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Rapid Digitization in the Auto Market · Leaders in Lending

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You're listening to Leaders and Lending from Upstart, a podcast dedicated to helping consumer
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lenders grow their programs and improve their product offerings. Each week, here,
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decision makers in the finance industry offer insights into the future of the lending industry,
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best practices around digital transformation, and more. Let's get into the show.
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Welcome guys to Leaders and Lending. Thanks for making the time today.
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I'm joined with Becky Philippi from First Interstate I got that right and Fabian Theory
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from Bank of America, the Chair and Vice Chair of the Auto Finance Committee
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at the Consumer Bankers Associations. Thank you guys for making the time to join
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the podcast here. Thank you for having guys. So. I know you
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guys recently had your committee meeting, so talk to me about like what's it
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is like a very interesting time to ask a question. What's top of mind
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for the committee? It's kind of a wild world we're living in, well
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right now, what's top of mind for the Auto Committee? And now we're
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it's just such a valuable committee and disagree griplic leaders coming together about really focusing
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in on kind of the the macro trends in the industry obviously regulatory items UM
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fair lending, gap insurance, and then UM servicing and collection processes. Yeah.
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Cheese also is another one that regulators of being into a cross. I
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was a cross across banking products, but not always can medics well to your
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two O toil selfie fees are also like top of mind for the bankers.
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So what do people think about I mean, it's that's a lot of tough
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fair lending, gap coverage fees, regulatory recite. Has there been an increase
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in like examination intensity or what's driving that the kind of focus on these regulatory
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topics. Actually, I will stop by sharing your stats from my institution.
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We were comparing level of exams combined between you know, internal in the external.
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Yeah, and there's an increse of like ate per SONCLFFE activities in the
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space. How do you measure that? That's like a very like a precise
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number. It's not like a back of the envelope to externally and internal exams
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coming from various regulators and various internal functions. So that was a needsing that
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for us to do. But just just to show the cross product out,
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how I would say, just additional resources needed to cover all those exams and
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so no wonder why it's it's it's number one on everybody's mind, right,
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but rapidly changing. Yeah, yeah, Well and I saw the there's lawsuits
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from attorneys general and you know, all sorts of stuff coming down. So
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I imagine it's a real increase in focus on getting things right because there's a
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you know, it feels like it feels like a lot of people out to
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make sure that the consumers are being properly served in the market. That put
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it that way. There's one one piece will so big yin foul and a
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committee is very interested to hearing from all of us is what we do in
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gim of innovation in the space, so not not of destruction and mostly you
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will be covering that a little bit later, but innovation is top off mind
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all the bankers. Well, le, let's talk about in so I know,
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like it's it's been an interesting couple of years in the just auto buying
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market, from like lack of inventory to digital buying, like just just the
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purchase of an automobile has changed, and a lot of pressure on both OEMs
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and dealers from experiences like Tesla or Lucid that have full digital end purchase and
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finance come my own funny stories about buying both the Tesla and the Jeep,
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which we can tell because they were they were pretty different in bizarre experiences both.
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Um. But what are the key trends you guys are seeing coming up?
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Because obviously whatever happens in the purchase of an automobile market flows through into
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the automobile financing market. So what are the trends you see happening in that
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space, because it feels like it's a very rapid pace of change right now.
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And I will stop by just maybe the number one that comes in mind.
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He's just increase ridd it online and activity increasing coming from the space.
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And that's really like kickting gears or during during trove it we've seen transact sit
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everyding um and and clients looking for digital solution to meet that auto finance need.
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And that's just like trickled down to the antire industry, fund the lenders
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to consumers demanding the new products. I will say that the dealers also in
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the industry changing the way you know, they ultimately have like a presence online
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and having different rules where clients at a time could not face to face,
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so that's really kind of like being one trend um another one. But I
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think I've been very transforming in our spaces thinking about just the level of like
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car in venturing. Yeah, so over the years that really like trouble,
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were used to have those lots at the dealership of four cars and we went
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down too close to nothing, And I think there's lesson learns here for the
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industry and manufacturers or ems. I think two good nuts so m because when
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you're thinking about just you know, the years of two thousand and twenty,
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two thousand and twenty one, if you're looking at the profit abbit for a
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lot of manufacturers, we've see profit abbib like reaching high scores at a point
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which the inventory was very scarce um. And so what would be interesting to
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look in the future to see how we see that trents coming back, How
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we're going to get back to both you know, high inventory levels with more
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discounts lack we we we used to in the past, or are we going
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to find like more of that balance. If that they took good notes and
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she gave it could be pretty it manage the inventory levels and kind of create
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that demand. Yeah, I thought it wasn't a car as another recreational vehicle.
