Uncovering hidden risks in auto dealership portfolios with digital data - Part 1

Updated: Nov 9

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. And if talks of an impending recession turn out to be accurate, one can expect such undesirable credit events to only increase. After all, the last time a recession rolled around, auto dealerships in the US witnessed record-breaking closures not seen since the 1950s. 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. And 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 current counterparty risk monitoring process

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 This can often mean that lenders are working with data that is outdated and inaccurate and are consequently using it to paint an inaccurate picture of their auto dealership portfolio’s health.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.

Image of a digital data going into the cloud
Most businesses now have a digital footprint that can be leveraged for risk monitoring
















Uncover hidden risks with TRaiCE


The TRaiCE platform uses digital data in its risk calculations. For this, its proprietary algorithms daily track and pull in whatever online information is available on a counterparty using world data and other third-party data APIs. 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.


Digital data improves the counterparty risk monitoring frequency


Conclusion


Digital data has the potential to uncover hidden risks and take your counterparty risk monitoring to the next level. In part 2 of this series, we showcase how TRaiCE does just that! We will be doing a use-case analysis of 3 auto dealerships, each with a different digital footprint to show how the platform uses digital data to identify businesses that may be in danger of distress. So, watch out for that! In the meantime, if you want to see for yourself how digital data can help with counterparty monitoring, why not give TRaiCE a try? For a limited time (from November 8 - 22) we're running a free 2-week trial offer. Sign up now to experience simplified risk monitoring for free! No credit card required!



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