Opportunity and Disruption in Auto Finance

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www.pwc.com/consumerfinance

Opportunity and

Disruption in

Auto Finance

Innovation, Operations,

and Compliance update

An illustrative look at

industrywide disruption,

default and servicing, and

compliance hot topics

May 2016


How PwC Supports Auto Lenders

Automotive Finance Industry Highlights

PwC has a team of dedicated professionals with unparalleled levels of

automotive industry experience and insight

Our in-depth automotive finance experience within all functional domains of an auto finance organization allows

us to address our clients’ distinct needs today while looking ahead to tomorrow’s opportunities. Our automotive

finance team routinely addresses contemporary problems with innovative solutions in response to today’s

business challenges.

Regulatory

CFPB and regulatory readiness.

Consumer complaints. Fair Lending.

Originations & Dealer Relations

Dealer segmentation and scoring. Pricing

elasticity and optimization. Cost and

profitability analysis.

Risk Management

Risk identification & assessment.

Internal controls, process review and

effectiveness. Process optimization.

Strategy

Market entry strategies.

Customer experience

strategy. Alternative

data and social media

strategy.

Servicing & Default

Segmentation and

dynamic scoring.

Default process design.

Call center management.

Repossession and

reinstatement.

Digital & Mobile

Digitizing processes. Enabling

company and customer digital

interactions. Transform business

through innovative business &

product models.

Recent client engagement experience includes:

10/10

PwC has worked with the

top automotive captives

within the last 5 years and

most large bank auto lenders

Access to 500+

PwC professionals

that have worked with

automotive finance lenders

PwC has published

numerous

automotive finance papers

and are industry thought

leaders

150+ Automotive

finance projects in the last

three years

2


Overview

1

2

3

Industrywide Disruption - Today’s world of auto finance includes constant innovation, exponential growth, and rapid

expansion. Even existing lenders, such as banks and captives, are finding themselves as part of the industry redefining itself - as

mobility and car sharing providers. Disruption being fueled by megatrends and burgeoning regulatory scrutiny, is forcing auto

finance companies to adopt new strategies to align with escalating and more stringent oversight, changing consumer behaviors,

and threats from innovative competitors. As such, companies must continue to engage the customer digitally throughout the loan

life cycle similar to the new market participants and alternative lenders by enhancing online and mobile capabilities, increasing

customer’s visibility into the financing process, and increasing participation in the online purchase market.

Regulatory Compliance - Aligning compliance with federal regulatory expectations across a group of often times siloed

functions can be challenging, particularly for institutions not accustomed to federal supervision. Technology and automation

can help increase efficiency, accuracy, and transparency of compliance related functions. However, significant progress can also

be made by considering traditional compliance strategies. For example, documenting compliance programs that address key

Compliance Management System (CMS) expectations of regulators and operational process maps that identify the process owners’

roles and responsibilities, particularly at critical “handoff points”, are useful to mitigate compliance risk.

Trends in Collections and Servicing - Automotive finance has enjoyed record low delinquency for the past few years, but

recent trends may indicate upward pressure is on the horizon, particularly in higher customer risk tiers. As the world becomes

ever more mobile, the challenge of speaking with delinquent borrowers has exponentially increased for lenders that rely on

traditional contact and dialer strategies. In today’s fast-paced environment, auto lenders must make every collection attempt

count. Implementing dynamic scoring strategies to prioritize accounts and aligning contact attempts with the probability of rightparty

contact, while providing lower risk customers with alternatives to collection agent contact, such as self-service and mobile

solutions, are a few ways we see the industry addressing the challenge.

The automotive finance industry shows significant opportunity for evolution,

provided that lenders are quick to adopt to the expected market driven changes

Market disruption

opportunity increases

Technology-enabled disruptors are forcing

lenders to change the way they operate,

but for many lenders, these emerging

trends are opportunities that present a

chance to increase their competitive edge

Cost reduction

is a top priority

While increasing automation presents

operational transformation challenges, it

offers the potential for significant cost

reductions and increased operational

efficiencies

Digital auto finance

gains momentum

Direct lending platforms and mobile

channels continue to increase

market-share in auto finance transactions

making a strong digital strategy necessary

for companies to remain relevant

Compliance costs

continue to increase

The cost of managing compliance with

regulatory requirements is requiring Auto

Finance companies to invest in technology

solutions to help automate compliance that

will ultimately reduce compliance costs

PwC capabilities

3


1

Disruption in the Industry

Adapting to changes in how consumers buy and use cars

Customer expectations for buying and financing a car are rapidly changing,

and lenders need to help their dealers improve the experience.