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So but I remember I was looking through the invoice this is during COVID,
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and I got there's there's this fee, like a thousand, two thousand.
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I said, what is this? What else clean? And it's a
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ridiculous fee. They go, Jeff, it's because we can would you like
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the vehicle or not, because if not, we can give it to somebody
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else. I thought, oh, interesting, this is the this is the
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market price fee. The market price is above the stated price, and so
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we're just gonna like stick it on there. And that was probably pretty good
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for for the for that dealer, for the OM ultimately, and Jeff,
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your point here is actually a good one. That's another trend that we've seen.
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If you're looking at just the level of pricing on new and news vehicles,
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I think we've seen those reaching historical high. You could argue at the
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steel at a very high Yeah, every very high level. We've seen,
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like US price coming down slightly. Um. But that's that's also another dynamic
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that we have to to to deal with at a time where inflation rights m
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our. You know, you're thinking about just APR and the level map just
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like it inflects the consumption. So this is this is what comes to mind.
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And the last one big issue. Agree, I think it's it's it's
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around lack the newcommerce. You mentioned the test Labe. Of course electrification,
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newev coming and challenging willso just the the existing model. Yeah, and coming
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back to you also the point I was making earlier about like the online buying
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process and short who seeing you dynamic and a mackt aw client experiense right now
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you could just do every fall like do you. I mean, it's interesting
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because it feels like the OEMs are using the moment of electrification to change the
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nature of the relationship with the dealerships in terms of many of them are looking
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like my experience, I joked about buying a Tesla, I'm buying My interesting
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jeep experience was that I wanted to buy a jeep. There was no inventory.
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I go to the dealer that like, you know, you can search
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to the inventory online, I hope, But there's nothing. There's like two
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that are here and they're not what I want, and they always just have
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to order it for you. I say, okay, And so you know,
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of course, what did I do first? I went to Jeep's website,
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I configured the car I wanted, and they put me in touch with
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the dealer and I went to the deal and like, oh, well you've
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got the order. I say, okay, how do we do that?
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They pull up jeep dot Com on an iPad and had me rea and figure
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what I'd already done at home and then submitted to the manufacturer. And I
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went, well, why did I what did I do? What did I
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come in here for? Why did what was this whole process? And they,
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of course got something a little wrong. You do the way I don't
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just you know, that was like Greece. But it feels like a lot
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of the manufacturers are trying to use their electric vehicle fleet as a place we're
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going, hey, no, we may take more control of that buying experience
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because this is not fitting into our old relationship. And so I'm curious if
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you see that shifting into more broadly, because it does feel like a moment
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where they're trying to like a little bit change the way it works and provide
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that the test experience. You go, like give your credit card and then
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the carshes up at your house like three weeks later. It's a very different
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experience and why I think that the aliens are trying to make something like that
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available for their for their for their consumers as well. Agreed, and so
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coupled off, you're thinking about dress, but you're describing which is really like
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reinventing or revamping I should say, the client experience. And NBC's really kind
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offlect the name of the gamp um. So a lot of the lenders are
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used to work through the HINDWEC space and the theater model. Some of the
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new players that you just mentioned just are reinventing client experiences, providing digital solution
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for the clients to configure the valiables, just linking linking the loan application and
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the finance directly and the light in it and providing like all the digital tools
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e contracting designing that clients will expect and that process could be done from your
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patch. So I am and I will say that is also a good thing
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for the industry, that accelerating that that transformation, that digitalization of the space.
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So so overall, I think it's better for the clients, better for
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the industry and a lot of the players process spectrum, not just that he
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needed to assortion and I know that we play in that space back then.
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Let me ask you this because I um, the technology side on lending particularly
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is interesting to be how do you really integrate that experience? And I thank
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you? So I said I wouldn't tell about my card banks. I want
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to tell both my car buying stories, which is you know. I went
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to Tesla and I called my bank and I said, well, i'd like
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to get I'm buying a Tesla. Can I get a loan? Like I?
