Think about indirect and direct loans, your mobile and omnichannel situation and, of course, your strategy.
Last month, I shared my thoughts on the difference between our COVID-19 recession and The Great Recession from the perspective of the potential for auto loan growth in 2021. This month, I’d like to provide a checklist of sorts for your auto lending strategy.
If you’re a credit union making indirect auto loans, you have to ask yourself almost every day this one question: “What is our value proposition?” In reality, if your value to the dealership is that you “buy paper,” it’s never been good enough in the past and it sure isn’t good enough today. The best credit unions see dealers not only as a source of loans, but as a business partner. You need to understand and be concerned about the dealer’s business!
How flexible is your program; do you have reasonable guidelines so that a dealer has some room to put together a deal? I often see a lender try to unduly limit the amount of “back-end” products like mechanical breakdown and other protection packages. While a dealer can certainly be overly focused on extracting every penny of profit from each loan via product sales, I believe it’s better to manage from a macro level and deal with the consistent offenders than trying to limit to a certain dollar of products per loan.
I’ve also seen lenders, both credit unions and banks, that are trying to treat their indirect programs and services as a commodity. Expense control for example, limiting the ability for dealers to talk to your underwriters, may be the wrong way to go. Our underwriters work a fair share from home so they can be available until 9 p.m. and on Saturdays for the finance managers. There’s still room in this business for differentiating your program through service excellence!
Sometimes it’s tough for credit unions that aren’t the biggest in their area to make an impact in the indirect marketplace. I have a former employee and great friend, Genice DeCorte, who is now the CEO of $41 million HealthShare Credit Union, in Greensboro, North Carolina. In the past I’ve told her she needs to “embrace small.” A smaller credit union is more likely to have a strong relationship with its members. Its members are more likely to listen when an employee of the credit union sells or offers advice. A smaller credit union may also be more likely to partner with a dealership on a special sale. Frankly, when things are slow at a dealership, they’re desperate for business, so a small, flexible credit union that can promote a sale on short notice will get noticed.
Another tip for credit unions that aren’t the biggest in town: Make a short list of dealerships that you are committed to owning. By owning, start with this idea: Does your credit union have a branch that is close to a particular dealer? Do you have few competitors that are closer? If so, be committed to owning that dealership. Make sure that dealer knows the branch is available for assistance to the dealership and borrowers after the sale. Spend extra time on the business development side with these dealerships. You can build these relationships with a special weekend sale as well. You may never be their top lender—but you might become their favorite.
All too often I see credit unions, intentionally or not, compete against themselves. How does this happen? One way it occurs is when they’ve made conscious decisions to price direct loans lower than indirect loans. Perhaps they know that indirect loans cause more losses than direct loans, so they’re pricing in that difference. In addition, direct loans don’t have dealer fees; yet they’re much more labor-intensive as well. You might wind up taking five applications for every loan you fund.
Another issue is your credit union’s approach to managing both a direct and indirect lending operation, specifically as it pertains to promoting pre-approved loan applications. At my credit union, Ent, 15 years ago we had so many members who wanted to be pre-approved before they shopped that it created a lot of internal competition. Our direct lending staff wanted credit for the time and effort put into the pre-approval, so they often told members to come back to us for the loan. Well, that wasn’t very convenient for the member. In addition, the staff pre-sold our mechanical breakdown protection and tried to compare our lower cost compared to the dealer’s plan. The bottom line is we didn’t have the best of relationships with our dealers when it seemed like our members had a negative view of doing business with them. We ultimately changed our messaging to tell our members to go right to the dealer and ask to do business with us there. We started doing a lot better when we had one fewer competitor!
Due to falling interest rates, this is a great market to get business in through a refinance program. Members are always interested in saving money. The question is, what’s the best way to reach your potential borrowers? If your credit union is big enough, you may have the data and the analytical ability to sift through automated clearinghouse data for members who have regular outgoing payments to known auto lenders. You can use that data to reach out to your members through your channel of choice. Smaller credit unions can leverage their member relationships and foot traffic to their branches to make a face-to-face appeal. Whether or not you’re asking members to refinance their loans with other lenders, it’s likely members who have an auto loan with you will be asked to refinance their loan elsewhere by another credit union!
Another idea to generate auto loans is through solid cross-selling efforts. The key is to have a complementary product driving the opportunity. In this case, I’m talking personal loans. Personal loans are hot; just ask SoFi. The company and other fintechs have built a business of promoting attractively priced personal loans to do debt consolidations, in an era when the personal loan has mostly been abandoned by the banks. If you can properly price and promote personal loans, you can drive a lot of opportunities to refinance an existing auto loan elsewhere. Years ago, I realized a fair share of personal loan requests might be considered a bit of a stretch on an unsecured basis. Yet the borrower often had an auto loan elsewhere—and that loan is secured. My staff became very adept at approving that stretch unsecured loan provided the member brought the existing auto loan to the credit union. In time, we realized that these “combo-loans” performed pretty well.
It goes without saying that the importance of a user-friendly mobile application is huge right now. Yet the best front-end application in the world doesn’t have a lot of value if your behind-the-scenes practices aren’t up to the same level. We talk a lot about the importance of omnichannel, offering the same quality experience regardless of the delivery channel. Omnichannel also means the member can start with one channel and jump to another when appropriate. If your member can apply on your mobile app and later call to talk to a lender about a question, you’re well on your way to omnichannel. Trust me, the fintechs want to drive everything to mobile; you’ll likely get frustrated hoping to talk to an employee.
Yet you have to understand when a borrower wants to stay on track, so to speak. When it comes to mobile-only borrowers, you have to be sure that your sale and cross-sale efforts don’t derail the train. Trying to pick up the phone and make a cross-sale for a mechanical breakdown policy or credit card may be the wrong channel at the wrong time. While it’s perhaps not the best way of making a sale, sometimes it’s best left until after the desired transaction is complete.
In time, as the mobile experience evolves for lending, I foresee a menu approach to sales that once borrowers knows they’re approved for their $50,000 car loan, they can pick and choose that car loan at $700 a month or select mechanical breakdown and pay $740 a month.
Stay Focused on Strategy
Whether you think COVID-19 will be with us and impacting our business for only a few more months or a much longer term, a focus on improving your strategic plan is never a bad thing.
Bill Vogeney is the chief revenue officer and self-professed lending geek at $7.1 billion Ent Credit Union, Colorado Springs.