auto loan

Autonomy & the auto loan

Driverless vehicles could change how consumers use, purchase, and finance their vehicles.

January 30, 2018

Technologists, auto industry experts, and futurists’ opinions about the impact of autonomous—or driverless—vehicles are all over the map.

Some say they will widely be speeding down the road in only a few years. Others think they won’t be here for decades. Some say they could dramatically alter American’s love affair with their vehicles, while others believe a decline in vehicle ownership is overstated.

Regardless of who’s right, credit union leaders are paying attention. New- and used-auto loans comprise nearly 35% of credit unions’ loan portfolios, according to CUNA’s research and policy analysis department.

Baxter Credit Union’s board of directors challenged staff to think through various scenarios about how the evolving technology could affect the $2.8 billion asset credit union in the foreseeable future.

“It’s clearly an important part of our financials, and some people out there believe car loans will go away,” says Jim Block, senior vice president/chief lending officer for the Vernon Hills, Ill., credit union. “The board just wants to make sure we’re looking at the future with our eyes wide open. We don’t want to be blindsided by a big shift in technology.”

Will ownership decline?

Autonomous vehicles could accelerate societal trends that could mean fewer auto loans for credit unions down the road, says Andrew Downin, Filene Research Institute’s managing director of research.

Fewer people are getting driver’s licenses, more people use rideshare services for their transportation needs, and younger consumers have less of a desire to own things such as cars, he notes.

“As a society, we’re slowly becoming comfortable with consuming as a group versus consuming as individuals,” Downin says.

Jeremy Alicandri, managing director of the automotive strategy consultancy Maryann Keller & Associates LLC, also sees an eventual decline in American vehicle ownership. “More people will likely live in urban settings and use public or shared transportation,” he says. “More people will use companies like Lyft for transportation, perhaps even driverless taxis. And more people will explore alternative car-ownership models. These changes are inevitable.”

A world where driverless taxis are ubiquitous could convince people they no longer need to purchase an automobile that they generally use only a few hours a day. “The new model might be renting a car by the minute or by the hour,” says Downin.

Yet, the changes might not be as dramatic as some expect, Alicandri notes. Some people might still prefer to own a car for specific uses.

“Imagine the proverbial soccer mom with a minivan full of children, soccer balls, and baby seats. She won’t be able to load and unload her baby seats and soccer balls in a different ‘autonomous taxi’ after each stop,” Alicandri says. “It’s just not practical.” Ultimately, affordability of autonomous vehicles could have a big impact too, he says.

NEXT: Solve the need

Solve the need

If automobile ownership declines, credit unions will need to think differently about serving members’ transportation needs, says Downin.

“It requires us to understand how we can continue to be relevant at solving that root challenge,” he says. “That root problem or challenge isn’t trying to finance a car—it’s getting low-priced, easy-to-use, easy to-access transportation in the hands of our members,” Downin adds.

One future strategy Downin likes involves a credit union, or a group of credit unions, buying a fleet of self-driving vehicles for members to use. As a benefit of membership, for a certain fee, members would have access to the pool of self-driving vehicles, he explains.

“We’d be doing the same thing we do today—helping members finance transportation—but in a completely different way that [still] fits well with credit union philosophy,” Downin says.

It’s probably too soon to make this type of investment, he adds. But it’s time to think about how credit union auto loan portfolios will be affected by autonomous vehicles, which could be a major disruptive technology for society.

It’s a topic Downin addresses when he talks with credit union leaders about the future. The pace of the change could sneak up on people, he says.

“The technology is being perfected very quickly,” Downin says. “It’s going to happen sooner than any of us suspect.”

Accelerated testing

Autonomous vehicles already are being tested on the roads in several states, including California, Texas, Arizona, Washington, Pennsylvania, and Michigan.

The technology is being perfected and companies are making big investments, according to Forbes and other business media outlets. Earlier this year, Ford invested $1 billion in Argo AI, a startup led by former Google and Uber employees, to bolster its self-driving future.

A year earlier, General Motors acquired Cruise Automation for $1 billion with the same goal. Uber spent $680 million on Otto. Meanwhile, others such as Apple, Google, and Tesla are in the race, too. With technology advancing quickly amid high levels of investment, the hype around autonomous vehicles is high.

Conversation among consumers about autonomous vehicles has soared in recent years, according to Crimson Hexagon, a company that monitors social media posts to uncover trends. Crimson Hexagon saw roughly 10,000 posts about the topic in 2010. But in 2016, driverless cars were the subject of more than 600,000 social media posts.

Speed bumps

Despite growing interest in autonomous vehicles, some expect bumps in the road.

At the Analytics and Financial Innovation Conference this summer, financial services innovator Neff Hudson, USAA’s vice president of corporate development, suggested that a lengthy adoption period is likely due to inadequate regulations and broader unanswered questions about driverless vehicles, such as insurance and liability.

“The social implications will slow that way down,” Hudson says.

As conversation about driverless cars has grown, consumers’ anger and fear about the topic has also increased, according to Crimson Hexagon. At the beginning of 2017, the company’s research suggests negative conversations about driverless cars are three times more common than positive conversations.

In the near-term, Hudson expects advances in auto features to focus on assisting drivers.

“There are a lot of things we could do to augment drivers versus replace them,” he says.

NEXT: The next 10 years

The next 10 years

During the next 10 years, credit unions won’t see a critical mass of drivers rushing to dealerships to buy driverless cars, says Alicandri.

“Whether it’s the [lack of] affordability of these high-tech vehicles, regulatory impediments, or technology limitations, there won’t be a mass exodus of traditional car ownership in the next decade,” he says.

But that doesn’t mean the technology won’t advance.

“These new models are more likely to disrupt certain segments of public transportation, like bus routes, before disrupting traditional ownership,” Alicandri says.

For example, consumers will likely see certain routes in major cities and other controlled environments with driverless taxis or other autonomous fleets, he says. And in 10 years, consumers will “absolutely” be purchasing “self-driving” vehicles—even though these vehicles might not constitute a majority of sales, and even if those vehicles still rely on the human driver for contingencies.

When self-driving technology becomes available to consumers, Alicandri says credit union leaders should expect two realities:

1. Vehicles will depreciate faster than ever, with technology obsolescence increasing vehicle costs and, conversely, driving down resale values as the technology becomes obsolete. Thus, collateral values will become a growing issue.

2. Vehicle transaction costs and loan amounts will increase. Even though self-driving technology will become more affordable, it will still be expensive. This might mean more interest income—and more risk—for lenders.

Widespread use of autonomous vehicles—either as owned vehicles, rentals, or a mix of the two— “might be a generation away,” Block says. But thinking through the potential impact of the technology on credit unions is a worthwhile exercise.

For his money, Block doesn’t think auto loans will fall off a cliff anytime soon.

“I’m not sticking my head in the sand, but I think the notion that car ownership will completely go the way of the dinosaur is exaggerated,” Block says. “Auto lending will be a core part of what we do for many years.”

Still, he thinks autonomous vehicles eventually will become the standard on roads in the same way that automobiles replaced horses: “It’s only a matter of time.”