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Where were you? Guess? For you? I did the thing that
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you all would love for consumers to do. I called my bank. I
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said I'd like to get a car loan and they said, I'm sorry,
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Jeff, we don't have a digital application and I can't do it for you
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as your banker, but if you walk into the local branch they can give
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you the application. I thought, I won't tell, I won't name my
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bank. And I said, this is ridiculous. I'm not doing that,
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and I went to the Tesla side. It was all, would you like
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to get one of our finance offers? I said, yes, I would
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Apparently how I thought I was just going to pay cash, but apparently I
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will finance with you. And I of the application, I got instantly approved
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and I got a loan from my bank that did not have a digital process
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for me as a consumer to get a loan, but would give me a
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loan digitally instantly through Tesla sites. So they got the business in the end.
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But back toward I'm curious. We've talked about the technology on the car
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buying process, but the technology of being able to offer instant clothes really seamless
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technology, and the lending side, I'm curious what you see happening. That's
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because it was really shocking to be that they could provide a digital clothes experience
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on a loan on Tesla's website, but not to me directly as a customer.
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That just I was kind of going, what has happened here? Surprising?
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How how many especially smaller institutions that you might hear that don't know that
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it was not a small institution really well, it's not a small student but
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are narrowing down the list tho we shot support that channel your left of the
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dust, not like you said, to have the back end integrations you're Tesla.
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I mean it's it's important that we accom for that. So I think
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what you're touching on me here, Jeff, is is really like an evolution,
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but is opening in the marketplace where even the landers are looking into.
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Historically, I will say, just most of the landers in the auto space,
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I've been playing into the indirect space, of course, and what you're
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describing here is just simply needed investment. And some players are you know,
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I will say, ahead of others um into the client direct to a point
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proposing financing solution for their own clients, and and and and then they can
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that will lead to the dealers, or that will lead to to to the
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manufacturer in your case, or the example of Baselatum and some of us capabilities
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are getting built. Um, it's a business decision. I will say also
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about some of those landers, I'm making a what's it's always often? I
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mean, I say, everybody wants me to everybody wants our customer to come
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to them for the loan. But then you know, the dealers have a
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habit of finding a way to convince you that there's a better option through their
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indirect channel that you can get and that loan not sticky. So I understand
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it can be a tough business decision to make that investment because like you can
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have a great available product. I might go get pre approved and you send
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me the check and I go, you know what, I didn't want that
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anyway. I actually got a better deal to test. So it's a it's
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a tough decision. It's not always been easy to keep that business. Even
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it's hard to get people to come to you in the first place, and
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it's even harder to them to stick with that direct loan when they walk in
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the dealer and they've got some incentive going they call their partner over at their
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local institution and find you a better deal. It could be disruptive to do
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other relationships too, So, like when you talk about the business decision,
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that's part of it as well. It's a cline violence. Yeah, So
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let's talk a little about the lending side of the business more directly, Like
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what is I know the inventories have shifted the sales environment, but the interest
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rates have been a pretty interesting ride here of late. And you combine that
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with you know, shifting asset values and like what what what is the collateral
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I have really worth? What's the value of my book? Like, what's
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the real recovery value on my book? As those prices go up and maybe
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don't stay where they are and come down, and how collateralized is my book.
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I'm curious what you're seeing shifting in the environment because it feels like both
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sides, both the interest rates, the cost of funds, and the asset
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value backing this or have been on a bit of a roller coaster ride in
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terms of where those values are and how is that impacted the lending business.
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You know, obviously really impacts the affordability you know, so so borrowers,
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Um, no, if they're at a position too with negative equity now from
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a like you said, buying high and yeah, kind of losing value to
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risk there too, but you know, maybe forcing them to ful that to
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their over units lager and and not enhapsing right away. Um, you know,
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stretching out loan terms, you know, longer loan terms to make that
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payment more affordable. But yeah, some definite risks there. You're thinking also
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about platform or pope folio standpoint, the clients made an arbitualge as well.
