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The Key to Getting the Most Out of Wholesale Finance Operations

By Chris Tobey, Global Sales Director - Wholesale Finance Solutions NETSOL Technologies

The Key to Getting the Most Out of Wholesale Finance Operations

By Chris Tobey, Global Sales Director - Wholesale Finance Solutions NETSOL Technologies on 30-11-2018

The sharing economy is fueling a transformation in the automotive sector. When self-driving cars began to emerge as a mainstream idea in the industry during the early to mid-2010s, many pundits pointed to a future in which the average consumer would stop purchasing vehicles and instead share them with one another via subscription models. While fully autonomous automobiles remain on the horizon, the transition to shared vehicle business models is already in the rearview mirror and coming up fast.

In response to this movement, manufacturers, dealers and financers must rethink their sales and lending models to better accommodate consumer demands or risk being left in the dust. Taking an innovative, customer-first approach to auto financing is a key response to this trend, and the wholesale market provides an early example of how to move forward.

Ride Sharing and the Wholesale Market

Business models that promote ride sharing - from Uber and Lyft to ZipCar - have made on-demand access to automobiles easy, affordable and convenient. In the past, consumers left without a car had to figure out if there was a cab company in the area, call to get a ride, wait around for an available driver and pay a high cost. With ride sharing solutions available, people use an app to find the nearest, most convenient option and get access to the car they need.

Traditional taxis and public transportation options offer limited access to shared vehicles based on location and, in some cases, economic resources. Emerging ride sharing models democratise access to shared vehicles, making it a real option for individuals who only need access to cars occasionally. This potential is leading to a dramatic rise in the ride sharing market.

The Rise of Ride Sharing

According to MarketsandMarkets, the global market for ride sharing solutions was valued at $61.3 billion in 2018. It will expand at a compound annual growth rate of 19.87% from 2018 through 2025 to achieve a value of $218 billion. The Asia-Oceania region is expected to lead the charge in ride sharing industry growth, but the global market is strong, the study found. What's more, a rise in corporate car sharing and micro-mobility solutions, such as bicycle sharing, are gaining prominence.

Ride sharing is fundamentally changing the auto industry. Instead of large taxi companies purchasing vehicles in bulk, individuals are buying automobiles and using them for both personal and commercial purposes. When the car ages to the point that it is no longer attractive to those hailing rides, they trade it in for a new model. Small fleets are on the rise as more individuals set up ride sharing micro businesses, using their vehicles for a wide array of mobility services, from bringing homebound individuals to physician appointments to ride sharing and delivering food.

Digital technologies have driven this change, allowing those owning a car to sign up as service drivers and easily connect with opportunities to monetise their vehicle.

The Changing Wholesale Market

These trends are evident in the wholesale market. The Manheim index found that used vehicle prices at wholesale auctions in May 2019 increased 4% year over year. This is the 28th month in a row when prices increased compared to the previous year, something that Wolf Street explained hasn't happened since the Great Recession. This is happening, in part, because the rise in ride sharing and shifts in consumer behavior are transforming the used car market.

Wolf Street explained that fleets are turning cars over quickly and at a high volume. At the same time, consumers who cannot afford the high price of new cars are turning to used vehicles or alternative options, such as ride sharing. Those who can afford higher prices, are increasingly turning to SUVs or trucks, crossovers and the like. This adds up to create a wholesale market that is flooded with used cars that are in high demand among consumers. The result is high prices and an aggressive purchasing environment. In response, the wholesale industry is turning aggressively toward digital sales models that allow for smoother, more efficient interactions with dealers.

Emerging Sales Models in the Wholesale Sector

The wholesale industry has been going through a shift to digital sales solutions for years. However, this movement has ramped up more recently as widespread access to mobile apps has created convenience that makes selling via digital channels a major method of operations in the sector.

A Cox Automotive study found that 2019 is expected to be a year in which digital channels continue to gain market share in sales. In 2016, approximately 0.9 million wholesale outflows were through offsite and online channels. In 2019, that figure is expected to grow to 1.4 million. Furthermore, direct to dealer and dealer to dealer transactions, which are often facilitated through digital methods, have grown from 4.1 million vehicles in 2016 to 4.9 million in 2019. All of this is happening while the volume of wholesale outflows increased from 15.5 million in 2016 to 16.6 million in 2019.

While these 2019 figures are forecasts for the year, they reflect a clear trend in the industry: Used car sales volumes are rising while digital transactions become the new normal. Auctions still have a strong place in the industry - that market isn't cratering - but non-traditional digital outflow channels are gaining while auctions slowly decline (9.9 million units in 2016 to 9.6 million in 2019).

According to McKinsey, the simultaneous shift toward increased used car volumes and use of digital tools is leading to the rise of digital-first retailers in the market. To further complicate matters, new car sales are declining while used cars rise. The research firm found that, on average, 39.4 million used cars are purchased each year in the U.S. For new cars, that figure is just 17.3 million. As more people turn to used models, many are choosing younger, more expensive options, further shifting the supply and demand dynamics in the industry.

These trends create opportunities, but also complexity for wholesalers. With digital technologies making it easier to sell directly to consumers and shifting fleet management practices emerging in response to ride sharing, wholesalers must adjust their models. If a consumer-focused site can use data analytics to offer the lowest price on a used car possible relative to the market conditions, then why would a dealer bother working with a wholesaler instead of simply purchasing the car online? This saves the dealer from going to auctions or dealing with as many transportation costs.

For wholesalers, digital technologies offer an opportunity to gain an advantage. If a wholesaler can keep up with the web and mobile capabilities of consumer-focused sellers, they can offer attractive pricing and purchasing models that maintain dealer interest and take advantage of the opportunities present in the growing used car marketplace. There is just one hitch: Leveraging this opportunity depends on modernizing financing to handle the specialty loans dealers may need to complete wholesale purchases efficiently.

Modernizing Financing in the Wholesale Market

When discussing the shifting used car market, McKinsey pointed out that the customer experience is becoming more important than ever in helping dealers keep up with the digital innovators that are disrupting the industry. This shift to digital processes in customer interactions is having a trickle-down effect into the rest of the auto market. If consumers can get heavily automated digital financing processes that give them options and loan transparency quickly and easily, then why shouldn't dealers expect the same thing when working with wholesalers?

While wholesalers aren't selling to consumers, the need to improve the customer experience in light of digital disruption remains evident in the sector. When it comes to financing, this creates complexity. Offering a loan to a dealer is very different than doing so for consumers. It involves cash flow analysis and market analysis to ensure the dealer is positioned to pay back the loan on time. It also often involves larger sums as dealers purchase wholesale vehicles at a higher volume to meet consumer demands for high-value used vehicles.

Whether you are a wholesaler looking to establish your own financing division to accelerate transactions or a specialist lending company serving the wholesale automotive industry, digital lending solutions that use data analytics and cutting-edge digital tools can give you an edge in the marketplace.

Optimizing financing models is increasingly critical in the fast-paced wholesale vehicle market. Asset finance and leasing models designed to provide adaptability stand out for their ability to fuel business growth. They do this by empowering financing companies to scale their business easily based on volume, making robust digital tools available for small lenders and providing the deep functionality needed to stick around as those companies grow.

Written By:
Chris Tobey, Global Sales Director - Wholesale Finance Solutions NETSOL Technologies

NETSOL’s Wholesale Finance System (WFS) provides a powerful, seamless and efficient system for automating and managing the entire lifecycle of wholesale finance. For more information or to request a demo, click below.

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