Why Auto Financing Is Going Digital, and Why That’s Good for Everyone

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What’s the most compelling trend in the auto industry in 2021?

Is it the new administration’s $174B commitment to electric vehicles (EVs)? GM’s initiative to go all-electric in less than 15 years? Volkswagen’s ambitious plans for solid-state EV batteries? Volvo’s hopes for self-driving long-haul trucks?

Why Auto Financing is Going Digital, and Why That's Good for Everyone

No, the industry trend that just might have the biggest impact in the shortest amount of time is the shift to digital in auto financing. Why? First, because “going digital” no longer means just making a few process steps available online. Second, because digitization will benefit the entire auto finance ecosystem – including banks, credit unions, nonbank originators, car dealers, investors and car-buying consumers.

Increasingly, digitization of auto finance will extend end to end, including:

• eSignatures
• Digital loan documents
• Digitization of asset-backed securities (ABS)

Several factors are converging to drive the trend to end-to-end digitization. Organizations that recognize the significance of these factors – and respond with agility – have an opportunity to gain early-mover advantage in the marketplace.

 

From eSignatures to Digitized Loans

Until recently, the auto financing industry had been slow to embrace digitization. After all, the legislation that lends validity to digital processes such as eSignatures – including the Uniform Electronic Transactions Act (UETA) and the Electronic Signatures in Global and National Commerce Act (ESIGN) – were put in place more than two decades ago.

But finance and insurance (F&I) stakeholders, from loan originators to dealers to consumers, were accustomed to manual, face-to-face processes. Many organizations preferred to avoid the potential risks of change and ease into digital transformation slowly.

Then a global pandemic hit, and participants needed to pivot to new ways of doing business. State mandates shut down dealers to in-person sales. Consumers demanded contactless transactions. Both lenders and dealers quickly learned how to implement eSignatures, remote F&I and other digital processes.

As a result, a hybrid process that was once 80% analog and 20% digital, in many cases is now 80% digital and 20% analog. F&I managers can take advantage of secure, online tools for eSignatures and document delivery. In fact, some dealerships have even enabled salespeople to handle digitized F&I.

Ultimately, effective eContracting solutions empower auto financing to “start digital and stay digital.” The positive results are tangible:

• Faster, more accurate loan origination
• Lower-friction, more convenient customer experiences
• The potential for higher sales volume

 

Building on Industry Momentum

Organizations that have made the shift to digitized auto financing find themselves well-positioned as the industry rebounds in a big way. U.S. retail deliveries of new cars and light trucks, excluding fleet sales, were expected to reach 1.26 million units in March 2021, a year-over-year increase of 53%. The seasonally adjusted annualized rate (SAAR) for total light-vehicle sales was pegged at 16.4 million units.1

The numbers reflect pent-up market demand – and suggest that organizations will benefit from an influx of capital through vehicle purchases. Throughout 2020, both lenders and dealers focused on managing a soft economy and mitigating losses. Going forward, they’ll turn their attention to volume – where digital processes will be a boon.

The increased activity extends to the secondary market, where even credit unions (CUs) are discovering that auto ABS are an efficient way to access capital. Unify Financial Credit Union has become the second CU after GTE Federal Credit Union to use securitization of auto loans as a funding method. In March 2021, Unify issued a $300 million privately placed deal consisting of five tranches.2

Digital innovator Carvana, meanwhile, continued its capital market activity with two auto ABS deals in March 2021 totaling $881 million. A $449 million deal was backed by subprime loans, while a $432 million deal was backed by prime receivables.3 The deals signal retailers’ needs for increased liquidity to fund operations and tech investments – as well as investors’ appetite for auto debt instruments.

Significantly, securitization is the last phase of the end-to-end auto financing process that can benefit from going digital. Digitization can simplify securitization processes, lower costs for securitizing and managing notes, and provide better experiences to key stakeholders – including loan originators, custodians and investors.

To make digital auto ABS work, financial institutions will need to invest in eVault technology that ensures regulatory compliance and legal enforceability. An effective eVault provides irrefutable proof that a digitally signed document such as a digital auto ABS is the original, unaltered document. The eVault should maintain a tamper-evident audit trail to track document access and copying.

Auto ABS is just one more way auto financing is being digitized. Going forward, the portion of F&I that remains analog and manual will grow smaller and smaller – while stakeholders from financial institutions to dealers to customers will benefit from total digital transformation.

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1 “TrueCar Forecasts Total New Vehicle Sales Up 42% Year-Over-Year for March 2021 in First Year-Over-Year Compare Since Covid-19 Impact on Industry,” TrueCar , March 2021
2 “UNIFY Financial Sells Auto Loans in ABS Deal,” CreditUnionTimes , March 2021
3 “Carvana Injects $881M Into ABS Market With Two Deals,” Auto Finance News , March 2021