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Sure, looking back into twenty two twenty one, Um, we had like
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a high mix of you know, lease happening in the US market that that's
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really kind of like shifting back to more like a purchase based on what you're
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describing in the dynamic of the market and the price and the interest rate that
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might shoot shot back in the future always seeing like some adventure we're coming back
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and if I would, I would age that some of the manufacturers might just
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subsiding a little more of the of those of those leases. Um. But
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that's another like dynamic that we've seen for the last couple of years, which
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obviously changed or has an impact on just the overall like Pope folio and the
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way we manage it. Are you are you seeing impact to like credit quality,
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credit performance as rates go up? Is you know, we've seen the
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personal savings rate, you know, was at a kind of obscenely high level
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that was almost never seen in history, and now it's like going down below
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where maybe the long term average seems to have been. If you except the
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kind of two years of like that immediately that grap it's like it just kind
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of doesn't even make sense with those two years. But it seems like that's
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coming down to you, Is that flowing through to losses and of course with
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asset values maybe decreasing over time, you've got like recoveries also come down.
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Have you seen that impacting portfolios generally yet or is that maybe something you're just
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keeping your eye on, because it's not it's not on the data yet,
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but it certainly looks like a trend to be watching. Oh, you're so
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artificially low on delinquency, you know, in the industry for for a while,
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so it's starting to let al out a little bit. Not that.
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Yeah, and you're thinking about just I mean, that's obviously something between monature
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just and constantly I imagine, Yeah, keep our eyes on to your point
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that Kia think just the industry has been giving with very little little be equancies
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and losses portfolio based on the you know, professors performance UM and great recovery
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I got chill enjoy that the higher values too. So yeah, so um,
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I would say just obviously depending on the landers and the type of like
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landing activities, you could argue that you will just be a sectually different UM
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and so at at B at bad stage, I think the losses of the
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equincy is still fee meant like failing law. Um just you know, coming
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back to to pre COVID a level. So, but but we we're watching,
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We're watching, watching, watching watching wondering see what that's I wonder do
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you see people preparing for this is thinking further in the future. But you
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know, we had a we were partnering with some institutions around a refive business,
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which has never been a huge business and auto um, you know,
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it's never been compared to like, let's say, mortgage. The percentage of
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loans and give refinance is actually quite a bit smaller, which which we found
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out. And obviously right now is a really bad time to refinance loans because
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your cost of funds are likely quite a bit higher than when those of thrones
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were originated, but also kinds that the launching new programs takes years, and
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in years, were likely to be in the opposite environment, which is a
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bunch of loans originated during a relatively high interest rated period. Now with costs
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of funds. You know, I could not supposed to knock on the Table's
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messed with the mics, but knock on wood. Interest rays coming down,
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you know, I'm not talking about the next six months, but the next
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two years we expect to probably see interest rates coming back down from where they
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are now, and that making means for an opportunity and one that probably if
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you want to be ready to execute on in a direct channel channel, you've
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got to be investing in if not today and the relatively near future. Do
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you see people looking to future? This is Hey, we've got a very
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different environment that will be here eventually. We want to be ready to take
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advantage of opportunities that are created by a very different environment English old enteries.
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Yes, and that specific product you're describing is something that I'll always be key
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in them. Where you're in the climbed all right space, that's actually very
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activing invasement and ulsting basting capability es ahead off the cycle these scribing and it's
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all about it again, just serving the clients being there, reinventing about client
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expanse, and I should think about the refineance processing itself VSPSPS. A lot
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of headles that comes. We've been we fee refinancing, there are financing your
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loan and so working through those ahead of time, trying to automate and simplify
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the process is what we already kind of like focussing them. It feels like
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that process is also getting easier with so many of the DMVs moving to electronic
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titling particularly during COVID where there's a lot of maybe not full electronic titling,
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but these signature is allowed on title transfer. All of a sudden, you're
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saying, you know, some states, that was a temporary and it's now
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it's becoming a permanent solution, going, hey, we can actually start to
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automate what was macas is a very manual process that made in my experience,
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like I can get you into a better rate, but after I cover my
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operation costs, well, now I can't get you into better rate anymore because
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it was so expensive to do some this manual processing. That may change the
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nature of the opportunity in a meaningful way of we can really get the high
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levels of digitization automation. Interesting, So what are the other big trends you're
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saying, like if coming up on a couple of years, the one that
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comes to mind is just, you know, an evolution of the ownership model.
