Rapid Digitization in the Auto Market

0:02 You're listening to Leaders and Lending from Upstart, a podcast dedicated to helping consumer lenders grow their programs and improve their product offerings. Each week, here, decision makers in the finance industry offer insights into the future of the lending industry, best practices around digital transformation, and more. Let's get into the show. Welcome guys to Leaders and Lending. Thanks for making the time today. I'm joined with Becky Philippi from First Interstate I got that right and Fabian Theory from Bank of America, the Chair and Vice Chair of the Auto Finance Committee at the Consumer Bankers Associations. Thank you guys for making the time to join the podcast here. Thank you for having guys. So. I know you guys recently had your committee meeting, so talk to me about like what's it is like a very interesting time to ask a question. What's top of mind for the committee? It's kind of a wild world we're living in, well right now, what's top of mind for the Auto Committee? And now we're it's just such a valuable committee and disagree griplic leaders coming together about really focusing in on kind of the the macro trends in the industry obviously regulatory items UM fair lending, gap insurance, and then UM servicing and collection processes. Yeah.

1:11 Cheese also is another one that regulators of being into a cross. I was a cross across banking products, but not always can medics well to your two O toil selfie fees are also like top of mind for the bankers. So what do people think about I mean, it's that's a lot of tough fair lending, gap coverage fees, regulatory recite. Has there been an increase in like examination intensity or what's driving that the kind of focus on these regulatory topics. Actually, I will stop by sharing your stats from my institution. We were comparing level of exams combined between you know, internal in the external. Yeah, and there's an increse of like ate per SONCLFFE activities in the space. How do you measure that? That's like a very like a precise number. It's not like a back of the envelope to externally and internal exams coming from various regulators and various internal functions. So that was a needsing that for us to do. But just just to show the cross product out, how I would say, just additional resources needed to cover all those exams and so no wonder why it's it's it's number one on everybody's mind, right, but rapidly changing. Yeah, yeah, Well and I saw the there's lawsuits from attorneys general and you know, all sorts of stuff coming down. So I imagine it's a real increase in focus on getting things right because there's a you know, it feels like it feels like a lot of people out to make sure that the consumers are being properly served in the market. That put it that way. There's one one piece will so big yin foul and a

2:43 committee is very interested to hearing from all of us is what we do in gim of innovation in the space, so not not of destruction and mostly you will be covering that a little bit later, but innovation is top off mind all the bankers. Well, le, let's talk about in so I know, like it's it's been an interesting couple of years in the just auto buying market, from like lack of inventory to digital buying, like just just the purchase of an automobile has changed, and a lot of pressure on both OEMs and dealers from experiences like Tesla or Lucid that have full digital end purchase and finance come my own funny stories about buying both the Tesla and the Jeep, which we can tell because they were they were pretty different in bizarre experiences both.

3:24 Um. But what are the key trends you guys are seeing coming up? Because obviously whatever happens in the purchase of an automobile market flows through into the automobile financing market. So what are the trends you see happening in that space, because it feels like it's a very rapid pace of change right now. And I will stop by just maybe the number one that comes in mind. He's just increase ridd it online and activity increasing coming from the space. And that's really like kickting gears or during during trove it we've seen transact sit everyding um and and clients looking for digital solution to meet that auto finance need. And that's just like trickled down to the antire industry, fund the lenders to consumers demanding the new products. I will say that the dealers also in the industry changing the way you know, they ultimately have like a presence online and having different rules where clients at a time could not face to face, so that's really kind of like being one trend um another one. But I think I've been very transforming in our spaces thinking about just the level of like car in venturing. Yeah, so over the years that really like trouble, were used to have those lots at the dealership of four cars and we went down too close to nothing, And I think there's lesson learns here for the industry and manufacturers or ems. I think two good nuts so m because when

5:00 you're thinking about just you know, the years of two thousand and twenty, two thousand and twenty one, if you're looking at the profit abbit for a lot of manufacturers, we've see profit abbib like reaching high scores at a point which the inventory was very scarce um. And so what would be interesting to look in the future to see how we see that trents coming back, How we're going to get back to both you know, high inventory levels with more discounts lack we we we used to in the past, or are we going to find like more of that balance. If that they took good notes and she gave it could be pretty it manage the inventory levels and kind of create that demand. Yeah, I thought it wasn't a car as another recreational vehicle.

