4 Minutes Read.
Commercial vehicle lending is embracing digital technology at a quickening pace. Loan underwriting, however, is still largely carried out using conventional, non-automated methods. As a result, some big banks are pushing to expand auto lending and introducing new channels such as direct lending, which may help 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. According to data from the Federal Reserve Bank of St. Louis, business motor vehicle loans and leases grew by 8.6 percent while consumer auto lending grew by 3 percent. 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.
While commercial banks or manufacturers’ finance companies are the traditional sources of financing for commercial vehicles, the market has attracted a wide variety of competitors in recent years.
As the number of online lenders has been increasing, many credit unions now offer commercial vehicle lending. Qualified borrowers with problematic credit can access loans guaranteed by the U.S. Small Business Administration (SBA). Lenders are increasingly 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. Banks such as Ally Financial, Wells Fargo, Chase and Bank of America have highlighted how direct lending is driving digitization and are now moving to “stay abreast” of this new competitive threat.
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 greater process efficiency given the relatively high cost of smaller loans. According to the SBA, 99 percent of U.S. companies are small businesses. Thus, it follows that the greater part of commercial vehicle loan demand will come from small businesses.
Automation in commercial vehicle lending is applied to two broad areas: the customer application interface and loan underwriting.
Virtually all lenders have deployed some kind of online customer relationship interface to meet customer demand for easy, always-on access. Bank of America’s Small Business Auto Loans webpage is a typical example. Customers can explore various loan options, get an estimate of monthly payments, apply for a loan and submit documents. Once they have fulfilled enough loan requirements, they can check on the status of their application, chat in real time with a customer service representative, or schedule a local appointment with a loan officer. 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
Commercial vehicle lenders are creating partnerships with vehicle dealers to gain a competitive advantage in the vehicle lending market. Essentially, lenders are providing customers with a “one-stop” experience. Ideally, every step, from selecting a vehicle, to obtaining a loan, to arranging for delivery of the vehicle, is available to the customer immediately. While this arrangement between the major manufacturer dealers and finance companies has existed for years, it is now being pursued by more conventional lenders.
Major banks can partner with vehicle retailers and develop their own online lending facilities. Most banks, however, are finding white-label partnerships with established online lenders or developers of lending systems.
Rather than developing the necessary automated systems in-house, partnerships allow lending products to be made available faster and at a lower cost. In effect, 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. These systems allow easy linkages between the bank, the system provider, the vehicle retailer and the customer.