As the automotive industry looks at the final stretch of 2023, it is clear that there continues to be progress made in the overall digital transformation journey for all involved – OEMs, lenders, dealers, and service provider partners.
Sure, for a few years now, the shopping process for customers has become far more digital than what they experienced pre-pandemic. However, the real progress is now being made at the back-office level, where behind-the-scenes workflows today are also more digital. As an example, almost all captive lenders now work with digitized documentation and contacts, compared with the mountain of physical paperwork that use to comprise each deal jacket.
While this progress is tangible, there is still more work to be done in digitizing every aspect of the operation. Let’s take a look at where the industry stands in the digital adoption of back-office documentation and workflow activity here in the fourth quarter.
Digital Adoption Continues Up Slightly
According to the most recent Auto Finance Digital Transformation Index based on third quarter data, auto dealers, service providers and lenders showed a digital adoption growth rate of 2% in the third quarter compared with the second quarter. However, in taking a more macro look at the industry as a whole, the rate of industry adoption of digital back-office documentation is up 120% when comparing third quarter activity to the third quarter of 2020.
One of the reasons why the Index has been flat recently has been attributed to slower sales of used vehicles through much of the year. According to Cox Automotive, total used-vehicle retail sales through the first eight months of the year are down less than 4% compared to the same timeframe in 2022.
We’re still in a period of transaction mirroring where the adoption of digitization is closely tied to the performance of new-vehicle sales, and we expect this trend will continue through the remainder of 2023. Despite this slower-than-normal pace of adoption, the industry has shown remarkable growth since the onset of the pandemic, when many quickly realized the importance of moving back-office documentation to digital formats.
Digital Adoption Up Significantly For Securitization Markets
The Q3 Auto Finance Digital Transformation Index also shows that the digitization adoption rate for securitization markets has shown a faster pace of adoption in recent months. The rate of adoption increased 34% comparing the third quarter to the second quarter, and this also marked a record high loan volume compared to any other third quarter period of activity on record. In fact, the adoption rate jumped 137% comparing to Q3 of the previous year.
The volume of these loans is certainly made up mostly of sub-prime loans. Given the recent rise in delinquency rates, lenders are seeking cash to be more liquid and ensure solvency in the event delinquencies continue to rise. Securitization appears to be a method for these lenders to accomplish just that. According to data from Equifax and included in a recent Washington Post article, 7% of subprime auto borrowers today are considered delinquent, up from 5% during the financial crisis more than ten years ago.
Why the Industry Continues to Focus on Digitization
The use of paper is not only inefficient, but also carries significant compliance risk for all parties involved. Examples include photocopies of customers drivers’ licenses sitting on the copier or a salesperson’s desk; Deal jackets sitting on an F&I managers desk with the door open to the office; And paperwork taken to the driveways of unverified customers for wet inked signatures. This results in customers with envelopes and throwing them in the glove box. Packages of contracts are sent to lenders via mail. And of course the back room with years and years of deal jackets.
While the rate of adoption has slowed over the last few quarters, it is still progressing. As both new and used vehicle transactions continue to grow in the coming quarters and years, more automotive professionals will continue to see the benefits of going digital on the back end.
We still have a very paper-driven culture in automotive, wrought with risk and liability for everyone involved. We now need to continue to shift focus to digitization as a solution for the risk and liability we have in the transaction around use of paper and management of original documents, to find end-to-end solutions that eliminate the need for paper.