By Mayank Kapoor, CTO (rupyy) CarDekho group
Imagine if buying a car were as easy as ordering your favorite fast food online. It may be a surprise to many but auto finance is heading in a similar direction. Once in a world of paperwork and long waits, auto financing is now racing towards a future of instant approvals and personalised offers. It’s like your smartphone, evolving from a simple calling device to a pocket-sized supercomputer. The auto finance market is revving up to hit new heights, with the global market for car loans projected to grow at a CAGR of 6.5% to reach more than $385 Bn by 2028, as per a report. This growth isn’t just about bigger numbers; it’s about smarter, faster, and more user-friendly ways to finance your dream ride.
For decades, the growth has been driven by factors, such as increasing vehicle prices, low interest rates, growing demand for vehicles, longer loan terms, easy access to financing, lease options, and a shift towards electric vehicles (EVs). However, traditional models are now facing limitations in meeting the demands of an increasingly digital-savvy consumer base and a rapidly changing automotive landscape.
The technical foundation of auto finance is also evolving. Technologies like AI, ML, Blockchain, Big Data, IoT, RPA, and others are closely addressing the limitations of inefficient processes, limited personalisation, and underutilised data. These innovations are fundamentally reshaping the outlook of financing, making the process smarter, faster, and more user-friendly.
Key technological disruptions reshaping auto finance:
1. Artificial intelligence and machine learning: AI and ML are set to revolutionise core aspects of auto financing. The auto loan sector is experiencing a surge in demand, prompting providers to adopt innovative AI solutions for operational enhancement. AI’s capabilities extend to expediting operations, reducing costs, and optimising resource utilisation. Its data-driven predictive power surpasses human capabilities in both speed and accuracy. AI applications in auto finance span several areas that include Intelligent document handling, AI-assisted decision-making, AI-driven predictive and behavioral analysis, AI-enhanced customer interactions, Voice AI in collections and payments, and AI-guided agent intervention.
2. Blockchain technology: The auto finance sector holds immense potential for the blockchain and these are shown through market predictions made by Statista, which expects that global spending on the technology will reach nearly $19 billion in 2024. Gartner estimates that the technology will generate a business value of approximately $3.1 trillion by 2030. In addition, blockchain-based systems are expected to govern by capturing 10% to 20% of the global economic infrastructure. This highlights the tremendous potential for blockchain, notably in relation to auto finance as an industry.
3. Digital onboarding and eKYC: The customer onboarding process is being revolutionised through digital identification and eKYC procedures. The global eKYC industry is transforming customer verification in auto financing. AI-powered systems utilising biometric authentication and document verification can complete KYC processes in minutes, drastically reducing loan approval times. This technology not only streamlines operations but also enhances customer experience and fraud prevention, making it a crucial element in the auto finance industry’s digital transformation.
4. Fintech integration: The integration of fintech solutions is creating new possibilities in auto finance. Embedded finance allows automotive platforms to offer end-to-end solutions, from vehicle search to financing, all within a single interface. This integration is blurring the lines between car shopping and financing, creating a more holistic customer experience. API ecosystems are facilitating this integration, allowing various services like insurance, maintenance, and payment systems to be unified into a single platform. This interconnectedness not only improves the customer experience but also opens up new revenue streams for auto financiers.
5. Data analytics and big data: The power of big data analytics is being harnessed to predict market trends, customer behavior, and potential defaults. By analyzing vast amounts of data, lenders can gain deeper insights into customer preferences and financial health, allowing for more informed decision-making. Predictive analytics can also help in portfolio management, allowing lenders to anticipate and mitigate risks before they materialise. This proactive approach can significantly reduce default rates and improve overall portfolio performance.
6. Internet of Things (IoT): The rise of connected vehicles is opening up new possibilities in auto finance, reflecting a broader trend in the fintech industry. IoT is one of seven key technologies driving business model reinventions in finance over the next decade. In the auto finance sector, IoT devices in vehicles provide real-time data on usage and condition, enabling usage-based financing models. This allows for dynamic adjustment of loan terms and insurance premiums based on actual vehicle performance and driver behavior. For example, safe drivers with low mileage could benefit from lower rates. This personalised approach offers fairer terms to responsible drivers while helping financial institutions make more informed decisions, potentially reducing risk and improving portfolio performance. The integration of IoT with other technologies like blockchain is refining risk management in areas such as inventory and property financing, ensuring accounting records match real-world transactions, and facilitating a new system of trust in auto finance.
7. Robotic Process Automation (RPA): The use of robotic process automation (RPA) has greatly accelerated fraud detection procedures. This development has resulted in less financial losses and quicker claim processing.
Financial institutions have experienced major cost reductions and a significant reduction in processing times as a result of the use of RPA. A Gartner study claims that by implementing RPA, financial departments can prevent up to 25,000 hours of rework brought on by human error, possibly saving an average-sized finance department $878,000.
Impact on stakeholders
These technological disruptions will have far-reaching impacts on all stakeholders in the auto finance ecosystem:
Customers stand to benefit from improved experiences, faster loan processing, and more personalised financial products. Moreover, as this new era of technology unfolds, customers may also shift their financial relationships, showing an increased preference for self-service lenders that provide automated, real-time experiences with minimal manual workflows.
Lenders will benefit from enhanced risk management capabilities, reduced operational costs, and better compliance with regulatory requirements. These efficiencies could lead to a transformation in their business models, allowing them to transfer the cost benefits to consumers.
Dealers can expect a streamlined sales process, increased sales through integrated financing solutions, and improved customer satisfaction. These efficiencies could lead to a shift in their business models, allowing lenders to transfer the cost benefits of automation to consumers, thereby offering more competitive pricing and terms.
Challenges and considerations
While the potential benefits of technological transformation are significant, the path forward is not without challenges. Data privacy and security remain paramount concerns, especially given the sensitive nature of financial information. Regulatory compliance in an evolving technological landscape presents another hurdle, requiring constant vigilance and adaptation.
Moreover, the adoption of these technologies, both within traditional financial institutions and among customers, may face resistance. Overcoming this resistance through education and demonstrating tangible benefits will be crucial for widespread acceptance.
Future outlook
The future of auto finance looks increasingly digital, data-driven, and customer-centric. We can expect continued innovation in areas such as quantum computing for even more sophisticated risk modeling or augmented reality for enhanced vehicles and financing visualisation. The key to unlocking this future lies in collaboration. A robust ecosystem where financial institutions, fintech companies, automotive manufacturers, and regulators work together will be crucial in driving innovation while ensuring consumer protection.
The auto finance sector stands at a pivotal moment. The technologies discussed here are not just incremental improvements but transformative forces that will reshape the industry. For stakeholders in the auto finance sector, the message is clear, embrace these technological disruptions or risk being left behind. The future of auto finance is being written now, and it’s a future of unprecedented efficiency, personalisation, and customer-centricity.