Online all the way

Offer improved mobile

capabilities

Reach younger

borrowers

Keep things quick and

simple

Compete on experience as

well as interest rate

Cross-selling works

Target the influencers –

Friends, family, and

point of sale

Financial management

tools can add value

Lenders will need to be prepared for changes across all participants in the

auto purchase process:

OEMs:

• Transitioning to

mobility providers

• Developing

autonomous and

connected cars

Dealers:

• Supporting OEMs’ new

sales and customer

engagement models

• Impacted by

consumers’ new

digital expectations –

virtual showrooming,

leveraging in-dealership

technology, and

supporting online

purchases

Indirect Lenders:

• Helping their dealer

partners so they

can stay relevant to

consumers despite

industry changes

Direct Lenders:

• Driving consumers’

changing digital

expectations

• Setting the standard

for online experience

that indirect lenders

need to help their

dealers exceed

4


The gloomy side of car buying today.

• Car buying today can feel like a high pressure, stressful, adversarial situation. Borrowers feel uninformed

and are subjected to drawn-out negotiations.

• Even a customer who gets a great deal may leave feeling like they ‘lost’ the negotiation.

I can pay $200

a month.

I bet this guy hasn’t

done any research

#$%?!

An hour later...

I talked to my manager again and he can’t come

down that low. Sign here to tell him you’ll drive it

off the lot today if he’ll do $240 and $1,500 down.

3

4

1

I can do $250 a

month if you put

down $2,000.

That…seems high.

Is that high??

Now I’ll take you over to

talk to my finance guy and

fill out the paperwork.

I hope I got a

good deal.

2

5

I’m going to get a nice

voucher for this one.

Wonder what else

F&I will sell him

The bright side of car buying tomorrow.

• Buyers are increasingly well informed, able to compare prices on their mobile phones even while at

the dealer. By the time a customer steps on the lot, they may already have the deal ‘done’.

• The same price point may now feel like a better outcome, if the borrower knew what to expect.

1

This seems like a good deal.

Wow, I can get pre-approved for

a loan, too! Let’s check this out.

You can get me down to 2.5%?

Perfect, that beats what I found

online. I’ll come in today and buy it.

Here’s the car you picked out. As we

discussed, you’ve been pre-approved

for a loan as well. Is all this info correct?

4

3

You are pre-approved

for a loan at 3%, for a

monthly payment

of $250.

That was

really easy!

Hmm. That’s a

little higher than

my bank offered.

I’ll see what they

can do.

2

5

The paperwork is all taken

care of, and I see you’ve

already made your F&I

selections online. Please

sign here.

Disruption in the industry

5


1

Disruption in the Industry

Adapting to changes in how consumers buy and use cars

Innovation is shifting from making driving a car safer and more enjoyable to

changing how cars are used. And this will bring seismic shocks to financing.

1950’s 1960’s 1970’s 1980’s

Automatic

transmissions

• Power windows

• Radial Tires

• Power brakes

and steering

• FM radios

• Power locks

• Air conditioning

• Disc brakes

• Front seat belts

• Transistor radios

• Rack & pinion

steering

• Rear seat belts

• Anti-lock brakes

• In-car stereo

• Cassette players

• Front Airbags

• In-dash CD player

• Memory power

seats

• Keyless entry

Continuous entertainment advances

Major safety enhancements

Driveability basics

“Buying Metal” | “10 years / 100,000 miles” | “Drive it into the ground”

6


1990’s 2000’s 2010’s 2020’s

• Side Airbags

• Multi-disk CD

changer

• Cruise control

• Auxiliary input

• Navigation systems

• Backup cameras

• Entertainment

system

• Bluetooth

integration

• Satellite radio

• Infotainment system

• Connected Car /

Integration with IOT

Autonomous /

Self-Driving Car

Improved comfort

New car usage models

“Accessing Mobility”

“Short technology upgrade cycles”

Disruption in the industry

7


2

Executing a Compliance Strategy

Compliance Blocking and Tackling

PwC’s 2016 Automotive Lending and Leasing Survey revealed technology

and compliance as the greatest challenges to growth and profitability

35%

30%

25%

20%

15%

10%

5%

0%

33% 21% 17% 17% 8% 4% 0%

Technology Compliance Dealer

experience

Other Operations Customer

experience

Human

capital

Source: PwC’s 2016 International Automotive Lending & Leasing Survey, US respondents

8


The Compliance Management System (CMS) is made up of five pillars. Key focus

areas for automotive finance institutions include the following in each pillar.

How does your CMS fair?

