This is the third installment on why I think subprime auto lending is about to transform radically.  I just returned from an enlightening trip to the Auto Finance Summit in Las Vegas.

Over the past five years, payday lending has evolved from a marketplace dominated by old-school lenders into one that is pioneering lower cost credit from a new breed of technology and data-driven lenders. Just as payday lending evolved to better meet the needs of the underbanked, so will auto lending change to meet the needs of non-prime customers.  New technology, new business models and new regulation represent an enormous opportunity for current auto lenders and entrepreneurial thinkers to create a more efficient and more transparent marketplace. Here’s how I place my bets:  In five years…

1. New risk scoring technologies will cut the cost of the highest subprime loan rates by 50%.  The impacts of big data, neural networks and machine learning are about to change the rules in auto finance.  Just consider what Yodlee could do for lenders (which it is starting to, perhaps unwittingly, in consumer finance), or how easy access to payroll data, through companies like FairLoan, could impact the economics for both lender and borrower.
2. Wal-Mart will be the nation’s biggest auto financier.  Almost all loans are made through auto dealers.  New types of dealers are going to pop up, as we have seen in so many other financial services.  Companies like Wal-Mart, with Costco and Sears close on its heels, are poised to challenge the traditional distribution models for auto, and bring the scale and mandate to do so at “everyday low prices.”  Did you know Wal-Mart is the nation’s largest check-casher?
3. Improved loan servicing will reduce repos by 80%.  Customer engagement through social media will be the least of it, but important.  Cars will become like utilities that can be shut off if payments are too late, and without remediation plan.  Ongoing cash-flow analysis and employment data will give lenders real-time information on job loss, and the ability to develop a new payment plan before it’s too late.
4. Collaborative consumption will influence loan terms for 10% of loans. We don’t need to wait for the automomous Google car for the impacts the “shared economy” to reach auto finance.  Uber, Lyft, Side-Car and others already provide us better means to share this major purchase which spends 90% of its life dormant, parked.  We’re only a deal away from lenders tying themselves into the payments platforms of Braintree and the like that give customers greater convenience and transparency and decrease lender risk.
5. Mobile phones will inform a majority of auto purchasing behavior.  Consider we consult our mobile phone on 80% of purchases today, and that over 10% of BHPH customers are prime and super-prime.  Like in almost all other purchases, the smartphone will mitigate against information asymmetries in this sector as well.  TrueCar gives real-world visibility to new-car prices. Dealers have access to Black Book (the insiders version of Kelly Blue Book) for used-car pricing – why wouldn’t consumers?