when the regulator says something whether it has the force of law or not technically doesn’t matter. It still represents the industry receiving communication about what it should do, and it needs to be heeded,” Christopher Willis, practice leader of Ballard Spahr’s consumer financial services litigation group, told AFN. “I don’t view the idea that it’s not law as meaning that that industry can ignore whatever is said in these guidance documents.”
The CFPB identified two central offenses that auto lenders should correct. First, the Bureau examined unidentified lenders whose servicers repossessed vehicles after the repossession was supposed to be canceled. “If you didn’t know that already and you’re in the auto finance industry it’s something that needs attention,” Willis said. “Because, it’s not one or two times we’ve seen them on that issue, it’s every exam for the past two years.”
Second, the Bureau found that in instances where there was a total loss on the vehicle, creditors were not properly communicating the repayment process to the customer. Lenders take different approaches to totaled cars, but the most common is to either have the consumer continue making their regular payments or to suspend the account until insurance payments are finalized.
“We haven’t seen the CFPB try to dictate what policy lenders choose, but they’ve been critical of the quality and accuracy of communication,” Willis said. “The real objection the CFPB gives is that consumers didn’t know what was going to happen or when. They just get these billing statements that say $0 due [when their account is suspended], and then like a week after that they get a notice that they owe $5,000 [once insurance payments have been calculated]. That’s not outlandish to me the idea that you should tell the customer what’s going to happen doesn’t seem controversial or difficult to comply with to me.”
As Hurricane Florence hits the Carolinas and surrounding areas, the flooding could damage 20,000 to 40,000 vehicles, according to forecasts from Black Book and Cox Automotive.
“The losses are set to cause demand for cars to push higher as consumers rush to replace damaged vehicles,” Anil Goyal, executive vice president of operations for Black Book, told Auto Finance News.
Demand for cars especially this summer had been causing prices to rise slightly even before Florence, so any rush to replace damaged vehicles could force prices higher in the near term, Goyal added.
It is too early to predict how high prices could rise, but many are looking to last year’s Hurricanes Harvey and Irma in Texas and Florida as a benchmark. Black Book estimates approximately 700,000 cars and trucks were either damaged or destroyed during Hurricanes Harvey and Irma.
However, the market today is very different from how it was in August 2017. Today, there is concern that demand is outpacing supply. “Last week, we had started to see more stabilization after values rose for the last three months, reaching an all-time record in August,” Jonathan Smoke, the chief economist for Cox Automotive, noted in an insights blog post.
Even though the replacement need will be smaller in this case, values might increase temporarily especially in the region due to limited supply.
Florence also won’t have as big an impact on the broader U.S. vehicle market given that Texas and Florida serve as larger hubs for retail sales and vehicle storage than South Carolina.
Though Hurricane Florence’s vehicle damage will be far less than what the industry witnessed last year, lenders should still leverage hindsight to “ensure that they are putting the right value on vehicles,” Goyal said.
It’s clear that China’s auto finance market is vastly different from the United States, but it’s hard to conceptualize those differences until you’re on the ground facing them head-on.
In hosting the Auto Finance Summit Asia earlier this month, the AFN team learned a lot about the industry as it exists in China from difficulties present in the used car market to innovations in leasing that are right around the corner.
Here are four takeaways from the conference.
Profit Margins Aren’t Tight
Right now, the auto finance business in China is about making the cake bigger, rather than lenders fighting to get a piece of the cake, William Shen, an industry consultant, said during a panel discussion.
Attendees were engaged with the panel, which featured executives from U.S. Bank and Westlake Financial Services sharing their experience operating in a tight margin environment.
“In order to be successful in a really thin margin business you have to understand your expense table and where you’re spending,” said John Hyatt, executive vice president of dealer services for U.S. Bank. “Then set an expectation to automate and innovate to a place where every year your gaining leverage on the expense base.”
Although the Chinese market is not developed enough to where lenders are fighting over a few basis points of growth like U.S. Bank is with its competitors, there are lessons to be gained, Shen said. For example, Chinese lenders could look to U.S. lenders for their compliance management and how to deal with on-site inspections.
David Gaynoe, Vice President, Global Sales & Marketing, RMS Automotive, A Cox Automotive Company
Used-Car Market Has a Long Way to Go
Dongfeng Nissan Auto Finance Co. is one captive that sees excellent opportunity in the used space.
“A lot of those customers are paying cash, but maybe you can put a proposal to them that they can put some money away and pay monthly payments,” said George Leondis, president of Dongfeng Nissan Auto Finance. “That’s an opportunity that the whole ecosystem could use.”
The perception in China is still that second-hand cars are unreliable in part because there’s no central database for the car’s servicing history. Additionally, license plates in major cities are prohibitively expensive, so if the consumer that can overcome those costs is also likely to jump for the more expensive newer model.
There are a couple of ways OEMs, and their captive arms can help overcome these perceptions through marketing campaigns, Leondis said. Specifically, the OEM’s site should be linked to the captive, and both companies should make a case for the cost saving benefits of financing.
“Instead of putting 200,000 RMB or more on a Tiana they’ll put — according to our regulations — 40,000 RMB down cash and then you finance the rest, and it frees up cash,” he said. “Chinese people tend to spend more money on travel than any other country in the world. [With this free cash] they can go shopping, they can eat at the best restaurants.”
