The automotive finance industry is undergoing massive change – a result of shifting customer preferences, electrification, technological advancements, the emergence of new ecosystem players, and new or updated regulations. All major parties are impacted: consumers, vehicle manufacturers and their distribution channels, lenders, and technology vendors.

Discussed at our 2023 Summit by James Powell, Head of Business, Specialized Finance at Sopra Banking Software, Jean-Jacques Pineau, CPO & Head Of Solution Offering, Specialized Finance at Sopra Banking Software, and Strategic Advisors Murad Baig and Philippe Maury, we dive further into each theme below.

Over the decades, the automotive industry has experienced relatively little disruption: Fundamental processes have stayed the same for years – manufacturers supply car dealerships, and consumers visit franchises to purchase and arrange financing. 

However, this period may be about to end. Consumers’ needs and buying habits are changing across the board, with new consumption patterns and flexibility increasingly important. Digitalization has also had an impact.

Alongside that, technological advancements in the business world and automotive sector influence the industry’s trajectory – cars themselves, electric vehicles (EVs), advanced driver assistance systems, connected and autonomous cars, and disruptive innovations like blockchain, big data processing, and artificial intelligence.

Couple that with greater environmental awareness and supporting ongoing green-related legislation like the EU Taxonomy, Energy Efficiency Directive, Alternative Fuels Infrastructure Regulation, and the UK’s Consumer Duty, and it’s clear that “change is real and happening now”, says James Powell.

Where’s the mobility industry heading?

According to Murad Baig, how people buy cars is the same as purchasing on Amazon. “They’re trying to do everything digitally,” he says. For original equipment manufacturers (OEMs) and asset finance companies to keep pace, maximizing customer and asset lifetime values across multiple cycles is critical. Achieving that requires harmonized, data-centric systems and a more services-driven model.

As an asset moves through ownership and/or usage cycles, there will likely be a shift toward asset management rather than asset financing.

Philippe Maury sees a “grand evolution rather than a revolution”, with a move toward cleaner and different modes of mobility. He also believes fintechs will play a customer-facing role, partnering with large financiers, captives, or banks as they scale.

For mobility to kick off, sharing car usage and autonomous vehicles will be key, says Jean-Jacques Pineau. With cars moving less than 5% of the time, asset use and cost efficiency aren’t optimized.

Cost of ownership can fall though, by finding ways to generate revenue when a car would otherwise be left idle. In the future, autonomous or robo-taxi capabilities could be leveraged to help optimize journeys and time, but they require extensive software development investment.

Customers who benefit from those mobility opportunities will demand a simple and frictionless journey. That necessitates a complex ecosystem, with many players – finance companies, manufacturers, and service providers – coming together and bundling services.

For mobility to kick off, sharing car usage and autonomous vehicles will be key. © Getty Images

What will trigger change in mobility?

Change is already underway, with consumers increasingly searching for more flexible mobility ownership options. Indeed, many Europeans are already leasing or hire purchasing rather than buying a car. 

A variety of flexible automotive finance plans are also available, like full-service leasing (FSL) across different geographies, or other local/regional arrangements within the trade cycle management, like personal contract purchase (PCP) in the UK. 

In France, FSL accounted for 31.9% of total vehicle registrations in October 2023, compared to 28.4% a year earlier.

There’s also a growing trend toward micro lease models (up to 12-month contracts), micro-mobility (scooters and bikes – some electric), and subscription services.

Philippe Maury sees a multi-layered ecosystem – a “mille-feuille” – that’s continually built on, with micro leasing and subscription services just another part of the evolving landscape.

Within this structure, full-service leasing is experiencing the most substantial growth – a trend that’s likely to persist. According to a survey by McKinsey, FSL is the “top reason for leasing” – insurance and maintenance are included in the deal, and issues like selling a used car are eliminated.

The vast majority are leased by companies for their employees through fleet management – likewise for EVs in the corporate sector. For example, Ayvens (ex-ALD | LeasePlan) aims for electric vehicles to “account for 50% of new car registrations by 2026, up from 28% in 2022”. Meanwhile, facilities management and professional services company Mitie already has a half electric fleet, and is targeting 100% by 2025.

Indeed, electrification in general is driving change. EV adoption is supported and accelerated by sustainability programs like low emission zones, set to reach 500 in Europe by 2025, net-zero regulations, and investment in infrastructure like charging stations.

Additionally, EVs boast significantly longer lifespans compared to traditional internal combustion engine (ICE) cars, due to fewer mechanical components. Consequently, it’s important to maximize their usage across multiple cycles.

Continued industry commitment is also essential, exemplified by Toyota’s KINTO mobility services, micro lease models with AutoNation Mobility, and green initiatives by Crédit Agricole – Leasys, a joint rental venture with Stellantis, and their takeover of ‘planet mobility’ Drivalia.

