Is it possible to provide auto loan decisions too quickly? Like the answers to “a good life” and lending’s biggest questions: it really depends on you. In today’s inflated “seller’s” market, lenders have potential for more control. How do we take steps forward to increase margins while improving customer experience? To better understand, let’s analyze three approaches – let’s call them “formats,” using the FAST method (Format, Accuracy, Speed, Trend) FAST allows us to uncover specific strengths and weaknesses for each and to provide insights to improve competitive advantage— brick and mortar lenders, dealer originated, and fintech-style auto providers.
Format: Defining the Structure for Leading Lending Styles
If we consider the three primary auto lending types of indirect (or dealer originated) lending, direct (or bank/credit union originated) lending, and digital lending (ex. Carvana, Carmax), we have 99% of the lending scenarios covered. Especially in the auto market, borrowers are overwhelmed consuming vehicle and finance information through a fire hose, oftentimes gaining pre-approvals from multiple sources and then being sold financing through the dealer as well. “Where can I get the best rate?” … “Should I work with my Bank or Credit Union?” … “Is the convenience of direct lending worth it?” … “Am I comfortable making a sight-unseen vehicle purchase through an app on my phone?”
Providing a trusted best-in-class experience that keeps the applicant feeling safe can make you really stand out from the crowd.
Smart auto lenders in every one of these scenarios are able to answer “why me” immediately. The pros for one lender can turn out to be liabilities for others. If direct lenders are able to tell a more inclusive story, indirect lenders are able to provide a convenient decision, and digital lenders can make a decision in seconds while the borrower binges on the latest streaming series. One of these options has to be better than the other, right? Maybe. And, if you play to your strengths, customers will respond.
Accuracy: Leveraging the right information to form the right offer.
In any credit decision, lenders need to ensure accuracy of information to mitigate risk, ensure repayment, and avoid fraud. When the race for decision speed has reached fractions of seconds, making sure that lenders are protected becomes paramount. An accurate credit decision is a combination of having good information available as well as knowing what to do with it. Banks and Credit Unions have best-in-class knowledge of their applicants because of their valuable, ongoing relationships. They can time offers proactively and should be—but also need to be—able to respond to a request. Learning how to build custom one-to-one offers in realtime is a next generation capability that provides competitive advantage and is beyond most organizations today. This could be a new focus for lending.
The other two lending scenarios are “first-time” interactions. And thus, these scenarios are much more dependent on public data and generic trends. For the “indirect” lender it’s as much about the relationship with the dealers as it is the applicant. How can your automated decisioning provide both you and the dealer better margins? Fundamentally, how can you lower the FICO score without increasing risk and still approve a loan in realtime? It’s about being able to support a more intricate decision model, taking in better data and double checking it against other sources leading to a better and more custom one-to-one offer. Doing this well with old loan origination software tools is next to impossible. The good news is that new capabilities brought on by enhancing your LOS platform can be a big difference.
Speed: In Auto Loan Decisions—Is it Still All About Who Responds First?
It’s no secret that decision speed is a critical piece of the auto lending experience. Providing fast decisions can be all that is needed to overcome challenges in borrower behavior—lack of loyalty, attention span, shopping around, and others. Borrowers consider themselves armed with buying power upon the first pre-approval they receive. In a symbiotic lending relationship, this is exactly what lenders want. Empowering borrowers to buy is what turns a decision into revenue. And doing this quickly means being the first to provide the tools needed to complete a purchase. After all, many auto buyers are excited at the prospect of spending money on a new vehicle.
In indirect, or dealer-based, lending situations, speed has the potential to be the difference between being the lender and being skipped over. First back with an approval and high margins virtually guarantee the customer. But, if you miss that window, or leverage bad data to generate a conservative offer, the opportunity may be gone. Lenders competing in the indirect environment need to have data-driven decisioning strategies that deliver custom and right decisions, right now
Digital lenders sit somewhere in-between on this speed vs. story timeline with the ability to virtually interact with a borrower online. Leveraging SMS & other communications to draw the applicant back into the conversation are great tools to allow for a more comprehensive lending story without the brick and mortar overhead. This lending style advantage is having a single session “conversation” with the customer and moving through to signature completely automated. This means that the infrastructure behind the scenes needs to get it right. Again, older platforms tend to be the reason “why not” vs. enabling easy new approaches.
Trend: Being Where Buyers are Buying
The real secret here is that lenders need to be everywhere a borrower is buying during the auto decision process. Smart lenders know that borrowers aren’t typically sitting down at one location, getting a decision, and driving off the lot. And while digital-first lenders may have the upper hand when it comes to accessibility, there is still plenty of room for all lenders to play a role in the buying process, and be in the right place at the right time. There is a captive experience to be had at every step. This is where some other “T” words come into play. Establishing trust and communicating with transparency are secret ingredients to ensuring borrowers keep you top of mind when the time comes. An open and flexible loan origination and auto loan decision platform is the way to make this happen. Make sure that you are adapting and adopting an LOS platform that allows for borrower focused messaging, open communication throughout the lending process, and completes the end-to-end lending cycle to capture accurate decisions in the amount of time and in the right place to set yourself up for a successful loan servicing program to follow.
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While we keep an eye on what’s coming next, and continue to stay educated and prepared to push the fintech industry forward, the loan origination software experts at FNI will keep providing insights and, of course, providing hands-on and high-level service to our loan origination platform partners. If you’re ready for direct access to decision strategy management and more, talk to a loan origination expert.