If you tried to encapsulate the guiding principle of most major developments in the fintech sector in recent years into a few words, it would sound something like: make it fast, make it efficient, and make it easy. That’s because fintech is all about lowering barriers to entry and reducing friction in financial markets to the greatest extent possible. In practice, that means that analysts can look to legacy-dominated financial sectors to determine which ones may be the target of the next wave of fintech innovation.
There is one sector, in particular, that has thus far resisted the advances of the fintech revolution, and it’s one with a long and less than customer-friendly reputation. We’re talking, of course, about the world of auto finance. It’s a sector that hasn’t seen much in the way of innovation over the last 40 or so years, aside from the advent of online payment calculator tools, but it appears that may all be about to change. Here’s what’s happening.
A Growing Domestic Market
In the United States, the auto finance market is enormous – and growing. As of the first quarter of 2018, Americans had outstanding auto loans that totaled $1.1 trillion, and it’s a figure that’s on a pronounced upswing. At the same time, the average length of those outstanding auto loans has risen to 69.2 months, which represents an all-time high. Those statistics are reflective of the fact that Americans are relying on credit to finance automobiles that are out of their price range, and are willing to pay them off over longer periods of time than ever. For fintech innovators, a motivated, high-value market with plenty of room for greater efficiency and transparency is a prime target for disruption.
Same Cars, Flexible Options
One of the first major fintech entrants into the auto finance markets in the United States is Los Angeles based Fair.com. In true fintech fashion, they appear to be zeroing in on the two major pain points that the above lending statistics reveal: length of term and cost. The basic idea behind the platform is to offer consumers a way to access pre-owned vehicles at competitive monthly rates with no predetermined term length. In short, you pay less per month for a well-maintained car, keep it for as long (or as short) as you like, and return it when you’re done.
Their approach is blowing up the traditional auto finance model and could turn out to be a game changer in the industry. Fair has some heavy industry backers, too, netting financing from the likes of BMW, Penske, and Mercedes in recent months. Most importantly, they’re already gaining traction, too, posting strong 40% customer growth over the previous two quarters.
Emerging Markets Show the Way
There’s another part of the world that may end up becoming a model for the global auto finance industry to follow, and fintech is leading the way there, too. The Chinese market, which was never big on auto financing options, is starting to shift and embrace auto lending, which could create a market that dwarfs the rest of the world. It is in that emerging market that we can see the makings of a fintech revolution as well.
Recently, blockchain innovator Ideanomics announced a $6 billion deal with China’s First Auto Loan to collaborate on the financing of vehicles in the Chinese market. That’s a pretty important foothold in an emerging market, especially when you consider that the Chinese government has mandated a switchover to all-electric vehicles in the country’s vast ride-sharing service sector in the coming years. It’s also a perfect example of how fintech innovators are pushing into the auto financing market in ways that could upend the status quo in the long term.
Change is Coming
Taken together, these developments in auto lending markets around the world paint a picture of a marketplace that’s on the verge of revolutionary changes. It should lead to a far more customer-friendly marketplace, with more flexible options and greater efficiencies at scale. The growth of fintech in the burgeoning Chinese auto financing market should also prove to be an important development as well. It represents a rare ground-floor opportunity for fintech to help shape a market that has yet to reach its full potential. It will do so largely free of the existing constraints of a legacy lending market, and how it shapes up may provide a modern model for other markets to follow. No matter what, these developments point to a change coming to a previously stagnant industry – and while that may not turn out to be good news for incumbents, it should be great news for everyone else.