George Leondis, president of Dongfeng Nissan Auto Finance Co. (Photo by William Hoffman)
Leasing Is Vital
Another way to build up the used market is through off-lease vehicles, executives noted at the conference.
“Captives, because they are attached to the OEM, are going to have the most information on the vehicle and the consumer,” said David Gaynoe, vice president of global sales and marketing at Cox Automotive’s RMS Automotive. “It’s a controlled data set where you have motivations by the captive to maximize that portfolio but also have the consumer retention piece.”
Leasing is a good way to build the future infrastructure of the market, but it’s also just a good financial product for captives to promote. Dongfeng Nissan Auto Finance is using it as a way to build customer retention with its brand.
“In the US, I can tell you every other day a Nissan Finance Company customer is getting a letter that includes an offer from Nissan about a new car that’s launched with a loan. This is not happening here in China,” Leondis said. “We have a huge opportunity to manage this customer through the lifecycle.”
Yet, there are others who believe China could “leapfrog” leasing and go straight to newly created subscription models that are being tested in the U.S. right now.
“In many markets (the US and Europe), the transition from full ownership usage was leasing, and here I’m not sure you will need leasing at all,” said Sebastian Pfeifle, partner at Deloitte. “Or, in a broad sense, will leasing become more of a short-term usage?”
Steve Cochrane, Chief APAC Economist, Moody’s Analytics
Macroeconomics Present Challenges
U.S. tariffs on Chinese goods could decelerate the economy more than it already is, according to Steve Cochrane, chief APAC economist at Moody’s Analytics.
The worst case scenario would be if the U.S. put a blanket 25% tariff across all Chinese goods. The effect would be a global slowdown because of the interconnectedness of trade and cause Chinese manufacturers to shift supply chains from the U.S. to Southeast Asia.
“Worst case scenario, it would bring GDP growth down by about a percentage point,” Cochrane said. “We’re predicting GDP growth of 6% in China next year so the worst-case tariff scenario would bring that down to 5% — still growing but a percentage point change would be significant for China and the region.”
Passenger car sales in China have started to slow — although it remains the largest market for new car sales — and overall the economy is expected to decelerate from its days of double-digit GDP growth.
“Long term, we have to expect that the Chinese market is going to slow as it becomes a more mature economy as it shifts from low value-added goods to high-value, and as it switches from goods to services,” Cochrane said.
One of the most frequently asked questions when implementing a vehicle subscription program is identifying a proper risk model for underwriting subscription customers. This typically corresponds to two areas that need to be addressed before allowing customers into a subscription membership — driving history and creditworthiness. In this article, we will focus on credit underwriting.
Subscription programs typically advertise convenience and simplicity for customers in accessing a selection of vehicles. These programs are attractive to customers precisely because of the ease of getting into a reliable car. On the flip side, operators need to consider the risks associated with allowing customers to drive their vehicles and create an appropriate qualification process to mitigate this risk.
As we work with operators implementing vehicle subscription services, credit qualification is top of mind for many operators. In general, operators can consider three approaches when thinking about driver qualification for subscription programs.
The first is following the standard creditworthiness checks that are implemented in qualifying auto loans and leases. This is perhaps the most straightforward approach given the broad support for tools and processes to facilitate credit checks. Also, the existence of well-established credit underwriting models makes it simple for operators to be confident about the risks they are taking when allowing subscription customers onto their platform.
On the other hand, as we discussed in our previous article, there are different target segments for subscriptions, and this approach might create barriers for some target customers. Based on the goals and customer audiences for the subscription program, an operator needs to carefully consider if a traditional underwriting model is a fit for its target customers — especially young drivers who might be attracted to the subscription program.
The second approach is the rental car model, which relies on the existence of a major credit card to qualify customers. This is probably the most relaxed approach for qualifying car subscription customers. This is also the most preferred method for mainstream customers as it avoids a credit bureau inquiry, and generally simplifies the process of getting a car. The rental car industry has long utilized this method to underwrite customers successfully.
Some challenges with this approach include cards that are issued with low limits, or even backed by a bank balance (referred to as ‘secured’ credit cards). These cards are typically viewed as major credit cards by the payment processing network but represent limited creditworthiness that might expose operators to more risk than intended.
The third approach is using the requirement of a deposit to qualify customers. Often, the deposit is some multiple of the monthly payment for the subscription plan. This deposit can be applied towards the subscription payment, or be eventually refunded to the customer. Depending on the arrangement, such a deposit can be used to qualify customers and enforce a minimum subscription period. In general, this approach is less popular with customers because it is viewed equivalent to the down payment needed on a loan or a lease, which subscription programs often promise to remove.
In summary, customer qualification is one of the most crucial elements for a successful car subscription program. Operators should carefully consider the target audience for their program, and establish an appropriate customer qualification process for their membership. There are several approaches to qualify customers, and often, some combination of the three strategies discussed above offers a successful underwriting model.
Azarias Reda, Ph.D. is the CEO of Carma Car. Carma is a technology company that offers a complete technology platform to power vehicle subscription program for auto finance organizations, OEMs, and dealerships. Carma Car is part of Techstars Mobility, the premier global network for mobility technology companies. You may reach Azarias at areda@carmacar.com.
