The Evolution of Lending

5-Point Recession Recovery Checklist

The auto loan industry in North America has seen a reduction of between 40% and 70% of loan origination volume, making it one of the hardest hit by the global Covid19 pandemic. 

In preparing this framework we combined two methods. First we looked for a general framework that deals with downturn planning. Next, we collected data and interviewed auto industry leaders in order to apply the framework more specifically to our industry.

Follow this framework to overcome the short term consequences of Covid19 – and more importantly, to plan for the recovery.

Your checklist to accomplish this should look something like:

  1. Empower a Team
  2. Study the Market 
  3. Preserve Innovation Spending
  4. Upgrade Outdated Systems
  5. Implement a Plan

Empower a Team

In reaching out to our industry colleagues, we quickly realized that their responses fell on a spectrum from ‘hide under the desk’ to ‘this is the time to innovate’. What we learned from the innovators is that the market has already shown signs of radically different patterns that would necessitate new operating models. It seemed immediately apparent that the only correct path to emerge successfully was to innovate. To do this, you need to create specific processes and responsibilities within your organization.

If you haven’t already, now is the perfect time to create an “innovation squad” – a group specifically tasked with defining and implementing future business strategies.

Consider the composition of this team to be:

  • Cross functional – a successful innovation team needs a diversity of viewpoints, with a mix of risk taking, innovation oriented individuals, balanced with operational personalities that tend to be more realistic about what is needed to execute a plan.
  • Innovation is almost certainly going to include new technologies so make sure to include tech savvy members.
  • Consider that those most likely to want innovation are levels below senior management; however, it is crucial for the “innovation squad” to have clear support from the senior leadership team.
  • The other most likely place to find good ideas is outside of your organization. Source advisors that have a thought leadership role. Find members with specific knowledge of online platforms that might figure into the long term plan.  And challenge your suppliers to bring forward their creative ideas and solutions.
  • Develop a process for designing prototypes to represent your ideas, testing these with your target markets and then implementing new models, in order to take the risk out of trying new ideas. 
  • Make sure your team has the necessary online tools to be effective remotely.
  • Get on a weekly cadence – things are changing that quickly – you might find a new management process emerges from this team that is more agile and innovative.

Study the Market 

In the few weeks that we have been preparing this checklist, we have learned some amazing, and likely permanent, changes that are taking place including:

  • Online ordering of cars by consumers is up 64% and, as a result, dealers are listing more of their inventory on sites like Autotrader.
  • Book-to-look ratios are down meaning that a lower ratio of applications are being approved. This is significant in two ways. First, it implies that dealers are pushing lower credit worthy customers to apply for auto loans. Second, if you are using a system that charges to look, your lower book ratio is costing more per transaction.
  • Home test driving and delivery is up considerably in States that still permit dealerships to be open. This practice is likely to continue to be popular in the future.
  • The dramatic decrease in new car sales has created a traffic jam on dealer lots making it impossible for them to take end of term lease returns.
  • Refinancing could make up to 80% of the auto lending market.
  • Consumer credit scores will go down across the board and the prime rate market may decline from 25% to only 15% of consumers.
  • Lenders will be chasing fewer credit worthy consumers and the winners will be proactive, direct to consumers.

In general our approach to reacting to these fundamental market shifts is:

  • Adjust operations to reflect necessary cutbacks – ‘minimize the nice to haves’.
  • Look for trends that represent new opportunities for example intercepting refinancing opportunities.
  • Try to understand the short term impacts that will be permanent – (e.g. remote workers and home delivery).

Preserve Innovation Spending

While the instinct is to hunker down and survive, the smart competitors will look for the opportunities to emerge stronger.

  • Slashing budgets across the board is not wise – consider the budgets that are needed to innovate and thrive in the upturn.
  • Preserve the team members most likely to contribute to the future vision.
  • Communicate to the organization as a whole more than usual and share the good news.

Upgrade Outdated Systems

One of the most debilitating outcomes of sending workers home for some of the companies that we have surveyed is that their systems did not allow for remote access. This is a prime example of an obvious and immediate priority.

  • Take advantage of the downtime to replace older systems that might have been too mission critical in normal times.
  • Consider how modern systems might improve your ability to respond to permanent market shifts such as going direct to consumers or supporting remote or other workflows.

Implement a Plan 

A strategy without a plan of execution is pointless. 

  • Formally document the plan of action including budgets, responsibilities and success metrics.
  • Determine how the plan will be implemented and made operational.
  • A new approach is required to motivate and manage remote workers including new tools, more communication, more deliberate collaboration – make sure to take this into account in the short term.

Takeaways

Unlike other economic downturns, most people we talked to believe that the auto lending marketplace will change significantly from the Covid19 induced recession.

By June of 2020 we will see consumers coming back to the market but that the majority, 70% or greater, will be refinancing. Given that lease returns will continue at a steady rate, it may take a year or more for the balance of new car loans to used car loans to return to normal. 

Credit scores will decrease overall and lenders will be competing for fewer consumers. The most successful lenders will find ways to get directly to these consumers and not wait for deals to come to them through dealer channels. This makes upgrading your tech stack imperative if you cannot compete for these refinance deals. In general, this is a good time to consider how a modern tech stack might make you more competitive coming in the recovery phase.

Successful companies will evolve to meet these new realities. Technology, including remote productivity platforms, will play a major role.