5:45 So but I remember I was looking through the invoice this is during COVID, and I got there's there's this fee, like a thousand, two thousand. I said, what is this? What else clean? And it's a ridiculous fee. They go, Jeff, it's because we can would you like the vehicle or not, because if not, we can give it to somebody else. I thought, oh, interesting, this is the this is the market price fee. The market price is above the stated price, and so we're just gonna like stick it on there. And that was probably pretty good for for the for that dealer, for the OM ultimately, and Jeff, your point here is actually a good one. That's another trend that we've seen. If you're looking at just the level of pricing on new and news vehicles, I think we've seen those reaching historical high. You could argue at the steel at a very high Yeah, every very high level. We've seen, like US price coming down slightly. Um. But that's that's also another dynamic that we have to to to deal with at a time where inflation rights m our. You know, you're thinking about just APR and the level map just like it inflects the consumption. So this is this is what comes to mind.

6:53 And the last one big issue. Agree, I think it's it's it's around lack the newcommerce. You mentioned the test Labe. Of course electrification, newev coming and challenging willso just the the existing model. Yeah, and coming back to you also the point I was making earlier about like the online buying process and short who seeing you dynamic and a mackt aw client experiense right now you could just do every fall like do you. I mean, it's interesting because it feels like the OEMs are using the moment of electrification to change the nature of the relationship with the dealerships in terms of many of them are looking like my experience, I joked about buying a Tesla, I'm buying My interesting jeep experience was that I wanted to buy a jeep. There was no inventory.

7:36 I go to the dealer that like, you know, you can search to the inventory online, I hope, But there's nothing. There's like two that are here and they're not what I want, and they always just have to order it for you. I say, okay, And so you know, of course, what did I do first? I went to Jeep's website, I configured the car I wanted, and they put me in touch with the dealer and I went to the deal and like, oh, well you've got the order. I say, okay, how do we do that? They pull up jeep dot Com on an iPad and had me rea and figure what I'd already done at home and then submitted to the manufacturer. And I went, well, why did I what did I do? What did I come in here for? Why did what was this whole process? And they, of course got something a little wrong. You do the way I don't just you know, that was like Greece. But it feels like a lot of the manufacturers are trying to use their electric vehicle fleet as a place we're going, hey, no, we may take more control of that buying experience because this is not fitting into our old relationship. And so I'm curious if you see that shifting into more broadly, because it does feel like a moment where they're trying to like a little bit change the way it works and provide that the test experience. You go, like give your credit card and then the carshes up at your house like three weeks later. It's a very different experience and why I think that the aliens are trying to make something like that available for their for their for their consumers as well. Agreed, and so coupled off, you're thinking about dress, but you're describing which is really like reinventing or revamping I should say, the client experience. And NBC's really kind offlect the name of the gamp um. So a lot of the lenders are used to work through the HINDWEC space and the theater model. Some of the new players that you just mentioned just are reinventing client experiences, providing digital solution

9:11 for the clients to configure the valiables, just linking linking the loan application and the finance directly and the light in it and providing like all the digital tools e contracting designing that clients will expect and that process could be done from your patch. So I am and I will say that is also a good thing for the industry, that accelerating that that transformation, that digitalization of the space. So so overall, I think it's better for the clients, better for the industry and a lot of the players process spectrum, not just that he needed to assortion and I know that we play in that space back then. Let me ask you this because I um, the technology side on lending particularly is interesting to be how do you really integrate that experience? And I thank you? So I said I wouldn't tell about my card banks. I want to tell both my car buying stories, which is you know. I went to Tesla and I called my bank and I said, well, i'd like to get I'm buying a Tesla. Can I get a loan? Like I?

