The growing popularity of direct-to-consumer business models like Warby Parker increasingly has implications for the auto finance industry. While the logistics of affording and purchasing a pair of eyeglasses is admittedly much easier than an automobile, the customer experience is highly relevant. This is especially true for subprime auto lenders where consumers are focused on securing a loan before deciding upon a vehicle for purchase.
The convenient, digital-first and thoroughly modern experiences of companies like Warby Parker have created higher expectations upon which all industries – including auto sellers and lenders — must deliver. According to Salesforce, 64% of consumers today expect real-time communication with companies.
At the same time, these direct-to-consumer models have demonstrated the business value of owning customer relationships. Accenture estimates that a poor customer experience resulting in a consumer switching to a competitor costs companies in the US $1.6 trillion a year.
The Case for Direct-to-Consumer Auto Finance
Historically, auto retailers have enjoyed productive personal relationships with buyers. By virtue of in-person visits and ongoing sales and maintenance dialogues, retailers build a solid understanding of their customers over time. Recently, auto retailers have begun leveraging that data beyond the 1:1 relationship held by salespersons and mechanics into enterprise-wide learnings that can help drive broader engagement opportunities.
But auto lenders normally live outside of that relationship. Most lenders indirectly reach customers through dealers only after a car buying decision has been made. The focus is largely on constructing a loan that meets everyone’s needs versus laying the groundwork for an ongoing relationship. By coming to the party late, they facilitate a transaction but do not necessarily own the data and relationship.
As the auto industry shifts even more to a digital-first engagement strategy — think Tesla, Carvana, and others — there is a danger that lenders could be further marginalized. Technology has lowered the barriers to entry for many new offerings and the balance of power has shifted to the customer.
Over the coming years, more banks, dealers, and aggregators will be migrating to a digital presence that can capture car shoppers and own their journey through the vehicle buying experience. Every step of the resulting customer journey must be optimized with a sense of urgency in order to meet the demands of the modern consumer.
Subprime Lending as an Industry Model
To remain relevant and competitive, auto lenders must rethink their models to put forward a direct-to-consumer offering that will bolster their value to buyers and result in longer-term relationships for repeat business and positive benefits to the bottom line. Fortunately, a precedent for this exists in the subprime market and could help others map out this new approach.
In the subprime arena, car buyers normally search for financing before deciding upon a car. For example, the deep subprime consumer can be attracted more by “no credit check required” marketing than shiny car ads.
The numbers support this approach. For example, 70% of Tricolor customers initiate a relationship by searching for financing. They want to know they’ll qualify for a loan before ever looking inside a vehicle.
As an integrated retailer and lender, this has an enormous advantage. It means we have visibility into everything at the top of the funnel and can apply and hone our underwriting and risk formulation along the way. It also enables us to vastly augment our use of technologies like AI and machine learning for scoring purposes.
This stands in stark contrast to an indirect lender that is reliant on a dealer sending them a loan application. The insights and ongoing interactions are severely limited.
This finance-first approach to car buying is now beginning to work its way up the chain to more and more near prime and prime buyers. These are also the same consumers already pre-disposed to direct relationships. Lenders must begin preparing now to take advantage of this shift.
Building a Direct-to-Consumer Strategy
One way to engage borrowers directly could be to capitalize on partnerships that deliver improved market share or an enhanced borrower profile. For example, a pure play auto finance lender could align with online aggregators, local market credit unions, large employers or others that give them marketing access to potential customers.
Another possibility might be to invest in building a consumer-facing brand similar to OnDeck for small businesses loans or LendingClub for P2P loans. This would require a large commitment of time and capital resources, but a lender could carve out a first-to-market strategy that could allow them to own a wide open direct-to-consumer auto loan brand and strategy. Focusing on a specific customer segment such as Tricolor’s emphasis on Hispanics, can also further differentiate a consumer brand play.
Lenders that do make this investment stand to vastly improve their operations and gain an enormous competitive advantage by virtue of having visibility into customer needs, desires and behaviors from day one. According to the Aberdeen Group, companies which can capture customer feedback, expectations, and preferences have an almost 10 times greater year-over-year increase in annual revenue.
Ultimately, if lenders can carve out their own relationships with borrowers, it will allow them to cement their place in the auto purchasing experience of the future by shaping more personalized experiences and interactions with consumers. The long-term benefits will be happier, more loyal customers, the potential to ease default rates through direct interaction, and cross-sell or up-sell opportunities across financial products and auto purchases.
Daniel Chu currently serves as founder and chief executive of Tricolor Auto Group and Ganas Holdings. Chu has distinguished himself as a successful entrepreneur, having founded six companies over the past 25 years, including two which became public. Chu currently serves as the founder and chief executive of Ganas Holdings, a national used vehicle retailer focusing on the integrated sale and financing of vehicles to Hispanic consumers. The branded chain of thirty dealerships across twelve metropolitan markets operates in Texas as Tricolor Auto Group, and in California as Ganas Auto Group. The company has been recognized by Inc. magazine for five consecutive years as one of the fastest growing companies in America, while also receiving distinctions as one of the ten fastest growing privately-held companies in the greater Dallas-Ft. Worth area.
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