As interest rates rise, will auto lenders change their strategies?

Ongoing digitization, unpredictable inflation, rising cost of funds, shifting consumer expectations and a wave of defaults are conflating turmoil in the auto finance industry.

The average interest rate on new car loans rose to 8.95% in March, up from 5.66% a year earlier, according to the report. cox autoFor used cars, it reached 11.3% last month, up from 7.7% in 2022. edmonds.

A recent survey by the Financial Services Agency shows that delinquencies are on the rise, especially among young borrowers. new york federal reserve.

Lenders are responding by making a variety of strategic shifts. Some firms have raised prices indefinitely, while others have paused to restructure and repricing to avoid excessive risk exposure. Still, some companies are aggressively pricing to gain market share. These changes are having ripple effects throughout the world of auto finance.

Are concerns enough to trigger strategic or technological change? If so, where will car lenders go from here?

auto finance news talked with Beeri MartHead of Banking and Auto Finance Arnixis a global AI provider focused on optimizing and personalizing the consumer lender experience for various financial institutions regarding how lenders manage their portfolios. Below is an edited version of the conversation.

Auto Finance News: Words like ‘unprecedented’ have largely lost their meaning in recent years, but they seem to best describe where car lenders are today. What strategies do you see in place, and are they working in this environment?

Be’eri Mart: There seem to be as many strategies at work as there are lenders. There will be fierce competition between different players.

Some, such as banks and financial companies, simply price their loans so high that they don’t lose money if interest rates continue to rise. The downside, of course, is that they may price themselves out of the market and lose business to more aggressive competitors.

On the other end of the spectrum, captives hope to drive demand at very attractive rates. Credit unions are likewise aggressively pricing loans in hopes that new auto loans will lead to other products in the future. Both companies are confident that this strategy will not lead to a buildup of bad debts in their portfolios or an increase in delinquencies.

Others, including some non-traditional lenders, have exited certain market segments, focused on higher income borrowers, exited the subprime market, or reduced loan issuance overall. I am

I don’t think there is a ‘right’ answer, but many of these decisions are made ‘broadly’, grouping consumers into target segments that are too large to be distinguished for analysis. It may not have been. Really effective. I think we need to add more precision to the equation.

AFN: As a data analytics company involved with many auto financiers and banks around the world, what are the most common questions customers ask today?

BM: The overall theme is: How should lenders view loan and lease pricing and portfolio risk management in an ever-changing market?

Over the years, we have received questions about the correlation between loan pricing and portfolio management, and how to optimize the two. Pricing is a key vehicle for managing trade-offs between profitability and market share, and lenders are looking for technology solutions to help manage these trade-offs and optimize their portfolios. .

More recently, the debate has expanded to include how lenders use pricing to control the risk profile of their portfolios given the recent trend of rising cost of funds and rising delinquency rates.

A major challenge in using pricing for risk management is that existing technology cannot solve segment-level pricing, leading many lenders to adopt a “one-size-fits-all” approach, considering only one or two broad parameters. is often used. A solution is needed that allows fine-grained pricing controls to influence demand across narrower, more targeted risk segments.

AFN: How can lenders maintain transaction volumes without setting prices so low that they threaten profitability and increase delinquency?

BM: We urge our customers to take concrete steps now.

First, we quickly and proactively assess the current market and how it might affect the lender’s overall portfolio. This should include changes in government bond rates, competitor pricing, delinquency rates, car prices, and macroeconomic trends.

Then create a detailed, intelligent plan and response. In terms of pricing, this includes highly agile pricing capabilities (driven by modern artificial intelligence and machine learning powered pricing solutions) that combine analytics, go-to-market strategy planning and competitive intelligence. ) must be included.

Third, look at technology. the bestpricing softwareToday’s solutions offer powerful automation capabilities. This is essential to eliminate excessive internal handoffs and reduce time to market. It also has ML and AI capabilities that use self-learning cycles to improve pricing strategies and results over time. Pricing is an important vehicle and common denominator in the discussion. AI and ML can help lenders make their pricing finer and smarter by helping them understand their customers better.

