The auto finance industry has long suffered when it comes to truly understanding the assets that are leased and financed on a daily basis around the U.S. This lack of insight is perhaps most apparent when it comes to titles and the remarketing of vehicles. Two significant problems stand in the way of reducing risk in auto lending.
Problem 1: Fraudulent Titles
As is happening in Houston right now, and has previously happened in New Orleans and North Carolina, thousands of vehicles are being destroyed by flooding as a result of a natural disaster. These affected vehicles will have insurance claims filed and settlements will be paid to their owners. The vehicles themselves will be declared a total loss and will have “flood titles” issued against them with the intent of going to their graves in a scrap or parts yard.
This creates the perfect opportunity for fraud rings to claim those vehicles for next to nothing, clean them up and get them operable, and move them across state lines. They will then re-title the vehicles with “clean titles” and subsequently sell them to unsuspecting consumers. When these vehicles have problems and the fraud is uncovered, borrowers and lenders alike bear the burden.
Problem 2: Remarketing
In a separate — and certainly less sinister — scenario, millions of vehicles are coming off lease, and many will be sent to auctions to be sold to dealerships and wholesalers for the next chapter of their lives. In many cases, the lenders selling these cars do not know the true equipment and options that exist on these vehicles. Therefore, they may sell them for less than they are truly worth.
The platforms where the vehicles are serviced are typically fed from a separate originations platform. That means that many of the details about the vehicle may be lost in integration: Seldom do these systems capture the same information on the vehicle. For example, if the lender does not know at the time of remarketing that the vehicle has the premium audio package or is all-wheel drive, he or she may set the floor price too low and fail to receive the benefit of those options when the vehicle goes through the (virtual) auction lane.
Both of these scenarios are the result of the same basic problem: A lack of an immutable history of the vehicle from cradle to grave (and maybe resurrection). Both of these cases would be aided by the creation of a common “chain” of data on all attributes and actions to the vehicle based on a vehicle identification number (VIN) that would span the lifecycle of a vehicle from manufacturing to final disposal/recycling. But how to keep all that VIN-linked activity somewhere for all life-cycle stakeholders to see and for the information to be secure and trustworthy? That is the challenge.
Blockchain technology could help. Blockchains are a distributed ledger technology based on records with unique “hash” metadata linked to every transaction. The cryptographic approach to hashes creates a verifiable “single source of the truth” — meaning an unchangeable digital record is created for every transaction. No sensitive information is ever transmitted in the clear, and blockchain ledgers can be full, limited, or private in scope.
Blockchain has transformative potential for automotive lending. The use of a blockchain could lead to these benefits for the auto lending world:
- Increased speed and security of transactions
- Transparency for all activities for all involved stakeholders
- A more efficient end-to-end process
- Improved costs
- Reduced risk for both lender and borrower
With these improvements to the lending process, blockchain would make fraud much more difficult to accomplish.
All honest stakeholders in auto finance would benefit because the data would be fully integrated for all events and there would be a single source of truth. The data would be both immutable and auditable, and the entire system would be incredibly secure.
In the case of using VINs to track vehicle details and activities, outcomes of having such a digital record would include:
- Faster, more accurate reconciliation than anything that is possible today, which is often nonexistent when it comes to tracking possible fraud
- The source of all activities and parties could be known, with all transactions time-stamped, secured, and cryptographically verifiable
- All VIN-related transactions would be 100 percent auditable, uncompromised, and unchangeable
- Transaction finality would significantly reduce clearing, reconciliation complexity, and errors
Blockchain would enable lenders to run effective title histories on vehicles to determine their status and if they have been moved across borders, had title statuses altered, and so on. It would also allow lenders to refer to a vehicle’s build data, so they would know exactly what options were on the vehicle when it rolled off the assembly line. As a result, the risk of lending on vehicles would go down and the value of vehicles to all parties would be enhanced. Determining such facts today requires multiple individual interfaces to try to address specific cases.
Making Blockchain a Reality
Creating a market-wide, entire lifecycle process is an incredibly difficult and lengthy process due to the sheer number of stakeholders involved. Yet today Fiserv is building proofs of concepts and trials for blockchain deployments in other sectors of financial services. The time is right to extend this to automotive lending as well.
This article was written by Charles Sutherland, vice president of product strategy and management for lending solutions at Fiserv.
For more content like this, check out the 17th annual Auto Finance Summit, which will take place on Oct. 25-27 at the Wynn Las Vegas. To learn more about this year’s event — or to register — visit the Summit’s homepage here.