Home Business How A Challenging Economy in 2020 May Impact Lenders

How A Challenging Economy in 2020 May Impact Lenders

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The U.S. auto industry has been fearing it may see sales fall after several years of strong activity and consumer demand. However, those fears will most likely fail to materialize in 2019, as the latest industry figures show an annual sales pace of 17.16 million projected for the year, just slightly above the 16.8 million mark forecast by many back in January.

Despite this end-of-year outlook, dealers and lenders should remain diligent and  plan for a variety of different scenarios.

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According to Barclays, there is a 25% to 30% chance that a recession could materialize for the U.S. economy at some point in 2020. This outlook is based on how the stock market and manufacturing activity has fared recently. If the market continues to face a bumpy road ahead, that might mean potential car shoppers may turn more conservative in their decision to plan their next vehicle purchase.

Because of these outlook predictions, some dealers are proactive in evaluating various activities at their locations.

Dealers Are Already Feeling a Slowdown

A recent survey conducted jointly by Equifax and NIADA found that only 30% of independent dealers are expecting economic conditions to improve during the third quarter of 2019, down from 38% in the first half of the year, and 42% in the fourth quarter of 2018.

Similarly, only 18% said they plan to expand their business in the third quarter, down from 33% in the first half of 2019.

When it comes to retail sales, only 37% of independent auto dealers said they anticipated their dealership’s retail sales to grow during the third quarter, down from 51% in the first half. Additionally, many dealers expect store traffic to decrease. In fact, only 38% expect traffic to increase during the third quarter compared to 46% who expected traffic increases in the first half.

How A Slowdown Affects Lender Portfolios

Lenders should take note as well and are encouraged to analyze their portfolio makeup to help minimize risk while remaining cognizant of any possible growth opportunities. Access to the right data is key here, particularly as dealers will need to make smart inventory acquisition decisions, and lenders will want to modify portfolios and credit risk accordingly.

This is important because auto debt has increased significantly dating back to the recession in 2010. According to the Federal Reserve, U.S. consumers held a record $1.3 trillion of auto debt at the end of June, an increase from about $740 billion a decade earlier.

Data & Technology Will Make This Slowdown Different

There are a number of data tools available today to help dealers and lenders create the right plan heading into 2020. For example, credit trends data can help analyze historical credit performance of individuals so lenders can better adjust risk decisioning strategies throughout the customer lifecycle. This can be critical in virtually all aspects of the shopping process including but not limited to the following:

  • Account management
  • Acquisition
  • Credit Decisions
  • Marketing
  • Prospecting

Credit forecasting tools can not only assist with the shopping process, but help mitigate risks associated with economic swings.

Analytic datasets help lenders identify a sample of loan-level credit file data, where they can better anticipate “roll rates” and understand the likelihood of customers moving from 30 days delinquent to 60 or 90+ days delinquent, as well as understanding likelihood to repay. This insight helps lenders better prioritize collections and contact management efforts and determine which customers to push to a collections agency.

Alternative data is also highly useful for lenders, as data sources and scores can help better segment customers and also provide additional insight that can drive safer decisions and mitigate risk. Finally, lenders need accurate data sources for proper sales analysis to better understand how lenders are competing, pricing and performing against competitors.

Managing risk heading into an uncertain economy is essential not just for lenders, but also for dealers. As the process of car shopping has become more digital with the promise of less friction, customers have relied more on email addresses and phone numbers as extensions of identity. Unfortunately, this means that much like name and address, phone numbers and emails can be changed at any point, shared with family and friends, or created with minimal identity proofing.

As consumers continue to change devices, social media accounts or other extensions of their identity, verification solutions must evolve too. Dealers of all sizes need income, employment and identity solutions that churn through vast amounts of constantly aging data in order to have reliability and trust in verifying the shoppers either in their digital or physical storefronts filling out credit applications – all while remaining a fast and frictionless experience.

The auto industry has remained a pillar of strength for the American economy dating back to the recession. However, there are growing signs that the broader economy could be facing a slowdown next year. Dealers and lenders would be wise to have a plan in place that leverages advanced data and technology to ensure they continue to offer a shopping experience consumers have come to expect, while minimizing risk on all levels.

Editor’s Note: Jennifer “Jenn” Reid is Vice President – Automotive Marketing & Strategy Lead – U.S. Information Solutions (USIS). With nearly two decades worth of experience in automotive on dealer, lender and information services sides, Reid is responsible for the development of Equifax’s automotive growth strategies, as well as overseeing specific marketing plans and initiatives. This includes understanding competitive automotive industry market dynamics and trends, key customer insights, new product innovations, and pricing and chancel strategies.

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Jennifer Reid

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