Uncertainty prevails among car dealers regarding AI's impact on credit risk assessments and auto loans, according to JD Power.
In the ever-evolving world of finance, generative artificial intelligence (AI) is making its mark, particularly in the credit risk industry. International credit risk organizations are integrating this cutting-edge technology into their digitalization and automation of risk and business process management. Experts like Lara Biermann are advising credit and surety insurers on implementing AI-driven systems, such as CAM Credit & Surety, until at least 2025.
However, the integration of AI in lending decisions is not without controversy. A recent academic study noted that profits were primarily derived from charging high-risk customers more, raising concerns about fairness and transparency. Moreover, AI lending decision models may bake discrimination into them, a troubling development that could exacerbate existing inequalities.
These concerns are echoed by auto dealer finance teams, according to J.D. Power's 2024 U.S. Dealer Financing Satisfaction Study. The survey, which polled 4,472 auto dealer finance employees, found that more than half (55%) of these teams are uncomfortable with the use of AI in determining auto loans. Patrick Roosenberg, senior director of automotive finance intelligence at J.D. Power, attributes this discomfort to fears about AI limiting their ability to find creative solutions, forge key relationships, and effectively close deals.
Dealer finance teams' top concerns with AI include the loss of human interaction, limited creativity, and fear of redundancy for employees. These apprehensions are not unfounded, as AI is said to lead to faster, more accurate credit decisions, potentially replacing human roles in the process.
Despite these concerns, AI lending is also associated with significant benefits. A recent academic study found that AI models increased profits from dealer auto loans by 34%. However, consumers around the world have shared stories about being unfairly rejected by AI lending decision models, raising questions about the fairness and transparency of these systems.
In a December eLend Solutions poll, many auto dealers and finance teams said that AI decision-making led to customers receiving inaccurate price quotes online. This is a 5% increase from last year's J.D. Power study, which found 50% of dealer finance teams expressing discomfort.
Despite these challenges, the adoption of generative AI in the credit risk industry is expected to continue. According to McKinsey research, several credit risk organizations are already using generative AI, and more are expected to do so by October 2024. As the industry continues to evolve, it remains crucial to address the concerns of both consumers and finance teams to ensure a fair and transparent use of AI in lending decisions.
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