Magazine article American Banker

Self-Driving Cars Could Change the Course of Auto Finance

Magazine article American Banker

Self-Driving Cars Could Change the Course of Auto Finance

Article excerpt

Byline: Brian Patrick Eha

Americans, by and large, are car people. Car owners, car drivers. Everybody knows it. Tom Wolfe knew it 50 years ago, writing about stock-car racing and the demolition derby, and it remains true today.

But Americans' longstanding relationship to automobiles -- owning them, driving them -- is set for a dramatic shift, as ride-sharing cements its place in American transportation habits and as automobile manufacturers, technology giants and ride-hailing companies make a concerted push toward self-driving vehicles.

If that happens, the automotive finance market will follow suit. A market in which 95% of loans and leases today go to consumers could, in the next decade or two, see 35% of financing directed at commercial vehicle fleets and other businesses, while shrinking by as much as half overall, according to a new report. The coming disruption presents a challenge to auto lenders and will likely create new winners and losers as the focus shifts from car ownership to so-called mobility services.

This outcome depends on the use of ride-sharing and ride-hailing services continuing to increase and eventually combining with autonomous driving technology -- in other words, fleets of self-driving taxis ferrying people from place to place instead of people driving themselves.

"There's a lot of evidence that ride-sharing and ride-hailing are here to stay and growing," said Tiffany Johnston, a principal with Deloitte and the co-author of the report. As for the transition to a new transportation paradigm, "the question is, is it going to be a cliff? Or is it going to be more gradual?"

Looking only at the recent past, it would be hard to foresee a major decline in private car ownership. In 2015, the auto industry enjoyed its highest sales in 15 years, and interest rates for new cars are at a three-year low. This year is expected to be the seventh consecutive year of growth in new-car sales, according to the National Automobile Dealers Association, which forecasts an uptick of 2.3%.

Given the health of the industry, Johnston admits that her report constitutes something of a contrarian view. Car ownership remains deeply entrenched in American society. As of 2013, 86% of U.S. workers commuted to work by car, according to a U.S. Census Bureau report. Of those commuters, three out of four drove alone.

But given the scale of the coming shift, it is one that banks cannot afford to ignore.

Today, new car loans and leases are primarily originated at dealerships, where cars are purchased by consumers for their personal use. Of the roughly $1 trillion in outstanding loans and leases in 2015, banks owned about 57% of the market, while captive auto lenders held about 38%. Deloitte expects that consumer habits will soon change: Rather than buying a car, more people will rely instead on ride-shares and on-demand taxi services like Lyft and Uber to get around.

Consequently, as much as 35% of the auto finance business will consist of providing financing for the owners of shared-vehicle fleets. But it will not be as simple as having $300 billion shift from the consumer to the commercial side. In the process, said Johnston, she expects the total market to shrink by anywhere from 20% to 50%, a huge loss of revenue for lenders.

That prediction relies on the evolution of the technology behind self-driving cars. It will probably make them more expensive than traditional cars at first, and cheaper to manufacture in the long run -- especially the utilitarian models likely to be used by ride-hailing services. For banks and other auto lenders, that means the financing they provide could look more like leases on commercial office equipment and medical equipment, according to the report.

Large diversified banks already know how to do asset financing, which may give them an advantage over other auto lenders in the future, Johnston said. …

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