4 Minutes Read.
Commercial vehicle lending is embracing digital technology at a quickening pace, but loan underwriting is still largely carried out using conventional, non-automated methods. The aggressive push to expand auto lending by some big banks, however, along with the introduction of new channels such as direct lending, may help to drive greater automation.
The commercial vehicle lending landscape
Commercial vehicle lending in the U.S. over the past year has grown faster than consumer auto lending, which is expanding at an annual rate of about 3 percent. According to data from the Federal Reserve Bank of St. Louis, business motor vehicle loans and leases grew by 8.6 percent in the same period. At the end of 2018, commercial vehicle loan portfolios in the U.S. stood at $115.46 billion and could exceed $125 billion by the end of this year.
Commercial banks or manufacturers’ finance companies are the traditional sources of financing for commercial vehicles, but the market has attracted a wide variety of competitors in recent years.
Credit unions have added commercial vehicle lending to their consumer auto lending offerings, and the number of online lenders is growing. Qualified borrowers with problematic credit can access loans guaranteed by the U.S. Small Business Administration (SBA). There are also a growing number of lenders offering tailored loans for specific types of commercial vehicles, such as heavy trucks or specialized equipment. Another more novel financing source that is expanding at an impressive pace is direct lending, where investment funds basically fill the role of banks. Some banks, such as Ally Financial, Wells Fargo, Chase and Bank of America, have highlighted how direct lending is driving digitization and are moving to “stay abreast” of the competitive threat it represents.
Automation in the lending process
The key driver for automation strategies in commercial vehicle lending is the same as it is for small business lending: the need to improve profitability through cost reductions and gains in process efficiency given the relatively high cost of smaller loans. According to the SBA, 99 percent of U.S. companies are small businesses, so it follows that the greater part of commercial vehicle loan demand will be from small businesses.
Automation in commercial vehicle lending is applied to two broad areas: the customer application and interface, and in loan underwriting.
Virtually all lenders have deployed some kind of online customer relationship interface in response to customer demand for easy, always-on access. Bank of America’s Small Business Auto Loans webpage is a typical example. Using it, a customer can explore various loan options, get an estimate of monthly payments, apply for a loan and submit documents, check on the status of his application, chat in real time with a customer service representative, or schedule an appointment with a loan officer in a local branch.
Loan underwriting is the area in which automation can help lenders make the biggest gains in productivity and cost reduction. Some of the advantages are obvious.
“Automation allows for much faster and more accurate processing of customer loan application data, as it virtually eliminates human handling.”
Commercial auto lenders can handle a much larger volume of business without adding extra personnel or expensive digital infrastructure. Artificial intelligence (AI) and machine learning allow lenders to expand their credit scoring to include customers that might be bypassed under conventional credit scoring and underwriting parameters. AI can also shorten the underwriting process by building a qualification profile while the customer’s data is being compiled. This allows for near-instant loan decisions, and can also be used to market subsequent loan products to repeat customers.
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Evolving lending into full-service solutions
One aspect of the commercial vehicle lending market that lenders are developing to gain a competitive advantage is in partnering with vehicle dealers. The concept is intended to provide customers with a “one-stop” experience in acquiring a new vehicle, where ideally every step from viewing and selecting a vehicle, to obtaining a loan, to arranging for delivery of the new vehicle. The arrangement has existed for years, at least in some fashion, between the major manufacturer’s dealers and finance companies, but is now being pursued by conventional lenders.
Major banks can partner with vehicle retailers and develop their own online lending facilities, but most are finding white-label partnerships with established online lenders or developers of lending systems.
Partnerships allow lending products to be made available faster and at a lower cost than developing the necessary automated systems in-house. The banks are not obliged to make large investments in digital infrastructure and the partnerships provide the added advantages of ready expertise and scalability. All this is made possible by the data management capabilities of automated loan processing and underwriting systems, which allow easy linkages between the bank, the system provider, the vehicle retailer and the customer.