By Anju Patwardhan

Car ownership places millions of people under unnecessary stress. It’s time to get behind an entirely new flexible ownership model that puts the power in the hands of customers.

There is something so deeply flawed about the prevailing model of car ownership that, if we take a step back and examine it in any detail, it’s remarkable that so many people willingly endure it.

As potential car buyers, we enter the stressful high-friction environment of a car dealership often poorly armed with the knowledge we need to select and finance a suitable purchase. We spend hours with multiple salespersons at different dealerships, listening to pitches, negotiating prices, loans, packages and add-ons and filling out paperwork in an increasingly bewildered daze until we emerge saddled with a vehicle that might continue to drain our income long after we’re tired of owning it.

During the period of ownership, we take on the separate trials of organizing loan or lease repayments, insurance, repairs, maintenance, claims and taxes. Then we subject ourselves to the stress of selling the vehicle for a fraction of the original price and incur penalties for early termination of the loans or leases.

It’s a model ripe for transformation.

Almost half of the estimated $10 trillion global mobility market is spent on car purchases, much of it through financing. From 2017-2018 in the United States, for example, over 85 percent of new and 54 percent of used vehicles were financed.

Auto financing is dominated by banks and so-called “captives”, which are typically subsidiaries of car manufacturers operating through sponsored dealerships. Financing companies, credit unions and dealerships that offer direct credit fill the rest of the market. As of Q4 2018, the outstanding balance of auto lending in the US alone stood at $1.18 trillion, the country’s third-highest debt pile after mortgages and student loans.

Worldwide, that suggests a huge financial burden.

Inherent Flaws

For modern consumers, and particularly millennials, the prospect of a life spent haggling with car dealers and dangling over a pitchfork of debts is not an enticing one. It’s not surprising, then, that majority of them no longer want to buy and own cars in the traditional sense.

Much of that has to do with the inherent flaws in the car financing model. Bank-loan options are limited mainly to prime borrowers, and loan terms are so long that customers face either being stuck with a car for up to seven years or face penalties for the early closure. Leasing, while increasing in popularity, still only accounts for a fraction of sales, and is also skewed towards prime customers getting new cars and is laden with financial disincentives for the potential lease-breaker.

Non-prime borrowers with limited or adverse credit history have very limited financing choices, and end up having to borrow from friends, family or payday lenders.

Technology as an enabler

Technology is transforming the car buying model. Smartphone penetration, advances in big data and use of machine learning, and digital documentation are creating a new kind of auto marketplace that offers greater convenience, transparency and flexibility to the customer.

The ultimate end-point of this transformation, of course, is the autonomous vehicle, but it’s easy to forget amid the often-excitable media coverage that we are at least a decade or two away from realistic implementation of self-driving cars. Until then, the market needs mid-point solutions, and over the next several years, alternative vehicle-access platforms such as digital pay-as-you-go subscription models are likely to be the winners. These are perfect for those who want to “own” a car but without the stressful traditional buying and selling process.

What does this auto subscription model in its digital version look like? Instead of going to a dealer, we’ll open an app on our smartphone and search for cars online. The app will use data sources and machine-learning models for instant credit underwriting and set an upper limit of monthly payments. Based on that, we’ll select a car that fits that payment ceiling and process all the paperwork digitally within minutes. The selected vehicle will either be delivered to us or collected at a convenient pick-up point.

The future of ownership: Pay-As-You-Go

Opportunities for short-term, all-inclusive, flexible vehicle usage under the current business models are almost non-existent, aside from expensive car rental options.

The future of car ownership is a subscription model. We will make a single payment each month that will cover leasing, maintenance and insurance, and we can keep the car for as long or short a time as we want.

Several manufacturers already offer this kind of model in the US –like Canvas (Ford), Porsche Passport, Maven (General Motors) and ReachNow (BMW) –but once again, these are mostly premium-priced services aimed at premium-level customers.

To see the potential of this model for the broader population, we need to look at companies like Fair, FlexDrive and Zipcar in the US, Dasouche in China and Carro in Singapore, which offer cheaper on-demand travel options through flexible lease-owned cars.

I became a customer of Fair in San Francisco in 2017, and the experience was a pleasure. To get approved, I simply used the app to apply online, selected the car I wanted, signed for it with my finger, made a digital payment, and the car was delivered to me in a couple of days. When I no longer wanted that car, I called and gave my mandatory 5-days’ notice and the car was picked up from my home. No haggling or bargaining or the usual stress of trying to find a buyer for the car.

So, in effect, having a car becomes as simple as any other consumer transaction, as it should be. Companies like Fair have taken the existing model and flipped it in favor of the customer, without attempting to cut out existing stakeholders, which is what makes it so exciting. Banks and financing companies still provide the loans (although to Fair and not to the end consumer directly), dealers still provide the inventory, but Fair does all the high-friction work on the driver’s behalf and provides a delightful user experience.

“We think Fair represents what car ownership will look like in the future because of its unparalleled benefits for both dealers and customers in making car transactions digital, affordable and flexible,” says Scott Painter, founder and CEO of Fair.com.

At CreditEase, we are inclined to agree.

The views expressed here are those of the individual quoted and are not the views of CreditEase Corporation and/or CE Innovative Technology Ltd./ CreditEase Fintech Investment Fund (CEFIF) or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of CEFIF.

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