As previously noted, technological advancements and autonomous cars are speeding up change. Round-the-clock robo-taxis already operate in San Francisco; as further progress occurs, various types of mobility will work alongside traditional modes.

Mobility ecosystem: pivotal role of financing 

As momentum gathers, mobility infrastructure and ecosystems become ever more important, aiming to deliver enhanced value to customers via the seamless orchestration of various services and providers.

Considering its trajectory, fleet financing is a crucial aspect. Financial institutions, notably banks, will play a substantial role, providing the balance sheets to ensure fleet owners can effectively fund vehicles. 

As we delve deeper, a diverse array of services like effective risk management and robust financial engineering framework are imperative: Accurate invoicing and billing ensure optimal asset utilization and maximized unit cost economics.

It’s not only about developing the mobility ecosystem, but ensuring its profitability, viability, and long-term sustainability, emphasizes Murad Baig.

What does this mean for software technology vendors?

Tech players like Sopra Banking Software are digitally transforming by moving away from outdated monolithic legacy systems. 

There’s a transition to a service-oriented platform – crucial for agility and the ability to deliver new services. The focus will be on an ecosystem that efficiently manages and utilizes data from existing legacy systems and connected vehicles.

“There’s significant data in legacy systems today, and we make very little use of it,” says Jean-Jacques Pineau. Leveraging it can enhance the customer experience (CX) and reduce total cost of ownership (TCO). 

Current “mobility” costs still remain high, and will need to significantly reduce for wider adoption and mass use. Embracing a service-based architecture helps, because it enables the use of cloud technology and serverless systems, and the implementation of cost-effective, pay-per-use models. 

It’s also fascinating to see software companies evolve from a desire to build everything to providing an end-to-end solution or delivering more specialized services, says James Powell.

What will change in the established vehicle distribution model?

Across industries, consumers are accustomed to customer-centric operating models and seamless digital purchasing experiences. Likewise, car buyers and users look for transport and mobility options that are convenient, cost-effective, and sustainable.

The traditional distribution/sales model – dealers buy vehicles from OEMs, funding them via wholesale financing, then sell to end consumers – can’t fully accommodate these customer expectations.

An agency distribution/sales model or a direct-to-consumer approach represents an evolution from the traditional three-tiered sales structure to a streamlined online-offline model. In this setup, OEMs directly engage with customers, assuming responsibility for sales transactions. Dealers still interface with customers, but act as agents rather than contractual partners.

According to Philippe Maury, the agency distribution/sales model seems promising in theory, especially in stockless scenarios. However, challenges arise when someone has to bear the stock burden.

A US auto retail marketplace study by Kerrigan Advisors backs that view up:

  • 43% are unsure an agency model will materialize.
  • 35% don’t believe it will happen.
  • Only 22% are optimistic.

Similarly, research by auto retail tech firm CDK Global reveals:

  • 46% of dealers felt unprepared to handle a shift to an agency approach in 2023 (up from 19% in 2022).
  • 10% are concerned OEMs will attempt to make the transition (down from 12% in 2022).

However, in Europe, a direct-to-consumer approach is making headway, with Volkswagen implementing an agency model for its all-electric “ID. family” and Ford for its Mustang Mach-E. Meanwhile, BMW is bringing in an agency model, as is Honda and a handful more OEMs.

Murad Baig believes a “phygital” (physical and digital) omnichannel experience is the way forward, where customers have the convenience of an online channel alongside the ability to visit a dealership to view a vehicle they’re interested in.

Some dealerships anticipate disruption and are taking preemptive action. For example, AutoNation acquired CIG Financial to form a captive finance arm. Meanwhile, Drivalia is opening mobility shops inside dealerships – wholesale funding incentivizes those dealers to take on some of the fleet, pushing subscription rental and car sharing.

The industry is evolving, much like product development, where experimentation, testing, and continuous iteration are essential.  Technology is central, but the challenge lies in aligning various proprietary systems. 

In Europe, a direct-to-consumer approach is making headway. © Getty Images

How far can a fully digital experience go?

A fully digital experience like Tesla adopted as a startup was appealing, but a one-size-fits-all approach may not suit everyone, particularly as customer bases expand. And despite utilizing artificial intelligence, managing “unexpected issues” is challenging, says Jean-Jacques Pineau.

A dealership-free experience is nice on paper but isn’t necessarily viable in the real world, where customer interaction and seeing cars physically are crucial. That suggests “dealers still have a long life in front of them,” according to Jean-Jacques Pineau.

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Anna Jacobs

Product Marketing Manager

Sopra Banking Software