10:07 Where were you? Guess? For you? I did the thing that you all would love for consumers to do. I called my bank. I said I'd like to get a car loan and they said, I'm sorry, Jeff, we don't have a digital application and I can't do it for you as your banker, but if you walk into the local branch they can give you the application. I thought, I won't tell, I won't name my bank. And I said, this is ridiculous. I'm not doing that, and I went to the Tesla side. It was all, would you like to get one of our finance offers? I said, yes, I would Apparently how I thought I was just going to pay cash, but apparently I will finance with you. And I of the application, I got instantly approved and I got a loan from my bank that did not have a digital process for me as a consumer to get a loan, but would give me a loan digitally instantly through Tesla sites. So they got the business in the end.

10:48 But back toward I'm curious. We've talked about the technology on the car buying process, but the technology of being able to offer instant clothes really seamless technology, and the lending side, I'm curious what you see happening. That's because it was really shocking to be that they could provide a digital clothes experience on a loan on Tesla's website, but not to me directly as a customer. That just I was kind of going, what has happened here? Surprising? How how many especially smaller institutions that you might hear that don't know that it was not a small institution really well, it's not a small student but are narrowing down the list tho we shot support that channel your left of the dust, not like you said, to have the back end integrations you're Tesla.

11:28 I mean it's it's important that we accom for that. So I think what you're touching on me here, Jeff, is is really like an evolution, but is opening in the marketplace where even the landers are looking into. Historically, I will say, just most of the landers in the auto space, I've been playing into the indirect space, of course, and what you're describing here is just simply needed investment. And some players are you know, I will say, ahead of others um into the client direct to a point proposing financing solution for their own clients, and and and and then they can that will lead to the dealers, or that will lead to to to the manufacturer in your case, or the example of Baselatum and some of us capabilities are getting built. Um, it's a business decision. I will say also about some of those landers, I'm making a what's it's always often? I mean, I say, everybody wants me to everybody wants our customer to come to them for the loan. But then you know, the dealers have a habit of finding a way to convince you that there's a better option through their indirect channel that you can get and that loan not sticky. So I understand it can be a tough business decision to make that investment because like you can have a great available product. I might go get pre approved and you send me the check and I go, you know what, I didn't want that anyway. I actually got a better deal to test. So it's a it's a tough decision. It's not always been easy to keep that business. Even it's hard to get people to come to you in the first place, and it's even harder to them to stick with that direct loan when they walk in the dealer and they've got some incentive going they call their partner over at their local institution and find you a better deal. It could be disruptive to do

13:01 other relationships too, So, like when you talk about the business decision, that's part of it as well. It's a cline violence. Yeah, So let's talk a little about the lending side of the business more directly, Like what is I know the inventories have shifted the sales environment, but the interest rates have been a pretty interesting ride here of late. And you combine that with you know, shifting asset values and like what what what is the collateral I have really worth? What's the value of my book? Like, what's the real recovery value on my book? As those prices go up and maybe don't stay where they are and come down, and how collateralized is my book. I'm curious what you're seeing shifting in the environment because it feels like both sides, both the interest rates, the cost of funds, and the asset value backing this or have been on a bit of a roller coaster ride in terms of where those values are and how is that impacted the lending business.

13:46 You know, obviously really impacts the affordability you know, so so borrowers, Um, no, if they're at a position too with negative equity now from a like you said, buying high and yeah, kind of losing value to risk there too, but you know, maybe forcing them to ful that to their over units lager and and not enhapsing right away. Um, you know, stretching out loan terms, you know, longer loan terms to make that payment more affordable. But yeah, some definite risks there. You're thinking also about platform or pope folio standpoint, the clients made an arbitualge as well. Sure, looking back into twenty two twenty one, Um, we had like a high mix of you know, lease happening in the US market that that's really kind of like shifting back to more like a purchase based on what you're describing in the dynamic of the market and the price and the interest rate that might shoot shot back in the future always seeing like some adventure we're coming back and if I would, I would age that some of the manufacturers might just subsiding a little more of the of those of those leases. Um. But that's another like dynamic that we've seen for the last couple of years, which obviously changed or has an impact on just the overall like Pope folio and the way we manage it. Are you are you seeing impact to like credit quality, credit performance as rates go up? Is you know, we've seen the personal savings rate, you know, was at a kind of obscenely high level that was almost never seen in history, and now it's like going down below where maybe the long term average seems to have been. If you except the