Board & Senior Management (BSM) Oversight Responsibilities

• BSM are actively involved in the oversight of the CMS and collaborate with CCO to establish

“Tone at the Top”

• BSM oversight includes a formal charter, regular reporting on emerging risks and trends, education and

training on regulatory and compliance expectations, and thorough documentation including

meeting minutes

Compliance Program Components

• Compliance risk assessment covers federal consumer financial laws, includes the measurement

of inherent risk and the adequacy of controls to mitigate those risks, and guides monitoring and

testing programs

• Program documentation, including policies, procedures, and training, are tailored to align to actual

practices at the appropriate level of detail for specific roles

Consumer Complaints Management

• All internal and third party service provider complaints across the enterprise are captured, analyzed, and

reported based on consistent standards to identify potential consumer harm and potential weaknesses

in the CMS

• Root cause analysis and predictive analytics drive enhancements to underlying business processes to

prevent future complaints

Independent Compliance Audit

• Internal audit performs compliance audits based on risk assessment results and includes an audit of the

design and operating effectiveness of the CMS

• The internal audit function operates independently of management and reports to the Board (or Board

Committee), who reviews, approves, and takes action on audit plans and results

Service Provider Oversight

• A robust end-to-end oversight program is in place for both initial due diligence and ongoing monitoring,

including compliance risk assessments and control reviews, as well as fourth party risk assessments

• Oversight function is empowered to take corrective action and/or terminate third party relationships due

to heightened compliance risks and/or compliance control failures

Automating compliance

9


2

Executing a Compliance Strategy

Innovations in Compliance Management

Auto finance risk managers are often challenged with the siloed nature of

their organizations. Operational departments function independent of one

another causing increased compliance and regulatory risk.

Complex and siloed auto finance operations

can make enterprise compliance a challenge.

Enterprise Risk Management (ERM) technology

solutions can help align and coordinate the

compliance functions of operations.

Originations & Funding

I never hear anything

from Servicing. I wonder

if they ever find anything

we could have done better.

Analyze Current State

Compliance Processes

& Technology

Identify Business & Technical

Requirements for the Prospective

ERM Solution

Create & Distribute RFP

to Potential Vendors

What was Originations

thinking making this loan?

We should have caught this

issue up-front, before we

had to take a loss.

Collections

Evaluate RFP Responses

and Conduct Vendor Demos

System Selection

I wish I could see what

collections is doing with

this account. Am I allowed

to waive this fee?

System Design & Build Out

Customer Service

System Testing and

Deployment

Implementing an ERM solution

can take two years or more.

10


While implementing an ERM solution, don't lose

sight of these quick wins to help further boost

operational compliance.

Together the quick wins and a longer term

ERM implementation strategy can help align

compliance priorities across all business units.

Risk and control

assessments to

identify concealed or

hidden compliance

risks

Operational

process flows

with control identified

at handoff

points

Consistent

policies and

procedures

to align operational

execution of

customer-facing

functions

Employee

training to

reinforce approved

organizational

processes

KPIs, KRIs, and

performance metrics

aligned with

company goals

Originations & Funding

Compliance risk

assessments that

align regulatory

requirements to

business line

functions

Customer Service

Collections

Automating compliance

11


3

Optimizing collections

New headwinds are challenging collections performance

Characteristics of an effective collections program

Robust customer segmentation

Segmentation is dynamic, it is not a

one time event. Segment customers

into the appropriate risk bands based

on risk characteristics, credit bureau

refresh data and past payment

behaviors.

Collector empowerment

Treat each customer contact as

the sole opportunity to resolve

the delinquency by empowering

employees to address customers’

situations with the goal of first contact

resolution.

Nonlinear treatment strategies

Build processes to quickly and

effectively escalate the mitigation

strategy you use based on a

customer’s willingness and ability.

Collect current not just payments

Encourage collectors to understand

the borrower’s situation and offer

solutions that cures account

rather than just collecting the most

outstanding delinquent payment.

Customer contact capabilities

Contact customers through a variety

of channels and methods. Know when

to use a push versus a pull strategy.

Champion-challenger mindset

Continually challenge your loss

mitigation program with the goal

of continuous improvement and

innovation.

Focus on pre-delinquent

customers

Have the capabilities to identify

customers who are moving towards

default and proactively intervene with

a variety of prevention strategies.

Performance monitoring

Establish robust, real-time

performance monitoring to analyze

the effectiveness of your segments

and strategies.

Capacity management

Anticipate inbound and outbound

call volumes and adequately staff

queues with experienced, empowered

resources.

