The Three R’s Driving the Acceleration of Auto Originations
Since the beginning of 2018, the auto financing industry has seen an unprecedented level of interest from auto lenders looking to replace their legacy originations platforms. While each lender approaches this process differently, the decision to begin the replacement cycle is likely being significantly influenced by recent changes in auto financing. We believe that the roots of this cycle began back in 2014 and that there have been three distinct eras of auto originations since then. As we look back over the last four years and look forward to the next, we want to share our views on these three distinct eras of auto originations with you so that you may use our insights to grow wisely in today’s ever-evolving industry.
The three eras of auto originations strategy are:
• 2014 to 2017 – Race for Share in Rising Volumes
• 2017 and beyond – Rise of the Borrower
• 2018 and beyond – Retail Transformation
In this blog, we will define each of these eras, what brought them about, the strategies of lenders that have arisen in response, and the key benefits that lenders are looking for from their originations systems to thrive in an ever-evolving, complicated landscape.
This era arose in response to the peak of new light vehicle sales which by the 2H of 2014 were approaching 17 million units annually rising to more than 18 million on a seasonally adjusted annual rate (SAAR) by late 2017. These were sales levels not seen in almost a decade and spurred a heightened level of speed-based competition amongst lenders especially given that economy-wide low interest rates limited the ability of lenders to competitively differentiate based on interest rate.
In response to these conditions, the strategy of many auto lenders was to:
• Push to acquire more business from existing dealer relationships and block out new entrants
• Refine decision models to increase auto decision rates
• Open new sales territories including pursuing direct lending wherever possible
• Expand the “buy box” of what would be purchased
For lenders this means that their auto originations systems needed to be able to provide two clear benefits: to book at scale and to deliver with efficiency and speed. Those lenders whose originations systems could not realize those benefits are the lenders we now see looking at our Auto LOS today.
This era of auto originations began to emerge when new auto sales began to slow down in 2017 and future forecasts suggested no growth and perhaps further declines. Decreasing volumes meant that borrowers were gaining influence in lending decisions because it effectually became a “buyer’s market.” Borrowers increasingly came to auto lending decisions expecting “the Amazon Effect” and lenders who couldn’t deliver suffered. Simply put, “the Amazon Effect” occurs when consumers expect a transaction to be as simple as researching and buying an item from Amazon. It’s fair to say that this was not the experience of many consumers looking to acquire an auto loan or lease at the start of this era.
In response to these conditions, the strategy of many auto lenders became to:
• Drive more loan and lease volume through emerging digital originations channel partners
• Look to increase booking rates in the absence of sustained borrower loyalty to a lender
• Invest in dealer relationships to prevent the rise of competitively-driven “flipped deals”
For lenders this meant that their originations systems needed to be able to provide further benefits to supplement those benefits arising from an earlier era: agility and compliance as well as an empowered borrower experience to reflect the rising power of borrowers in lending. These additional required benefits have heightened the interest of lenders with legacy platforms in replacement solutions and have encouraged other auto lenders to look for solutions with borrower enabling capabilities as well. As an originations system provider with a focus on empowering borrowers, Sagent Lending Technologies welcomes this era.
The era of the “Rise of the Borrower” isn’t going away any time soon. In fact, it may be a permanent change in the power relationship in auto lending. What we have seen so far, this year is that the strategic responses to that era may have unwittingly created a second concurrent era of change in auto originations as well– the retail transformation of lending. Lenders have further increased competitive intensity via traditional channels (you can see that in the decline towards 3-5% book-to-look ratios in segments of the market) and by also opening many new channels for borrower acquisition in response to changing borrower expectations.
The auto lending strategy taking shape among many auto lenders today is to:
• Build new partnerships to deliver a complete online sales and financing experience
• Deliver to borrowers in a “finance anytime, deliver anywhere” model
• Pilot new models for vehicle financing including subscription and shared-asset ownership
But there is a price to be paid by creating so many new retail channels simultaneously. For lenders operating with legacy origination systems that can’t support these various concurrent channels, this has created the third and final reason to start looking for a new originations system, one that addresses the retail transformation of lending. Lenders need an originations system that can reduce the costs of acquisitions rather than raise them and manage evolving retail channels holistically. This is what’s driving the renaissance in auto originations legacy system replacements.
At Sagent Lending Technologies, we have responded to the emergence of these eras by helping our clients deliver today while building for tomorrow. We are here to provide technology and advice to lenders that want to navigate through these auto lending changes and challenges and in doing so, help them grow wisely.