15:18 kind of two years of like that immediately that grap it's like it just kind of doesn't even make sense with those two years. But it seems like that's coming down to you, Is that flowing through to losses and of course with asset values maybe decreasing over time, you've got like recoveries also come down. Have you seen that impacting portfolios generally yet or is that maybe something you're just keeping your eye on, because it's not it's not on the data yet, but it certainly looks like a trend to be watching. Oh, you're so artificially low on delinquency, you know, in the industry for for a while, so it's starting to let al out a little bit. Not that. Yeah, and you're thinking about just I mean, that's obviously something between monature just and constantly I imagine, Yeah, keep our eyes on to your point that Kia think just the industry has been giving with very little little be equancies and losses portfolio based on the you know, professors performance UM and great recovery I got chill enjoy that the higher values too. So yeah, so um, I would say just obviously depending on the landers and the type of like landing activities, you could argue that you will just be a sectually different UM and so at at B at bad stage, I think the losses of the equincy is still fee meant like failing law. Um just you know, coming back to to pre COVID a level. So, but but we we're watching, We're watching, watching, watching watching wondering see what that's I wonder do you see people preparing for this is thinking further in the future. But you know, we had a we were partnering with some institutions around a refive business,

16:49 which has never been a huge business and auto um, you know, it's never been compared to like, let's say, mortgage. The percentage of loans and give refinance is actually quite a bit smaller, which which we found out. And obviously right now is a really bad time to refinance loans because your cost of funds are likely quite a bit higher than when those of thrones were originated, but also kinds that the launching new programs takes years, and in years, were likely to be in the opposite environment, which is a bunch of loans originated during a relatively high interest rated period. Now with costs of funds. You know, I could not supposed to knock on the Table's messed with the mics, but knock on wood. Interest rays coming down, you know, I'm not talking about the next six months, but the next two years we expect to probably see interest rates coming back down from where they are now, and that making means for an opportunity and one that probably if you want to be ready to execute on in a direct channel channel, you've got to be investing in if not today and the relatively near future. Do you see people looking to future? This is Hey, we've got a very different environment that will be here eventually. We want to be ready to take advantage of opportunities that are created by a very different environment English old enteries.

17:47 Yes, and that specific product you're describing is something that I'll always be key in them. Where you're in the climbed all right space, that's actually very activing invasement and ulsting basting capability es ahead off the cycle these scribing and it's all about it again, just serving the clients being there, reinventing about client expanse, and I should think about the refineance processing itself VSPSPS. A lot of headles that comes. We've been we fee refinancing, there are financing your loan and so working through those ahead of time, trying to automate and simplify the process is what we already kind of like focussing them. It feels like that process is also getting easier with so many of the DMVs moving to electronic titling particularly during COVID where there's a lot of maybe not full electronic titling, but these signature is allowed on title transfer. All of a sudden, you're saying, you know, some states, that was a temporary and it's now it's becoming a permanent solution, going, hey, we can actually start to automate what was macas is a very manual process that made in my experience, like I can get you into a better rate, but after I cover my operation costs, well, now I can't get you into better rate anymore because it was so expensive to do some this manual processing. That may change the nature of the opportunity in a meaningful way of we can really get the high levels of digitization automation. Interesting, So what are the other big trends you're saying, like if coming up on a couple of years, the one that comes to mind is just, you know, an evolution of the ownership model.

