How Connected Cars Could Change Auto Finance

The automobile is one of those products that can change countless details of daily lives, to say nothing of the payments and commerce ecosystems associated with vehicles. And any significant change to the automobile — and that includes the rise of connected cars — will bring shifts to other businesses and business processes.

That includes the world of auto finance. And those changes will play out over a longer term than the changes now taking place — with interest rates rising, auto lenders are reigning in their 0 percent financing deals that have become the norm over the past few years.

As connected cars — that is, the vehicles that enable deeper forms of mobile payments and commerce than is the case now, including activities that involve fueling, restaurant reservations and the like — move closer to reality, fresh attention is focusing on what changes that might bring to auto lending and leasing.

New Complexity

Get ready for one recent analysis called a “new layer of complexity,” at least when it comes to leasing, thanks to connected vehicle technology.

That’s because “conventional leasing models, whereby contract prices are determined by fixed parameters — i.e. mileage requirements, car choice, duration, residual value — will no longer be enough,” according to Daniel Layne, founder and CTO of Quotevine, which sells automated finance technology. “With over the air data or software updates, connected cars have the potential to become smarter, and therefore actually increase in value throughout the duration of the contract as new functionalities are added to the car,” he said.

Data Race

In fact, there is a race going on for control of the data from connected vehicles. As PYMNTS has reported, nearly every new vehicle that is bought or leased is, by default, programmed to share data with manufacturers. Vehicle owners must consent to the data sharing, but they often give their permission unknowingly when signing lengthy or multiple documents at the time of purchase — when consumers are often eager to take the keys and drive off the lot.

Some 78 million existing vehicles are already connected to the web, according to an estimate from ABI Research. By 2021, 98 percent of all new vehicles sold in the United States and Europe will have web connections. The software in those vehicles — the source of all that data — also continues to get more complex, which only increases the available well of information.

All that data promises to change the leasing process, as further explained by Layne. “A leasing specialist with access to the right mix of data could use previous personal and driving related history to create a range of adaptive vehicle plans tailor-made to the customer’s profile,” he wrote. “Cost savings and helpful push notifications could then be delivered to customers — for example, by helping them avoid charges on excess mileage, based on forecasted driving time.”

New Ownership Models

That’s not all that might change in the coming years as connected vehicles become more common. According to another report, “automakers are experimenting with new ownership models” as the technology spreads.

Ford, for instance, has tested a model that enables multiple consumers to share a lease for a specific vehicle. More recently, Ford also introduced an auto rental subscription, as detailed in a PYMNTS Subscription Commerce Tracker. And Hyundai has tested a model that offers a two- or three-year vehicle subscription instead of a traditional ownership.

These efforts come amid an anticipated decline of up to 50 percent in the auto finance market — worth about $120 billion annually — as connected cars, ridesharing and shifting consumer preferences make traditional car ownership less desirable, at least according to a Deloitte report.

“With more people willing to give up vehicle ownership, opportunity exists to create subscription and loyalty programs for ridesharing or vehicle usage to further entice users,” according to an analysis from Acxiom, a database marketing firm. “This type of program would enable these consumers to sample a number of different vehicles, which could then entice them to the OEM’s products when they are ready to buy.”

Ownership Desire

That’s not to say all younger consumers will reject traditional ownership when it comes connected cars and trucks. There is a growing body of  data that indicates millennials do want to own vehicles and not just share them — nor tie their lives to ridesharing services such as Lyft and Uber. One report from TransUnion said that consumers between the ages of 21 and 34 are “taking out new auto loans at a 21 percent higher rate than Gen X borrowers did when they were that age.”

One reason for that? Different loan terms, according to Ezra Becker, senior vice president of research and consulting for TransUnion. When Gen X consumers started shopping for cars and trucks, typical loans offered five years to repay them. “Now, you can get a seven-year loan, which lets a lot of consumers manage their cash flows better,” Becker said.

Connected vehicles are going to change so much — including dealer operations as those sellers craft new financing processes, along with insurance — but with change always comes opportunity,