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.
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The credit rating agency argues in a new report that the financing arms of auto manufacturers are better positioned than banks to withstand a widely expected decline in used-car prices. The report also finds that the quality of auto loans made by banks has been declining.
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The deal to buy TradeKing would allow the online-only bank to offer wealth-building products to its roughly 1.1 million depositors. The additional low-cost deposits could also help fund loan growth as it looks to expand beyond auto lending and into mortgages and credit cards.
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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 Consulting 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. "We don't think it's brand-new products over there, but it's new customers on existing products," she said.
Deloitte predicts that these changes will take place sometime in the next five to 25 years, and probably in the next decade or so. Already we are seeing "a steady and sustained set of trends that are causing us to rethink what the car looks like, and how we use it," said Jeremy Carlson, a principal analyst at IHS Automotive.
Even so, he added, "this is a gradual transition. I don't expect to see huge decreases in the number of vehicles sold to individuals [anytime soon], but we would expect to see some impact on that over time."
Indeed, the way to what Deloitte calls the "driverless revolution" has not been smooth. The electric-car company Tesla Motors introduced "autopilot" technology for its cars last October, and since then it has been associated with a small number of crashes. One crash, in May,
Yet despite the negative press Tesla has received, and the broader conversation it has spurred about auto safety, most observers still believe that widespread adoption of self-driving technology is a matter of when, not if.
One bank executive who has publicly addressed the possibility of a disruption to the automotive sector is Tim Russi, the head of auto lending at Ally Financial. "In the coming years we might be supporting the mobility services industry [rather than] the auto industry," he said at Ally's investor day in February.
But in an interview, Russi tempered his earlier remarks, saying that while "there's makings of a paradigm shift out there," it will not become manifest for a while yet. "This isn't a five-year horizon or threat to the business," he said.
The primary inhibiting factor, besides the need to perfect autonomous driving, said Russi, is the sheer number of cars, 250 million of them, already being driven by Americans. "If the entire society is going to be autonomous, you've got a lot of vehicles you've got to get off the road," he said. "So I think the horizon goes out at least 10 years."
Christopher Donat, an analyst at Sandler O'Neill, agreed. "It's going to take a number of years to work through the number of legacy cars on the road," he said. "People aren't going to give up an existing car that they've paid for."
Nevertheless, Russi said he wants to make sure that Ally does not miss a trend. "We're making sure we have the fundamental building blocks in place," he said.
Among these is Ally's SmartAuction, an online auction platform aimed at commercial buyers and sellers, including automakers, dealerships and owners of vehicle fleets. More than five million vehicles have been sold on SmartAuction since its launch in 2000. The platform has more than 8,000 buyers and sellers nationwide, and about 1,500 vehicles are sold daily. Ally rolled out SmartAuction iPhone and Android apps in 2013; as of October 2015, they were seeing an average of 22,500 logins per month.
Ally is one of the country's largest auto lenders, with $78 billion of consumer auto loans and leases on its balance sheet as of March 31. The commercial side of the business accounts for another $30 billion.
Russi's forward-thinking approach could see the bank through the coming changes. Digital platforms and mobile experiences will be key to survival, Johnston said. Others might not be so fortunate.
"If $1 trillion turns into $600 billion, some of these players are going to find it an opportunity to increase their [market] share," Johnston said. "Some may fall out. … You're going to see winners and losers."