19:14 That's a FASCINTI thinking about trends that we're seeing in Europe. Um. So obviously we've seen the traditional ownership model in the introduction of more of the subscription model, and you sho're thinking about the technology, we're thinking about evs you're thinking about, you know, the the enancement of the technology if that comes with LAG you know auto drive and the mobile idea aspect. You could think about clients potentially pivoting in the future and looking for another way to own or USERVA, so usership or subscription versus owning UM and and that's something that I think often now will the consumer in the US. There's a couple of players of it. He just more on the fine take, but just I to produce solution in the markets, more on the fleet side. And that's an interesting things to fall us to watch and see how the consumer demand.

20:18 Are you seeing real adoption? I mean it's passing. I was having this debate with my son the other day because he just bought a record player, which is neither you know there, but I was kind of saying, I remember when streaming music first came and the music efficionado said no one will ever use streaming because they want to own the music. They don't want to like I can't not own this, Like if I stopped paying Spotify, I can't listen to the Beatles anymore. Like that's crazy. I bought it, it's mind I could listen to it forever, And of course the reality was that most consumers went, now, this is just much easier. I get access to a huge, huge library. I'm okay paying ten dollars a month to Spotify whatever and like awesome. And so that was this moment where you thought people really need to own and then turn out that they were totally fine subscribing music instead of owning it. Except for my son with this record player now has to own physical vinyl records all the time. It's a thing. What's all this new again? Right? The redtrail is in? But um, it's interesting because it makes me wonder if that, you know, I kind of go, how could you not own your car? But then that's what people were saying about music teen years ago. Maybe this is a trend that's there, really is is going to be coming for us far they were able to get into a vehicle where they couldn't s otherwise. Yeah, and again you're talking about potonomals driving. Yeah, as a technology, but just you know, steel has waste e guilty for it becomes menstream. Um, but that becomes the case you might see also just at the end of the day, if you're thinking about the usage of your vehicle. I will see just you know, you at a good sixty seventy percent of the time, but Vequali spark better at home, walk way more than that way more than that

21:48 ninety something percentage park either at home or work. That could totally change. Also the way you know the dynamical the future again, challenge ownership model and another another item we'll keep. We'll keep eye. It's a lot of things to keep your eyes on in this space. It seems to be very free, interesting, tryans happening. So what is your advice to lenders who are in this fast moving, rapidly changing space. A lot of things keep your eye? How do you stay out of the curve? Raw? Do you keep your eye on the ball where it's going and make the right investments? Like what's your advice? Have to be flexible because like you said, it is changing so quickly, and be ready to adapt and stock keep other things we're watching cheer point earlier it is you have to be forward looking so you can put things in motion to capture that next cycle. It's really keeping to watch that. Yeah, I will come back to the concept around the client experience and providing like the lighting solutions out there, digitalization of the Lune application process, integration with some of the players for us Slender right though I'm not right Oiman with the Oyam's format matter. Personalization is another one that I care and as a former marketer, I think it's it's it's important time to see what's also just we can make but you know, application or financing process a little more personal level. Yeah, and you know if you're thinking about just the technology and and that digital component mobile first, automate automation, trying to

