The Future of the Automotive Finance Industry

It’s not an exaggeration to say that the automotive industry is going to experience more change in the next decade than it has in the past 100 years.

In this article we explore what the automotive finance industry may look like in 5 years, including how consumer expectations and shopping activities are likely to change, how automotive dealership profit margins may evolve, expected change to financial players and the automakers' captive finance companies, and how increasing regulation is likely to impact automotive dealerships and the industry in general.

Consumer Expectations Have Evolved

The automotive finance industry is undergoing a rapid transformation due to technological advancements and changing consumer behavior. Carvana’s rise illuminated for the industry a different way to shop for and buy a car and identified a customer segment that was ready to embrace a more consumer-centric purchasing model.

Accelerated by the COVID pandemic, all industry players have prioritized how they might provide a consumer-friendly way to purchase a car. This trend is expected to continue and will require significant investments in digital marketing and technology, as well as a general willingness to adapt to changing consumer preferences.

Consumer expectations will continue to push boundaries, with a greater emphasis on convenience, transparency, and personalized experiences. Consumers will increasingly expect to be able to research and purchase vehicles online, with the ability to compare and shop transactable prices and financing options across multiple dealerships. They will also expect a more streamlined and transparent financing process, with clear and easy-to-understand terms and fees.

The percentage of automotive shopping and buying that occurs online is likely to increase significantly in the next five years. According to a study by McKinsey & Company, online channels could account for up to 10% of all new vehicle sales by 2025.

To meet these expectations, automotive dealerships will need to invest in digital tools and platforms that enable customers to research and purchase vehicles online. This will require a significant shift in the way dealerships operate, with a greater emphasis on digital marketing, customer experience, and data analytics. Dealerships that can make this shift successfully will be well-positioned to thrive in the coming years.

What About Profit Margins?

Despite the last three years of inventory-suppressed record profits, automotive dealership margins are likely to come under pressure, as we’ll quickly get back to an era of surplus inventory and vehicle incentives, as both new and used vehicle inventories come back into line with consumer demand.

In addition to declining profit margins, automotive dealerships will also face pressure to adopt new technologies to remain competitive. For example, the adoption of electric and autonomous vehicles will require significant investments in charging infrastructure, training for sales and service staff, and software and hardware upgrades. Dealerships that fail to make these investments will be at a disadvantage compared to those that do.

To remain competitive, automotive dealerships will need to invest in their online presence, develop digital tools and platforms that enable customers to research and purchase vehicles online, as well as provide a seamless and transparent financing process.

The automakers' captive finance companies will also need to evolve in the coming years. As the industry shifts towards electric and autonomous vehicles, captive finance companies will need to adapt their offerings to meet the changing needs of consumers.

This could include new financing and leasing options for electric vehicles, as well as the development of new software and analytics tools that enable customers to better manage their vehicle ownership experience. Captive finance companies may also need to partner with other players in the industry, such as charging infrastructure providers and software developers, to provide a more comprehensive and integrated offering to customers.

What About Regulation?

Over the next five years, the industry should anticipate more scrutiny and regulation of industry finance processes that will ultimately impact profit margins.

Regulation from the Federal Trade Commission (FTC) runs the risk of significantly impacting automotive dealerships. The FTC has recently taken action against several dealerships for deceptive advertising practices and is likely to continue to scrutinize the industry for unfair or deceptive practices.

The FTC Safeguards Rule?requires non-banking financial institutions (which includes dealerships) to develop, implement, and maintain a comprehensive security system to keep customer information safe and will add a layer of compliance (and associated cost) to dealership operations.

We’re entering an era where automotive dealerships will need to spend a lot more effort and energy on regulatory compliance. To avoid regulatory scrutiny, automotive dealerships will need to ensure that their advertising and marketing practices are transparent and comply with all relevant laws and regulations. They will also need to ensure that their financing practices are fair and transparent, with clear and easy-to-understand terms and fees.

Wrapping Up

In conclusion, we are seeing many industry trends on the horizon that indicate we’re entering an era of accelerating change. But like all periods of uncertainty, there will be opportunities for the most prepared and nimble players to take market share and deliver incremental profit.

Steve Greenfield is CEO and Founder of?Automotive Ventures, an early-stage venture capital firm that has a global mobility investment thesis.