Home music industry Open Lending CEO and CFO Explain Why Auto Lending Fintech Keeps Working

Open Lending CEO and CFO Explain Why Auto Lending Fintech Keeps Working


President and CEO of Open Lending John Flynn, CFO and COO Ross Jessup

Through John jannarone

The COVID crisis may have stalled demand for auto loans, but investors watching it closely will see it picking up again – and the fintech behind it matters more than ever. Open Lending technology that helps lenders grant more auto loans to people with a wider range of credit scores has remained critical even during the height of the coronavirus pandemic, thanks to credit unions continuing to grant loans and a strong demand for refinancing. That’s according to Open Lending President and CEO John Flynn, as well as CFO and COO Ross Jessup, who spoke to IPO Edge during an interview before the official listing of the company. The company, which serves hundreds of lenders by providing analysis and linking it to loan default insurance, is made public through a merger with Nebula Acquisition Corporation (ticker: NEBU), subject to a final vote on June 9. Assuming the deal goes through, shares of NEBU will become shares of the merged company and will trade under a new ticker symbol.

MM. Flynn and Jessup also said car purchases were aided by a move away from public transportation services, as well as Uber Technologies, Inc. and Lyft, Inc. due to social distancing protocols. Looking ahead, they said the company can benefit from geographic expansion as well as loans backed by other assets such as boats.

IPO Edge: Can you tell us about the importance of credit unions as lenders and the role they play in a recessionary environment?

MM. Flynn and Jessup: Credit unions, our main customers, have the lowest cost of capital and are traditionally viewed more favorably by consumers. As a result, many credit unions eventually increased their share of auto loans in the previous cycle, which we would expect to see in another economic downturn. While this would ultimately increase our existing customer base, there is also additional white space in the credit union market that we can enter. Credit unions finance about 20% of the cars financed annually, and we only signed 7% of the credit union market. Our unique product with our insurance partners and the ability to protect some of the downside risk will allow our community banks and credit unions to continue to provide loans while others may contract. In addition, automobiles are considered non-discretionary for work and life in general. Specifically, our primary focus is on used cars, which tend to be more stable in a recession environment. Interest rate cuts and other stimulus can also impact volumes. Thus, the need for auto financing solutions will only increase with the revival of economic activity.

IPO Edge: How did lower interest rates help maintain business volume? Is refinancing important and will it remain so?

MM. Flynn and Jessup: Lower interest rates result in considerable refinancing interest from consumers, which should lead to additional certificates. In most cases, refinances can be done by consumers without entering a physical banking location. This is a channel that we are focusing on in the future.

We have several loan service companies as partners. These companies generate requests for refinancing and buying money from a number of sources. They have the ability to speed up edits very quickly. Many of their lead sources are web-based and therefore less impacted by quarantine or shelters in place. Our account managers proactively solicit our lenders to adopt the services of these companies in order to increase their arrangements. This channel also has the advantage of risk arbitrage as they are direct consumer loans with a much lower risk of default than our indirect distribution channel.

IPO Edge: What is the competitive advantage of Open Lending and will it maintain it in the future?

MM. Flynn and Jessup: We don’t have any competitors doing what we do – offering risk-based pricing combined with premium auto default insurance. It took many years to build our economic model and gain the trust of ecosystem players.

  1. We have worked with credit unions for years and John Flynn was previously the CEO of a credit union. Earning the trust of credit unions takes time and someone who knows them.

  2. We must integrate into each of the LOS systems used by our lender client. It took years to integrate into the 20+ LOS systems we use today.

  3. We have earned the trust of our insurance partners with a proven history. It took a long time to build and is not easy to develop.

  4. Our data feeds into our models and has been accumulated over more than 15 years – there are only a handful of lenders with a database like ours that includes our combination of LTV and near premium terms. Our data also covers the Great Recession.

IPO Edge: Why Do OEM Financing Services Need Your Help Making Credit Decisions?

MM. Flynn and Jessup: We help OEMs facilitate new car sales by extending credit to near-prime consumers where they are not competitive today and support the value of cars by increasing the availability of used vehicle financing.

We also help them develop brand loyalty by increasing the number of repeat buyers by keeping customers in the captive customer ecosystem, capitalizing on loan life milestones to locate the customer.

Finally, after working with KPMG, we now know that banks and OEM captives can get full credit for CECL relief, i.e. income statement neutral, when using our product. The net effect is an approximately 80% reduction in CECL’s loan loss provisions. This represents a major relief of capital for banks and OEM captives. In this time of risk aversion and uncertainty, we believe this creates a major opportunity to acquire larger lender clients, including super regional and regional banks and other OEM captives in the future.

IPO Edge: What do you think of the trend of ‘travel as a service’ with Ubers and Lyfts around the world and the impact on car ownership?

MM. Flynn and Jessup: We observed positive trends in our certification volumes during the second half of April and continued throughout May. We believe this recent success is due to low interest rates, the pullback of traditional lenders and the abandonment of public transportation by commuters. According to recent data from JD Power, wholesale vehicle prices have recovered from their mid-April lows, with the weekly wholesale auction price index now only down 1.9 % compared to pre-coronavirus estimates.

IPO Edge: What are the future growth paths? Should investors expect to see other asset classes and geographies?

MM. Flynn and Jessup: In the near term, we continue to expect growth from a combination of the arrival of new lenders and net growth in the existing base. I think our pipeline is as strong as it has ever been with several of the top 50 credit unions signed and expected to start in the next few months or at advanced stages of the pipeline. We have also had phenomenal success with the two OEMs that have been launched to date that have several leading OEMs, similar to the two that have been commissioned, in our pipeline that are not reflected in our financial projections.

Going forward, we see many adjacent opportunities with our existing lenders – leasing, primary decision making, hub and spoke. Also, we looked at a lot of geographic and product expansions, but the opportunity was so great in automotive and in the US that we just didn’t have the capacity, although there are multiple markets. which we have been thinking about for a few years now and could look to in the years to come.


John Jannarone, Editor-in-Chief

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