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That's a FASCINTI thinking about trends that we're seeing in Europe. Um.
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So obviously we've seen the traditional ownership model in the introduction of more of the
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subscription model, and you sho're thinking about the technology, we're thinking about evs
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you're thinking about, you know, the the enancement of the technology if that
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comes with LAG you know auto drive and the mobile idea aspect. You could
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think about clients potentially pivoting in the future and looking for another way to own
19:48
or USERVA, so usership or subscription versus owning UM and and that's something that
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I think often now will the consumer in the US. There's a couple of
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players of it. He just more on the fine take, but just I
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to produce solution in the markets, more on the fleet side. And that's
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an interesting things to fall us to watch and see how the consumer demand.
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Are you seeing real adoption? I mean it's passing. I was having this
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debate with my son the other day because he just bought a record player,
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which is neither you know there, but I was kind of saying, I
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remember when streaming music first came and the music efficionado said no one will ever
20:33
use streaming because they want to own the music. They don't want to like
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I can't not own this, Like if I stopped paying Spotify, I can't
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listen to the Beatles anymore. Like that's crazy. I bought it, it's
20:41
mind I could listen to it forever, And of course the reality was that
20:45
most consumers went, now, this is just much easier. I get access
20:47
to a huge, huge library. I'm okay paying ten dollars a month to
20:49
Spotify whatever and like awesome. And so that was this moment where you thought
20:55
people really need to own and then turn out that they were totally fine subscribing
21:00
music instead of owning it. Except for my son with this record player now
21:03
has to own physical vinyl records all the time. It's a thing. What's
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all this new again? Right? The redtrail is in? But um,
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it's interesting because it makes me wonder if that, you know, I kind
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of go, how could you not own your car? But then that's what
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people were saying about music teen years ago. Maybe this is a trend that's
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there, really is is going to be coming for us far they were able
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to get into a vehicle where they couldn't s otherwise. Yeah, and again
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you're talking about potonomals driving. Yeah, as a technology, but just you
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know, steel has waste e guilty for it becomes menstream. Um, but
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that becomes the case you might see also just at the end of the day,
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if you're thinking about the usage of your vehicle. I will see just
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you know, you at a good sixty seventy percent of the time, but
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Vequali spark better at home, walk way more than that way more than that
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ninety something percentage park either at home or work. That could totally change.
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Also the way you know the dynamical the future again, challenge ownership model and
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another another item we'll keep. We'll keep eye. It's a lot of things
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to keep your eyes on in this space. It seems to be very free,
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interesting, tryans happening. So what is your advice to lenders who are
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in this fast moving, rapidly changing space. A lot of things keep your
22:14
eye? How do you stay out of the curve? Raw? Do you
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keep your eye on the ball where it's going and make the right investments?
22:18
Like what's your advice? Have to be flexible because like you said, it
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is changing so quickly, and be ready to adapt and stock keep other things
22:26
we're watching cheer point earlier it is you have to be forward looking so you
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can put things in motion to capture that next cycle. It's really keeping to
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watch that. Yeah, I will come back to the concept around the client
22:42
experience and providing like the lighting solutions out there, digitalization of the Lune application
22:49
process, integration with some of the players for us Slender right though I'm not
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right Oiman with the Oyam's format matter. Personalization is another one that I care
23:02
and as a former marketer, I think it's it's it's important time to see
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what's also just we can make but you know, application or financing process a
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little more personal level. Yeah, and you know if you're thinking about just
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the technology and and that digital component mobile first, automate automation, trying to
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apply potential AI to again, but landing space, all those other trends.
