Auto financiers can navigate the COVID-19 crisis

The impact of the first Covid wave was cushioned with multiple measures like regulatory moratorium, loan restructuring, additional funding through the emergency credit line guarantee scheme along with a sharp pent-up demand recovery which raised optimism about faster-than-expected normalisation. However, the outcome may be different during the second wave due to widescale impact, including rural areas and pent-up demand being absorbed already. It is estimated the collection efficiency for the first fortnight of May could be lower by 5 to 7 per cent on top of a similar decline in April over March. Lenders will be impacted in the medium term due to restricted mobility and moderating borrowers’ cash flows.

Even before COVID-19, auto finance companies were on the on-ramp to change. An increased focus on the customer, new modes of engagement, and preparation for a slowdown were driving digital transformation in their operations and offerings. COVID-19 will not throw this transition into reverse but will instead accelerate it. Now, auto finance companies must harness the digital and analytical capabilities they were already developing and put them to work in two new ways. First, to address the current crisis. And second, as part of a longer-term customer- and asset-focused strategy reset.

Develop digital-first debt management capabilities
Auto collections volumes are on the rise. As customer income continues to fall, auto financiers will face an even higher volume of complex collections. And, because of social distancing measures and health issues, fewer collections agents will be available to manage the influx. The solution? Augmenting the human-driven approach to collections with automated and omnichannel customer engagement strategies. Fortunately, the ‘stay at home’ strategy for dealing with Coronavirus has forced digital to become the standard and primary means of communication. Financiers should use this digital goodwill to improve their collections efforts. To manage increased workload from customer calls and delinquencies, which may be delayed because of payment deferrals and loan extensions, auto financiers will need to consider solutions such as interactive voice messaging, backed by conversational artificial intelligence (AI) with integrated speech analytics.

Enhance risk-based segmentation with data analytics
To emerge from this crisis with reputation and finances intact, auto lenders need to understand two things better: their customer and the macroeconomic conditions. Data – both internal and external – becomes very important in this respect. The world is upside down: traditional internal data that helped indicate when and how to collect – and from whom – may still be useful, but financiers need to capture and act upon it with more immediacy. Similarly, external data assumes a more significant role in helping to identify new sources of risk. As a result, financiers must now use advanced data analytics to: Use synthetic data and theoretical models – Because this is a completely new scenario, auto financiers will have to feed and train models with synthetic or proxy data, or build new theoretical models to help them understand, explain, and predict credit risk and devise appropriate customer segmentation and treatment strategies.

Improve customer retention
If auto financiers do not make changes to their offerings and operations, they will see not only a rapid increase in delinquencies but also a loss of customers. To improve customer retention, they will need to reshape a range of finance options. For example, some financiers are giving new borrowers the option to defer their first payment by 90 days or existing customers the ability to defer payment for up to 120 days without any late fees. Financiers will also need to use deep data analytics and build and use digital channels to present these new finance options to customers – for example, a self-service portal that allows customers to rework their terms based on their financial situations and choose their own path to resolution.

Roll out new repossession and return strategies
No matter what auto financiers do, many customers will still not be in the position to meet their auto loan repayments. And in some cases, the relief available will not sufficiently help them to hold on to their vehicles. Auto financiers will need to brace themselves for much higher rates of repossession and return. But this does not have to be painful. Auto financiers can implement strategies that will reduce repossession in the first place. For example, in addition to developing agile resolution strategies, they can also digitally enable downgrades.

Even with these strategies, a high number of cars may still come back to the market quickly – whether through repossession or return – which will increase pressure on lease residual values, widening the gap between the realizable value of the car and the loan value. Therefore, lenders will need to build intelligent models, feed them with data (such as contact history and external payment history), and use deep data analytics to obtain insights into asset value and the right time to repossess cars.

Remarket more efficiently
Because more customers will be returning their cars, and financiers will be repossessing still more vehicles, inventories of used cars are likely to explode. To maximize profitability, these cars cannot sit in parking lots indefinitely.

To reduce the time from return or repossession to resale, auto financiers can take four steps: Use touchless, self-serve inspection solutions – As social distancing remains in effect, customers will be reluctant to bring their vehicles into the dealer for end-of-lease inspections. And there may not be enough staff to perform this service in any case. Remote inspection capabilities will be crucial during and directly after the pandemic. And, in the long term, these capabilities will drive cost-efficacy for the auto financier.

Better predict residual values – Using predictive analytics, auto financiers can better predict residual values based on current market conditions
Restructure used car loans – With hardship on the rise, demand for used cars will increase. Financiers need to shift their focus from term-wise management of loans to innovative ways of structuring loans so that customers can buy these used cars in the first place. Improve marketing platforms for secondhand vehicles – Existing marketing platforms for used vehicles can be time consuming to use and opaque in their pricing, and they are not well trusted by consumers. By focusing on the whole remarketing journey and using digital and analytical technologies to make it seamless from end to end, auto companies can keep inventories of used cars moving, which will help maintain healthy portfolios despite low sales and high returns.

People will always need mobility solutions, but the auto finance industry won’t go back to where it was before. COVID-19 has radically changed its short-term outlook. And controlling the immediate risks and ensuring long-term success require rapid action. The digital and analytical solutions auto finance companies put in place today will serve them well during the pandemic by easing financial pressure on customers and reducing repossessed inventory. They will also enhance loyalty and maximize customer lifetime value, helping to usher in a new era of better customer and asset-focused finance.