It seems no industry is safe from the buzziest of buzz words – the internet of things. I’d like to discuss the internet of cars. From titans like Google and Apple launching platforms to bring Android and iOS into the car, to OEMs like Tesla pushing the boundaries of in-car computing, to the laughable yet inevitable rise of self-driving cars – cars are becoming equal parts hardware and software.
The resulting wave of connectivity will profoundly impact the auto sales and finance industry. With 50% of all new vehicles projected to be sold online by 2015, 100% by 2025 – connectivity will fundamentally shape how consumers purchase vehicles, how much they pay for Finance and insurance, and whether they choose to buy a vehicle at all.
In brief – connected cars are hardly about putting neat apps on my dashboard. No disrespect to Spotify or Pandora. While incumbents mostly watch from the sidelines, a growing crop of Silicon Valley startups are starting to look at the old, ossified business of car sales, finance and insurance – which I recently made the case why this is a compelling market.
Let’s start with how 41 M or so used cars are sold each year. Last week I wrote about dealer inefficiencies and how start-ups like Beepi and Carvana save customers money by shifting car sales online and cutting out dealer overhead and opex. Carlypso goes a step further. By marrying Zipcar like gps tracking technology with an online marketplace, Carlypso is able to facilitate P2P used car sales 100% via online and mobile channels – without buyer and seller ever needing to meet in person or exchange keys. The result – sellers earn nearly as much as they would through a personal sale, but with the convenience of a trade-in, while buyers save upwards of $1,000.
Next-up, finance and insurance. Underwriters are now able to gain detailed, real time insight into driving patterns and usage rates. The impact – connected vehicles are fundamentally changing how carriers and lenders can measure and price risk. Take the recent wave of subprime auto lending – this growth in originations has been enabled to a large degree by the proliferation of low-cost OBD devices linked up to software platforms (like those powered by CloudLending) that can monitor high risk borrowers. While somewhat Orwellian and, as the NYT recently pointed out, vulnerable to abuse, these technologies have dramatically reduced the risk and cost associated with collateral repossession. In turn, lenders are now able to extend credit to borrowers who may not otherwise qualify.
In insurance, connected vehicles will enable usage based policies that dramatically reduce premiums for urban drivers who generally cross-subsidize the premiums of their heavier driving counterparts. OBD devices linked to smartphone applications are bridging the gap between legacy vehicles and new connected models – and are creating reams of telematics data in the process. Dash Labs is one of several start-ups that offers customers a useful application to monitor their vehicle’s maintenance status, the safety of their driving, and even the fuel efficiency of their routes. On the backend Dash is aggregating the scale of data required for insurers to develop new underwriting models based car usage and driving behavior. MetroMile, an exciting start-up in the space, is providing UBI insurance directly – offering users an OBD widget, accompanying app, and insurance policy based on their mileage. Metromile promises to save users hundreds on their premiums – luring light drivers away from subsidizing pools of heavier drivers (which, as you may expect, will drive up premiums for those remaining in traditional pools and increase the incentive for light drivers to switch to UBI policies).
Finally, connectivity has enabled new models of ownership that are impacting demand, distribution, and pricing of auto finance and insurance. Car “sharing” services like Uber and Lyft, combined with a demographic shift back to cities, are changing the cost/benefit equation of ownership. For a growing cohort of Americans, it is now cheaper and equally if not more convenient to use a mix of transit, biking, walking, and auto-on-demand than it is to own, park, maintain, and insure a car.
While more Americans may be moving to cities and forgoing ownership, the flip side of this shift is that more and more drivers are entering to serve autoless urbanites. Uber is adding around 20,000 drivers a month to its platform, and recently began to offer auto financing in certain markets. Repayment is debited out of drivers’ income stream in real-time, dramatically lowering risk. Uber and Lyft have transformed cars from a depreciative asset to a productive one – increasing borrowers’ ability to repay through the very act of providing them with vehicle financing. Meanwhile, carriers and regulators are scrambling to determine how these new models should be insured. What is clear, is that car sharing companies will increasingly become significant distribution channels for auto finance and insurance.
So while I eat my pumpkin pie, software is eating my car.
(and again, I’m in debt to Colleen Poynton behind the curtain)