Like all segments of the banking industry, automotive lending software is in the midst of tremendous change, driven not just by the effects of the COVID-19 market shock, but also from structural changes in the market such as online car buying, and resulting changes in dealer behavior.
At the recent Earnix Excelerate Summit, Earnix spoke with Ryan Potts, Director of Pricing & Profitability, Dealer Services at U.S. Bank. A 14-year veteran of U.S. Bank, Ryan leads the consumer dealer services division, and he and his team are responsible for pricing and profitability for auto loans and auto leasing, as well as financing for recreational vehicles (RVs) and marine lending.
As with all Summit sessions, this interview was wide-ranging and informative. Here are some highlights of the conversation.
Navigating a World of Change and Multiple Goals
Earnix: I know, Ryan, that you’ve been with U.S. Bank for a long time, and you’ve also been an Earnix customer for quite a while. Can you tell me a little bit about yourself and your journey with analytics?
Ryan: My role over the last three to four years has been to manage the pricing profitability group, which handles the rate setting that we put out to the market, and then also modeling the profitability of those new loan originations that then come onto our books. Our goal is obviously to remain price competitive while optimizing our profitability and hitting all the volume hurdles that the bank is looking for from us. It’s been an exciting time here in our division. We’ve had some great growth over the last five years, especially. It’s been an exciting thing to be a part of.
A World of Competition, Rate Gyrations, Supply Chain Disruptions, and Compliance
Earnix: I know when we’ve talked to you in the past, Ryan, you’ve mentioned how much the landscape has changed, between the immense amount of pressure that banks feel from other competitors and then from fintechs, and try to balance that with all of the regulatory compliance that you need to meet. Can you talk to us a little bit about how things have actually changed for you, particularly when it comes to leveraging technology?
Ryan: It’s been a really interesting last five years; we’ve been through almost two [business] cycles, or been through two cycles and now coming up on a third cycle that we’re just starting in terms of the interest rate environment.
In 2017 and 2018, we were experiencing that rising rate environment, which of course banks love, but can be difficult for some dealer services. You have to make sure that you’re making a lot of good choices from a profitability perspective, in terms of volume versus spread, holding your margins, while also ensuring that you can get the volume that you need.
Then, in 2019 and 2020, as we get into a US-China trade war, COVID in 2020, we get into a quickly lowering rate environment, almost down the Fed funds rate at zero. Margins widened out and volume really took off, especially in 2020 as demand was extremely high in the auto industry.
And now, as you’ve seen in the news, we’re getting back into a rising rate environment pretty quickly here. We’re back into that cycle of margins, management of volume, and those types of tradeoffs. And how do we remain competitive? How do we continue to grow in an environment like this, when we were growing at a very fast clip over the course of the last two years?
Finally, we’re a big bank. We’re subject to all the same regulatory scrutiny that all the other big banks are, and that’s ever-changing. How do we change on the fly, and how can we make sure that we can stay in line with the regulations while continuing to do our day-to-day work?
A lot of challenges, a lot of things have changed over the last couple of years, but exciting stuff, and looking forward to seeing what happens here in 2022.
Analytics is Key to Navigating Price Competition
Earnix: I know that you and your team rely heavily on analytics in your whole pricing process. Can we dive into that a little bit?
Ryan: From an analytics perspective, that’s where we’ve really made the biggest changes over the last couple years. We had a very granular rate methodology, a highly-manual, risk-based pricing methodology over the last 10 or 20 years.
What we’ve tried to incorporate in recent years is more of a machine learning (ML), algorithm-based approach, of course with Earnix’s help.
When you’re doing it with a pricing team we can move fast, but not as fast as an algorithm or a machine learning model.
We’re moving towards a price optimization platform and making improvements as we go, [then] everything can speed up. The models are learning as we’ve continued to feed them better application activity, they’re learning more as we feed them better market intelligence data, and suddenly we’re able to make these decisions and feel really comfortable with the decisions that are being made.
On the Horizon
Earnix: What are your plans for the future of pricing? What’s next?
Ryan: There’s no such thing in our business as being too granular. We want to continue to try and work almost towards a continuous model where customers are being priced on an individual basis, rather than getting a number of their characteristics on an application and finding out what pricing “bucket” they might fall into. [Otherwise] a number of customers might get the same pricing because they fall into these FICO buckets, or these term buckets, or these LTV buckets.
Also, the super-prime and the prime auto market from a financing perspective is really competitive. There’s not 25 basis points worth of margin that’s going to be magically found by doing some type of different price methodology.
It’s going to be really around focusing on where can we find one basis, two basis points, maybe three or four basis points that we can get an additional profitability by doing our methodology better, and really focused on being a little bit more granular and individualized than we have been in the past.
And when you take 1, 2, 3, 4 basis points on nine to 10 billion in annual originations, you’re talking about real money there. And really significant money over the life of those loans. Sometimes it might sound small, but the opportunity from a final dollars perspective to do this stuff right is the difference between being really good at pricing and being great at pricing. So that’s what our focus is on – to keep taking this to the next level.
We’ve gotten through a couple steps in this journey [but] continue to realize that there’s more ways to go.
[We know] that the big banks are all on the cutting edge. And so are the fintechs. So that foresight to try to stay up with them, stay ahead of them, is what’s going to be the differentiator as we move forward here.
As we said, the conversation with Ryan was wide-ranging and informative, and we’ve only scratched the surface in this post. For the full video, visit the Earnix Excelerate section of the Earnix website.