#Automotive Finance

Financing the electric vehicle revolution

Apr 15, 2022 - 5 min read
Also Available in : Français | Português
Ravi Naicker, Global Commercial Director (Specialized Finance) at Sopra Banking Software

In a previous article, we talked about the need for commercial lenders in the automotive industry to digitally transform if they’re to meet the needs of today’s market. With Mobility-as-a-Service gathering traction, consumers seeking greater personalization, and customer experience central to success, the world of auto financing can’t escape digitization. Almost implicitly linked to that is another burgeoning trend: the rise of electrification. Below, we delve into the impact of electric vehicles (EVs) on automotive finance lenders and how they can cement their place in the green automotive ecosystem.

The seismic shift toward electric vehicles and associated assets, such as batteries and charging stations, is set to change the automotive industry forever, impacting captives – wholly-owned subsidiaries of automakers – commercial lenders, original equipment manufacturers (OEMs)/captives, dealers and consumers.

Green-friendly vehicles and equipment require financing, representing a valuable opportunity for captives and commercial lenders capable of doing so. However, much of the technology used by these organizations isn’t fit for purpose, meaning IT systems will need updating if they’re to play a key role in the electric vehicle revolution and profit from the shift.

Greening of wholesale auto financing

Despite supply chain challenges, EV sales more than doubled to 6.6 million in 2021 – close to 9% of the worldwide car market. What’s more, the global EV market is predicted to increase more than four-fold by 2026, making it worth over $1 billion. And by 2040, UBS forecasts virtually every new car sold will be electric.

According to the BBC, “we’re in the middle of the biggest revolution in motoring since Henry Ford’s first production line started turning back in 1913.”

Leading car manufacturers are paving the way, with Jaguar announcing plans to sell electric-only cars from 2025, Volvo from 2030 and General Motors by 2035. Ford wants all vehicles sold in Europe to be electric by 2030, while Volkswagen aims for 70% by 2030.

Companies intend to sell electric-only vehicles in the future.

OEMs need lithium car batteries to power their EVs, so demand is skyrocketing. Greater emphasis on the circular economy also comes into play, with lithium batteries set to get greener: reusable, traceable and cobalt-free.

At the same time, governments are setting targets to ban the sale of petrol and diesel vehicles, motivating electrification. Combined with consumers’ increasingly eco-conscious appetites and more competitive prices, the EV revolution has unstoppable momentum.

This notable shift toward electric requires massive financing, giving commercial lenders already active in the automotive industry unmissable opportunities. Eyes are on captives to fund charging points and invest in battery-related R&D to increase energy density and extend lifespan – perhaps surpassing CATL’s battery that can power a car for a million miles. Through these types of financing, captives become part of the revolution.

Legacy IT systems: unfit for purpose

For captives and other lenders to be an integral cog in the electric wheel, however, it’s about more than just money. They must also gear up for servitization of auto finance. Electric, autonomous and connected vehicles need innovative and varied types of service and support. To deliver the flexible, digital-forward, customer-centric and loyalty-generating solutions that today’s market requires, there are three steps captives should consider:

  1. Change the business model. Switch from focusing on one-time sale of assets toward recurring revenue over the customer and vehicle lifetime by incorporating the sale of higher-margin add ons, such as insurance, encouraging car subscription, bundling services and incentivizing co-ownership.
  2. Build an ecosystem. Connect with service providers to develop variable-cost mobility solutions, work with service orchestrators to gain scale and reduce costs, and partner with specialist technology companies to bridge gaps in areas like AI and machine learning.
  3. Capture, analyze and use data. Leverage AI solutions, analytics generated by connected vehicles and data from OEMs to deliver new and personalized products and services, make better credit decisions and detect fraud.

The obstacle to achieving these goals lies with the software that underpins lender’s financing capabilities. Many use outdated, custom-fit systems, ill-equipped to deal with evolving needs. Moving forward requires an IT overhaul. 

The solution: evergreen software

Enter Software-as-a-Service, facilitating automated processes and open communication through custom APIs. By working with an experienced partner, lenders can replace legacy systems with a scalable solution, allowing them to prepare for a future fueled by a greener automotive industry.

Sopra Banking’s cloud-ready digital platform offers rich functionality for all asset types. Highly configurable according to specific geographical requirements such as currency, language and compliance, our end-to-end solution streamlines business processes and improves efficiency while acting as a risk management tool. 

Cloud ready digital platform

Although innovative solutions are ready and waiting, the journey to becoming a digital lender is challenging, with decades-old systems, disconnected records, regulatory challenges and complex business relationships slowing the pace of change. Overcoming cultural barriers and updating infrastructure takes money, the right technology, stakeholder buy-in and a mindset shift.

That being said, lenders recognize modernization is vital and urgent. Moreover, captives have a competitive advantage over other finance providers because they’re already tightly integrated with OEMs. But unless captives move fast, they’ll lose ground to fintechs that are already testing servitized models and lenders better equipped to harness the power of data.

Ushering in a new wave of green-friendly automotive assets

To seize opportunities arising from electrification, there are several routes lenders can take, including investing in EV research and development, monetizing vehicle data to offer customer-focused services, and adopting innovative business models to capitalize on evolving market needs and new revenue streams. Accomplishing these takes modernization, using a digital-first, agile and customizable software solution.  

Click here to find out how Sopra Banking’s Wholesale Finance platform can help you.