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But I think are players in the industry are needs you needs you to look
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and consider when when developing new products and not the solution. Do you have
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an advice on how you I think one of the things you said, Becky
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that's really interesting is this need to be flexible. And I feel like so
23:44
often our investments, particularly technology, end up constraining us in terms of our
23:48
ability to adapt to what's next. We've spent all this time integrating one thing
23:52
and then it's not the thing we want. Sometimes by the time it's implemental,
23:57
I need another thing. Are there how do geese or advice you have
24:00
on like, how do I build myself you know, capabilities such that I
24:03
can respond more rapidly and I'm not stuck in I think maybe the chorus is
24:07
a great example of like something that I really have made a huge investment in
24:11
a now like it's constraining my optionality moving forwards. I'm just curious how you
24:15
think about best supporting optionality flexibility in the future when you're making investments now,
24:18
because it feels like that's the answer you're giving me is like you gotta be
24:22
ready for stuff you're not ready for. How do you how do you give
24:23
yourself an infrastructure to support that kind of flexibility? Really making sure I guess
24:29
that if you are implementing a solution that um it has PUPE and integration,
24:33
you know capabilities. So if you're putting something in place and then you might
24:38
have wanted to join something else in to support the process or my API,
24:42
so I have my my capabilities. Yeah, think about just think from a
24:49
thick stock. I think the industry genre is speaking come from a space where
24:55
and I will talk about hers as banks, where you own your technology,
24:59
you back in the house. Collaboration in the future is most likely you just
25:04
mentioned the terminal PI, but also collaboration with various players FinTechs could be could
25:11
be could be also a sovation here, an easy in generation and always coming
25:15
back again just to when you build those capabilities, making sure that it's built
25:18
around the clients, just that it's always simple and it's automated taking you know,
25:23
we're talking about refinance earlier. Just ticking all those components out and just
25:27
making it like a very linear process and easy and so that, plus the
25:33
collaboration and not necessarily the need to be owning your own platform, but later
25:38
for its sovation out there is one way to keep on evolving without the cost
25:45
and the results that come with love it. I love your point about this
25:48
has come up frequently with my guests. But focusing on the client experiment,
25:52
I think so often we think about the features the bank wants, where the
25:56
capabilities the bank needs, and you get this checklist of stuff you're Sally needs
26:00
to do and making sure that you're thinking about it from the client's point of
26:03
view. You go, oh, it does all the things we think we
26:04
need. And then she opened up as user you, oh my god,
26:07
I would never do that. Go, well, maybe that's not a good
26:10
solution, even if it checks all the internal risk management you know whatever product
26:14
boxes and so it's always a good I think a good reminded the lake.
26:15
Ultimately, you gotta gotta I mean, customers have a Google's favorite saying when
26:19
I was there was a competition is just to click away. And it's like
26:22
so true now in the digital world that you really do have to think about
26:26
that experience because people, if they don't like it, they we'll go try
26:29
somebody else real fast. All right, My last question I like to ask
26:33
people. I'm gonna ask you, guys, you've felt a little bit of
26:34
this, like what's one good bold prediction about the future of We'll just say
26:38
the auto linic space. But good bold prediction for us can make him go
26:42
first that he can can collect your thoughts like the strategy. And again in
26:48
term of innovation, where where do you want to go? Wherever you want
26:52
to give? So I will stay with the concept around like being clian centric
26:56
and launching product and solution that meets that clients need, being an omnichannel.
27:04
I think if you're thinking about landers and the various players in the space,
27:12
looking to the DoD the OEMs and in having solutions and capabilities in that space
27:21
that will allow you to be driving that better client experience a role. I
27:26
think that's really the challenge at the same time, at the time where the
27:29
technologies are voting so fast, so you have to run with those principles in
27:33
parallels. But I think that's the challenge. But at the same time,
27:36
the opportunity in follow us yeah, and being able to meet the clients needs
27:41
the way that they want to be met. I mean, because not everyone
27:44
wants to be interacted with in the same way. So said being forward thinking
27:48
so that you're you're able to satisfy needs just depending on you know they want
27:52
to be interacted. It's such a great point because one of the things I've
27:56
heard a lot that I think is rings are true to me, is like
27:59
when people want to talk to somebody, make it easy, and when they
28:00
don't want to talk to somebody, make that easy. And sometimes we do
28:03
both. We say, when you got to call somebody to do that,
28:04
I don't want to call anybody that somebody goal you can't call anybody about that
28:08
I do. And of course the more you get people, your people out
28:11
of the process that somebody can do on a cell service way, the more
28:15
they're available to be instantly available for the people that actually want that. And
28:19
I think that's a that's easy to say and hard. Some of the best
28:22
advices is simple and yet very challenging to actually execute. Well, thank you
28:30
Becky Faid for making the time today. This was great. I appreciate you
28:33
taking the time and very great insights. Yeah, and thank you. Upstart
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