Uncovering hidden risks in auto dealership portfolios with digital data
Lending (direct or indirect) to auto dealers can be both risky and rewarding. On the one hand, the auto dealership industry is worth trillions of dollars with the average dealership recording profits of over $7 million through the first quarter of 2022 alone. On the other hand, the past few months have seen several instances of auto dealership failure and fraud. Given the volatile economic environment that we live in right now, hidden risks can emerge from anywhere and at any time. It is therefore vital for lenders to stay vigilant and keep a close eye on their auto dealership portfolios. One way to do that is by using near real-time digital data to assess a dealership’s business health and operating risks concurrently.
The current counterparty risk monitoring process
The traditional method of monitoring counterparties such as auto dealerships includes assessing how healthy the business is using financial reports that contain metrics such as gross profit margins, liquidity ratios, credit bureau reports, obligor ratings, etc. As seen in the figure below, it is an intermittent process dependent on the availability of annual or biannual financial reports.
The intermittent nature of the monitoring has some obvious drawbacks. For one, periodic monitoring does not reflect sudden declines in business health that may occur in the interim period between reviews. And as the pandemic demonstrated, business fortunes can fluctuate wildly at the drop of a hat.
For another, the bulk of the information used in intermittently monitoring a counterparty’s business health is past data. This can often mean that lenders are working with data that is outdated and inaccurate and are consequently using it to paint an inaccurate picture of their auto dealership portfolio’s health.
So, when an undesirable risk event occurs, lenders are often left feeling in the dark despite their best efforts to dot all the I’s and cross all the T’s traditionally.
How digital data improves counterparty risk monitoring
We live in a world of constant flux where myriad internal and external factors can affect an entity’s business health. How can lenders stay up to date in this constantly evolving environment? This is where digital data comes into the picture. Aided by the pandemic, the business world has largely shifted online. This means that most businesses now have a digital footprint (see below). Monitoring this readily-available information ensures that lenders identify adverse events related to a counterparty in quick time. In this way, they do not need to wait for quarterly, biannual, or annual financial reports to make an assessment of a third party’s business health.
Uncover hidden risks with TRaiCE
The TRaiCE platform uses digital data in its risk calculations. For this, its proprietary algorithms track and pull in whatever online information is available on a counterparty using world data and other third-party data APIs daily. This ensures that lenders always have a current view of their counterparty’s creditworthiness. In addition, by using digital data, TRaiCE effectively shortens the risk-monitoring cycle and ensures better risk-review frequency (see figure below). All of this helps lenders uncover hidden risks and adverse events early so they have the time needed to take immediate steps to derisk their portfolio.
Use case analysis — How TRaiCE helps uncover hidden risks
To showcase this, we’re looking at two auto dealerships monitored by the TRaiCE platform. For legal and data protection purposes, we will not be using real names.
Company A is a Florida-based auto dealership. It is a public company with a large digital footprint. Company B is a New York-based private auto dealership with a minimal digital footprint. Both companies have been in the news for all the wrong reasons in the recent past.
Florida-based Company A was hit with a class action lawsuit in May 2022. This was followed by a delay in disclosing its financial results, stock exchange delisting, and reports of increasing store closures. As shown below, all of this was picked up by the TRaiCE Digital Risk Index which shows the company’s business health decline progressively (index scores go from positive to negative values or from green to red) from April 2022 onwards.
Company B was charged with engaging in deceptive trade practices by New York City’s Department of Consumer and Worker Protection in May 2022. Thereafter, the auto dealership had its license revoked temporarily and had to pay fines in excess of $750,000. Despite its limited digital footprint, the TRaiCE platform picked up signs of business distress with this particular auto dealership well before these risk events occurred (see below). This is reflective of the many negative customer reviews and complaints that the company had against its name prior to its eventual distress.
Conclusion
As you can see from the above use-case analysis, the TRaiCE platform, with its use of near-real-time data in its risk calculations, can alert lenders to counterparty risks in their auto dealership portfolios in advance. This is the case irrespective of the size of the auto dealership’s digital footprint. By monitoring entities on a 24/7/365 basis, TRaiCE ensures risk coverage that is ongoing. In this way, lenders never miss an event, adverse or otherwise, in connection with its third parties. This can be especially valuable in times of financial stress.
Want to stay ahead of unwanted counterparty risks with daily, AI-powered alerts? Why not try out TRaiCE free for 2 weeks, no strings attached? Sign up here for a taste of simplified third-party risk monitoring!
Originally published at https://www.traice.io on November 08, 2022.