Incentive compensation

Use a combination of efficiency and

effectiveness measures to motivate

personnel to drive results. Check

that incentives are properly aligned

organizational goals.

12


Segmentation strategies can help prioritize collection contact efforts based

on a borrower’s ability and willingness to pay

Analyze data...

...to identify segments based on

willingness and ability to pay...

...and develop a collection strategy

and customer journey for each

segment.

Transaction

data

Historical

data

Credit score

movement

3rd Party

data

sources

Pre collections

High risk into

collections:

Likely about to fall

behind on payments

Self-cure:

Accidently missed

payment

Outline

customer

journey based

on collections

effectiveness

data, contact

effectiveness,

information collected in

the collection process, etc.

Data

analytics

Data

analytics

• Predictive modeling

• Rules based engine

• Behavior profiles anaylsis

• Risk segmentation

Early stage collections

Temporary

delinquent:

Sudden job loss;

unforeseen medical

expenses

Practitioner:

Been through

collections a few

times /understands

the system

For example: Pre collections

Soft touch:

Reminder

communications

or virtual touch

(emails)

High

risk

Hard touch:

Proactive

communications

& solution

offerings

(outbound calls)

Collectors can struggle to execute strategically without the right tools

to guide them

Begin

skiptracing?

Take a

promise?

Leave a

message?

Offer an

extension?

Call a

reference?

Optimizing collections

13


3

Optimizing collections

New headwinds are challenging collections performance

Lower risk segments can be aligned with alternative collection strategies

to reduce call volumes and prioritize higher risk accounts for live

agent handling

Self-Cure Strategy:

Improve collector effectiveness by deprioritizing

customer call efforts of accounts that will

“self-cure.”

Self-Service Strategy:

Enable the customer to choose and fulfill

payment options independently and supports

alternative resolutions.

Extension Modeling:

Identify accounts that positively correlate with

historical extension data to proactively offer loss

mitigation/extension solution.

Higher risk customers can be futher

segmented for contact via live agent

or dialer strategies.

14


Higher risk segments can be immediately aligned with the appropriate early, mid

or late collection stage rather than progress along the traditional linear path

Critical Risk High Risk Medium Risk Low Risk

Ability to Pay Highest

Illustrative Scenario

• Customer employed with other

excessive lines/loans, assets

• Minimal customer

responsiveness

Refer to late stage collections and consider

rewrite; potentially issue for repo

Illustrative Scenario

• Customer employed but nonresponsive

to collection calls

• Has a track record for

paying late, but always pays

Consider self-cure strategy or understand reason for

delinquency and take promise to pay to cure account

Illustrative Scenario

• Several prior payments paid

ahead, but currently delinquent

• No customer contact;

customer (and reference)

contact info bad

Illustrative Scenario

• Temporary reduction or

disruption in income

• Customer maintains

communication

Lowest

Refer to late stage collections and

begin skip work; likely issue for repo

Understand reason for delinquency and

refer to loss mitigation or consider extension

Lowest

Willingness to Pay

Highest

Optimizing collections

15


Experience Radar 2015

www.pwc.com

For additional insight, view our other thought leadership collateral

Consumer

lending

Understanding today’s

empowered borrower

Converging Megatrends—

shaking up automotive finance:

How disruptions to the status quo

are challenging today’s lenders

and dealers

From idea to innovative market

leader: A roadmap for sustainable

marketplace lending growth

Consumer Lending Experience

Radar 2015: Understanding

today’s empowered borrower

For a deeper discussion on auto finance, please contact:

Roberto Hernandez

Principal, Consumer Finance Group

(940) 367-2386

roberto.g.hernandez@pwc.com

linkedin.com/in/robertohernandez1

@RobertoGHern

Doug Ekizian

Sr. Manager, Consumer Finance Group

(949) 517-8220

douglas.c.ekizian@pwc.com

linkedin.com/in/dougekizian

@DougEkizian

Martin Touhey

Principal, Consumer Finance Group

(206) 790-8751

martin.e.touhey@pwc.com

linkedin.com/in/martintouheypwc

@METouhey

Craig Schleicher

Manager, Consumer Finance Group

(415) 531-8728

craig.schleicher@pwc.com

linkedin.com/in/craigschleicher

@CWSchleicher

Daniel W Berman

Manager, Consumer Finance Group

(469) 569-4846

daniel.w.berman@pwc.com

linkedin.com/in/danielberman

www.pwc.com/consumerfinance

PwC_US_FinSrvcs

© 2016 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may sometimes refer

to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information

purposes only, and should not be used as a substitute for consultation with professional advisors.

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