23:22 apply potential AI to again, but landing space, all those other trends. But I think are players in the industry are needs you needs you to look and consider when when developing new products and not the solution. Do you have an advice on how you I think one of the things you said, Becky that's really interesting is this need to be flexible. And I feel like so often our investments, particularly technology, end up constraining us in terms of our ability to adapt to what's next. We've spent all this time integrating one thing and then it's not the thing we want. Sometimes by the time it's implemental, I need another thing. Are there how do geese or advice you have on like, how do I build myself you know, capabilities such that I can respond more rapidly and I'm not stuck in I think maybe the chorus is a great example of like something that I really have made a huge investment in a now like it's constraining my optionality moving forwards. I'm just curious how you think about best supporting optionality flexibility in the future when you're making investments now, because it feels like that's the answer you're giving me is like you gotta be ready for stuff you're not ready for. How do you how do you give yourself an infrastructure to support that kind of flexibility? Really making sure I guess that if you are implementing a solution that um it has PUPE and integration, you know capabilities. So if you're putting something in place and then you might have wanted to join something else in to support the process or my API, so I have my my capabilities. Yeah, think about just think from a 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, you back in the house. Collaboration in the future is most likely you just mentioned the terminal PI, but also collaboration with various players FinTechs could be could be could be also a sovation here, an easy in generation and always coming back again just to when you build those capabilities, making sure that it's built around the clients, just that it's always simple and it's automated taking you know, we're talking about refinance earlier. Just ticking all those components out and just making it like a very linear process and easy and so that, plus the collaboration and not necessarily the need to be owning your own platform, but later for its sovation out there is one way to keep on evolving without the cost and the results that come with love it. I love your point about this has come up frequently with my guests. But focusing on the client experiment, I think so often we think about the features the bank wants, where the capabilities the bank needs, and you get this checklist of stuff you're Sally needs to do and making sure that you're thinking about it from the client's point of view. You go, oh, it does all the things we think we need. And then she opened up as user you, oh my god, I would never do that. Go, well, maybe that's not a good solution, even if it checks all the internal risk management you know whatever product 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 I was there was a competition is just to click away. And it's like so true now in the digital world that you really do have to think about that experience because people, if they don't like it, they we'll go try somebody else real fast. All right, My last question I like to ask people. I'm gonna ask you, guys, you've felt a little bit of this, like what's one good bold prediction about the future of We'll just say the auto linic space. But good bold prediction for us can make him go first that he can can collect your thoughts like the strategy. And again in term of innovation, where where do you want to go? Wherever you want to give? So I will stay with the concept around like being clian centric 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, looking to the DoD the OEMs and in having solutions and capabilities in that space that will allow you to be driving that better client experience a role. I think that's really the challenge at the same time, at the time where the technologies are voting so fast, so you have to run with those principles in parallels. But I think that's the challenge. But at the same time, the opportunity in follow us yeah, and being able to meet the clients needs the way that they want to be met. I mean, because not everyone wants to be interacted with in the same way. So said being forward thinking so that you're you're able to satisfy needs just depending on you know they want to be interacted. It's such a great point because one of the things I've heard a lot that I think is rings are true to me, is like when people want to talk to somebody, make it easy, and when they don't want to talk to somebody, make that easy. And sometimes we do both. We say, when you got to call somebody to do that, I don't want to call anybody that somebody goal you can't call anybody about that I do. And of course the more you get people, your people out of the process that somebody can do on a cell service way, the more they're available to be instantly available for the people that actually want that. And I think that's a that's easy to say and hard. Some of the best advices is simple and yet very challenging to actually execute. Well, thank you Becky Faid for making the time today. This was great. I appreciate you taking the time and very great insights. Yeah, and thank you. Upstart

28:37 partners with banks and credit unions to help grow their consumer loan portfolios and deliver a modern all digital lending experience. As the average consumer becomes more digitally savvy, it only makes sense that their bank does too. Upstarts AI lending platform uses sophisticated machine learning models to more accurately identify risk and approve more applicants than additional credit models. With fraud rates near zero, Upstarts all digital experience reduces manual processing for banks and offers a simple and convenient experience for consumers. Whether you're looking to grow and enhance your existing personal and auto lending programs or you're just getting started, Upstart can help. Upstart offers an end to end solution that can help you find more credit worthy borrowers within your risk profile with all digital underwriting, onboarding, loan closing, and servicing. It's all possible with Upstart in your corner. Learn more about finding new borrowers, enhancing your credit decisioning process, and growing your business by visiting upstart dot com slash four dash banks. That's upstart dot com slash four dash Banks. You've been listening to Leaders in Lending from Upstart, make sure you never miss an episode. Subscribe to Leaders in Lending in your favorite podcast player using Apple Podcasts. Leave us a quick rating by tapping the number of stars you think the show deserves.

29:57 Thanks for listening, until next time.