Debt collections best practice for auto finance

The unprecedented disruption of COVID-19 has forever changed the shape of the auto finance sector. Not only did the pandemic lead to a dramatic decline in sales but production was halted across the globe and dealerships and showrooms were forced to close for months. Many have yet to recover and many more never will.

Perhaps the largest shift catalyst by the pandemic, however, is in our general mobility patterns. Germany saw a decline of 11% in new car registrations and while the UK fared better with a decline of only 3%, it was still an unexpected dip.

With fewer people commuting to work and a steady rise in ride-sharing and public transport popularity that pre-dates COVID, there was always going to be a ripple effect that would impact auto finance.

A spate of trends has emerged to attempt a course correction, with significant rises in the subscription leasing model, online purchasing, and digitization painting a clearer picture of how the market might look by 2022. And that’s before we even mention the surfeit of new players entering the market - from fintech and independent leasing companies to automotive OEMs.

But how is this affecting the consumer and how should auto finance and leasing companies and debt collections teams be altering their practices to better reflect this bold and more tentative new landscape?

Click here to read our full report on auto financing in Europe.

It’s all about the customer

Simply put, best practice in a post-COVID world is always going to be about the customer, first and foremost. Lenders need to consider how the lives and situations of their customers might have changed as a result of the pandemic and alter their practices accordingly.

Below, we’ll be exploring how industry players should be establishing their post-COVID resilience strategies, strengthening the cores of their business, and reinventing future offerings, all in service of the customer.

Manage residual values

Preservation of the residual value of leased vehicles is still something that many players in the auto-financing sector have very few risk-management strategies for. With an uncertain playing field lying ahead, having a good grasp of the residuals alongside active inventory planning will give companies a solid, data-driven model for remarketing off-lease vehicles and ensuring a decent turnover of vehicles returned after their leases expire.

Improve collections efficiency

A big part of any resilience strategy should also be improving the effectiveness and efficiency of collections. An executive McKinsey survey found that over half of all auto finance respondents classed their collections management as just “mediocre,” which is simply not good enough. Strong cash-management skills and improving turnovers within accounts receivable should be a goal for all players in the coming months.

Digitize core processes

Product development and market strategies should all be driven by a strong technological backbone. Without it, players are likely to be superseded by younger and more nimble fintech players that are always going to be at least a little ahead of the game. Inefficiency can be overridden by replacing outdated manual processes with automation and digitization at every stage of the process - from selecting a leasing option to financing and everything in between. With many ‘non-traditional’ debtors bound to find themselves behind on their car payments due to the knock-on effects of COVID, a foundation of digital processes is going to seriously help mitigate the fallout.

Update IT

Of course, digitization is just one piece of the puzzle. If the infrastructure isn’t in place to support that digitization then it’s never going to work. A large part of the process is going to be approaching it from a foundational level. Rather than seeing themselves as simple financial service providers, auto finance players are going to need to start seeing themselves more as tech companies that operate within the financial services space. By updating their core IT capabilities, they will be able to implement bold new initiatives like AI-driven customer trend analysis.

Prioritize self-service

Early credit risk detection can reduce the overheads associated with delinquent account management. That much is as true in auto finance as it is in utilities or retail banking. However, customers are significantly less likely to even qualify as a risk if they are given greater agency over their finances. To ensure their customers are not burying their heads in the sand, suppliers need to stay in contact via as many digital channels as possible. Making debts impossible to ignore will make customers more likely to pay them. Not only that, but it opens up a range of opportunities to engage with the customer and make them feel like an individual. Retail banks have been offering online self-service tools to customers in debt. Auto companies must do the same.

Stay ahead of the game

In an increasingly competitive market organizations need to adapt to new ways of working. That means implementing cross-functionality between teams to create a more transparent operation and creating products that feel more cohesive and tailored to customer behaviors and customer needs. Sustainable growth in 2021 is about aligning IT with your business objectives and that will require individuals with a wealth of digital and IT knowledge and expertise and more streamlined organizational models. It’s going to require a lot of work, of course, but it will definitely be worth it.

Address the used car market

Disruption should be about catalyzing and cultivating long-term change. Leasing companies should start by targeting the B2C used-car market. This could be a great avenue for remarketing and getting rid of formerly leased vehicles. Companies should also adapt their residual-value models for used-auto leasing to increase financial stability while reducing unexpected losses.

The EXUS financial suite manages credit risk along the whole lifecycle of an account

Offer new products

In the short term, companies need to scale their online channels and digital solutions, particularly when it comes to debt collections. Online and mobile traffic is only going to increase as the month's tick on, with some insiders expecting as much as 25% of B2C sales for auto leasing and loans to go through online channels by 2025. Companies need to develop new products that speak to this shift and satisfy customer demand for more modular, full-service and subscription offerings. All of these new products and existing products should be evaluated against KPIs to decide which remain and which are either eliminated or simplified.

Weaponize the smartphone

Being able to access their accounts 24/7 via a bespoke smartphone app will allow auto finance customers to repay without ever having to directly converse with an agent. They might have a text conversation, but even that is likely to be with an AI chatbot. This is a solution that retail banks have been making work for years now and it’s been so successful because it’s all about putting the power back into the hands of the customer and improving the overall debt collections experience. It’s all about empowering the customer to make the right choices, which will, in turn, encourage their trust and their loyalty.

Repositioning for success

If they want to stand any hope of disrupting the disruption caused by COVID, auto-financing players need to act now and defend their core business by delivering change for their customers before it’s too late. Because those that refuse to capitalize on today’s trends will be left behind by the new players waiting in the wings.

Find out how you can digitise your debt collections with EXUS Financial Suite by contacting our team.