Modern technology enables lenders to use predictive models to understand differences in price sensitivity, profitability and risk profiles at the customer level.

Combining optimization algorithms with these predictive models allows lenders to determine optimal price points at a very granular level, down to individual consumers. This is much more granular than looking at a wide range of consumers, such as consumers with specific credit scores, income levels, and so on. Or loan history.

Lenders also gain new levels of agility and the ability to quickly respond to market changes and market feedback, quickly assess the effectiveness of pricing strategies, and implement a “test and learn” or “self-learn” cycle. to adjust as necessary.

Finally, monitor and adjust in real time. In addition to developing better pricing strategies and offers and getting them to market faster, car lenders need to continuously monitor pricing performance in real time. Ideas to consider here include real-time price evolution, dynamic A/B testing capabilities, and continuous monitoring to make the best possible decisions.

AFN: What is the role of data in evaluating pricing options and trying to predict market reactions? What kinds of data should lenders analyze and what kinds of analytical tools should they use? Should I?

BM: Data plays a big role in designing solutions and day-to-day operations.

To gain intelligence and get an accurate picture of the current state of the market, lenders should consider market conditions (interest rates, competitor pricing, demand for new loans, macroeconomic data, etc.).

There is an absolute need for technology that provides a forecasting framework that can instantly reflect changes in capital costs and competitor trends in demand and revenue projections.

It also takes into account internal data on current customers and loan performance. With delinquencies on the rise, some customers may be behind on their payments or in danger of default and may want to get in touch with an offer to renegotiate.

All this data not only helps optimize pricing strategies, but also powers prescriptive analytics to evaluate and adjust those strategies based on real-time performance data. This gives lenders greater confidence that they can balance new customer acquisition efforts, financial performance and regulatory compliance to optimize their portfolios.

The right data to feed up-to-date analytics and models makes lenders much more agile in responding to changing conditions, and rapid results analysis allows them to assess the effectiveness of their strategies and quickly adjust if necessary. can do.

AFN: Many lenders seem to feel the need to overhaul legacy systems before taking advantage of new technology, which can be costly and time consuming. How do you see the introduction of new technology in loan pricing?

BM: you’re right. Many lenders follow the “all or nothing” path, becoming overwhelmed with tasks and resource requirements and, as a result, never achieving the promised results.

Earnix takes a more agile and modular approach.Our strategy is to build what we call Configurable solution.

Some existing systems, such as Loan Origination Systems (LOS), are perfectly fine as-is and just need to be connected to the new pricing solution. And much of the data lenders need for smarter decision-making is already in-house, but inaccessible due to disconnected, siled systems and internal data management challenges.

Avoid “throwing the baby in the bath” by using modular structures and technologies such as application programming interfaces (APIs).

This allows lenders to keep what works and focus on quick returns, such as operationalizing existing data, more precise market segmentation, deploying scenario modeling, and automating pricing strategies. This strategy enables rapid solution deployment and faster time to market while keeping the long-term strategy in mind.

AFN: What recommendations do you have for auto lenders today to improve their pricing analysis? Are you optimistic about how lenders can adapt to the current situation?

BM: No. 1: Manipulate existing data at your disposal. As mentioned earlier, customer behavioral models and loan profitability algorithms have been developed over the years, but in order to perform portfolio analysis and model various “what if” scenarios, must combine these.

No. 2: Implement an integrated, purpose-built pricing analytics framework that enables lenders to understand in minutes how market changes are impacting their business and how best to respond to those changes.

No. 3: The combination of this data and the latest analytics will enable the introduction of real-time pricing, enabling lenders to gives you a competitive advantage.

The current environment may present “challenges” for auto loan originators, but it can also present new opportunities. We help lenders move away from cumbersome and time-consuming pricing approaches and adopt new technologies for faster and more effective pricing, gaining competitive advantage and delivering long-term financial performance. I’m optimistic that we can.

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