Risk, Reward & Regulatory Change – Insights from the US Marketplace
Las Vegas was the home for the Auto Finance Summit in early October. As always, the event provided a fascinating insight on the dynamics of the US vehicle financing market and a potential bellwether for what may develop in other mature financing markets around the globe.
With speakers and attendees from across the automotive spectrum (including; banks, captive finance providers, independent financiers, credit unions, floorplan lenders, ‘thrift banks’ and dealerships and a supporting cast from; investment banks, law firms, rating agencies, consultancies, insurance providers and technology providers), the Summit provides a valuable networking opportunity and a chance to take stock of the current and future direction for the market.
The US vehicle market has, like many other mature markets, enjoyed positive momentum over recent years. A sustained, albeit gradual improvement in the economy, has slowly built consumer disposable incomes and with it confidence. The US vehicle market set a sales record in 2015 of 17,470,659 sales, an increase of 5.7 percent over 2014. Lending into the sector outperformed this growth, increasing by 10% year on year, and balances financed exceeded 1 trillion for the first time. However, rather than fueling optimism, the key theme of the Summit was one of caution, with concerns that the market may have peaked.
Increasing finance sales has attracted new entrants and new technologies. It has also seen an increasingly crowded market place that in turn has encouraged margin pressures and ‘bolder’ credit policies. This desire to expand the appeal of credit has been balanced by an increasing compliance backdrop as regulators seek to ensure the lessons of the credit crunch are learnt and that consumers are treated fairly.
The battle for sales and market share have made automotive loans arguably easier to get than ever before, but worryingly delinquency rates have nearly doubled since 2013. The landscape to this emerging rise in default levels is an economy that in July was reported to be running at ‘stall speed for a third straight quarter’. Risk and reward is a growing challenge for lenders and for regulators alike and formed the key topic of this year’s Summit.
From the very first session, a ‘fireside chat’ Q&A session with Tim Russi, President of Auto Finance at Ally Financial, the theme was set.
The strong performance from captive financiers in the prime and super prime area and what Russi sees as unsustainable price-led models by other players has seen Ally taking on a new change management process to define how it approaches things in a complex environment and prepare for the future. Russi sees the route forward for auto finance as one where positive business culture meets timely consumer data, which in turn will enable smart underwriting decisions. “It comes down to the people. It starts with the right culture,” Russi explained. Better technology, as other commentators at the Summit noted, will be vital to delivering considered underwriting.
Ally’s new approach is being mitigated and balanced by a focus on compliance, where the business aims to be “best in class.” Given the fines issued to a wide range of lenders and dealers by The Consumer Financial Protection Bureau (CFPB) for breaches in its mission of ‘promoting fair and equal access to credit in the auto finance marketplace’, a strong focus upon compliance by any lender, especially those engaging in riskier market areas must be seen as imperative. This priority must not be diluted in spite of the move in mid-September by the US Government’s Financial Services Committee to approve a bill that has the potential to undermine the CFPB and deregulate the financial services industry. In today’s customer-centric, transparent operating environment it seems unlikely that the topic of compliance will go away as an area for public debate. The genie is unlikely to go back in the bottle entirely.
In a nod to the development of deeper relationships between financier and dealer in areas such as CRM, Russi pointed to the importance of developing an agile business model that can create a sustainable, resilient revenue model for the long-term, rather than taking a short-term, opportunist approach. He reflected that the automotive industry needs to be disciplined, responsible and competitive. This long-term approach, he concludes, is important, noting; “When the economy gets tougher, those who entered the market at a more favorable time, will exit." The industry has seen the revolving door of finance providers in the past; given the growing complexity of the market, the speed of change required to adapt and a slowing economy, developing partnership longevity has much to be recommended.
By Doriene Viera at 17 Oct 2016, 09:34 AM