Fintech accelerates the digitization of the automotive sector
New business models for payments and loans are emerging in the sector. Non-bank operators are intercepting demand in these segments and challenging traditional banks
The automotive sector is becoming an increasingly digitized. Emerging online business models are helping to advance digitization of loans and payments. Consequently, traditional banks will have to try to keep pace with these models. Until recently, traditional banks enjoyed returns on equity of 20-40% and leveraged this business as an anchor for major corporate relationships (with cross-selling opportunities). Fintech companies have intercepted the market share of these banks.
Investments in the automotive sector are in fact shifting towards the production of electric cars. In Asia, non-bank operators such as SP Mobility and Oyika, focus on installing charging stations. Non-banking platforms such as Cazoo, Carvana, CarMax, Cars24 and Carro focus on converting motorcycle owners into owners of used cars in India, Latin America and South-East Asia, where less than 12% of the population owns a car, compared to more than 50% in the United States.
All the more, the growth of subscription offers, especially for online car sales, will transform traditional leasing and rental models. The development of financial services business helped offset the decline in new vehicle sales. Innovative platforms such as Carvana have seen loans contribute almost 50% of gross profit per car unit and increase car purchasing transactions. In 2020, leased and financed vehicles they made up 28% of Volkswagen’s vehicle sales.
There is consequently a move towards the emergence of new loan and credit models in the automotive sector. Innovation in digital payments can ensure a better customer experience by settling in-car payments for motorway tolls, parking and fuel at service stations, or charging electric cars. Payment platforms such as LogPay in Europe are driving this innovation. If this is to be possible, payment processors will have to work with service stations and issue fuel cards that allow cardholders to refuel or top up at the nearest participating station. They will also need to integrate with parking and toll operators.
In order to follow up digitization, banks will have to partner with technology platforms and build a cloud-based ecosystem of multiple players including automotive manufacturers, providers of insurance and payment technology, service providers and retailers. They will also have to build infrastructure to support micro-payments, real time transactions and the evolution of digital currencies. Alternatively, if investments in a new digital bank will be necessary if building new system capacity will involve higher costs and times.