By John San Filippo
The credit union industry has a major presence in auto lending. According to Paul Rindone, vice president of product for CUNA Mutual Group (CMG), credit unions own approximately $430 billion in outstanding auto loans representing a 30% market share. And the vast majority of those loans are used to finance vehicles that were sold by franchise auto dealerships. It should be a match made in heaven – dealers selling cars and credit unions financing cars – but the relationship between credit unions and auto dealerships can often be adversarial. Finopotamus spoke with Rindone about this problem and possible ways to address it.
Flipping or Flopping
According to Rindone, both credit unions and auto dealers are guilty of “flipping” the other party’s transaction. Flipping, he explained, is defined as convincing a buyer to abandon one transaction in favor of another. For the dealer, that means convincing the member to abandon their credit union financing in favor of financing provided through the dealership. For the credit union, that means convincing the member to abandon the dealer’s protection products (e.g., mechanical breakdown coverage, gap coverage) in favor of protection products offered by the credit union.
“One of the reasons dealers don't like credit unions is that credit unions often flip their deals and cancel their protection products,” said Rindone. “However, when a member goes to the dealer with their credit union preapproval, dealers flip those loans all the time.” That leaves the member stuck in the middle between these two competing interests.
Issues With Indirect Lending
Indirect auto lending relieves this tension to some extent. And while credit unions interested in growing their auto loan portfolios have little choice but to participate in indirect lending, it’s not without its issues.
“From a credit union standpoint, they look at the indirect channel as offering less control and being more expensive compared to a direct transaction,” said Rindone. “But the reality is, if they want to grow loan volume, the indirect channel is the place to be.”
With the extra expense of an indirect loan, it makes sense for credit unions to further develop the new member relationships that come in through the indirect channel. “We think about the indirect channel as a great source to grow loans,” explained Rindone, “but typically, credit unions will tell you those members gained through the indirect channel are non-engaged. Eight to nine out of 10, after the 30 or 36 months, run off and they don't renew their memberships.”
According to Rindone, the dealership has no incentive to expound on the value of their buyer’s new credit union membership. Rather, it’s up to the credit union to increase engagement and grow the relationship.
Scaling for More Direct Lending
From a purely financial standpoint, a direct auto loan is more favorable for the credit union than an indirect auto loan because there’s no “middleman” indirect facilitator that needs to be paid. The key is convincing both dealers and credit unions to freeze their flipping practices.
“We see it all the time,” Rindone told Finopotamus. “The dealers that do really well with our credit unions and the credit unions that do really well with dealers have defined their roles.” The challenge for all but the largest of credit unions is developing and nurturing those dealer relationships.
Rindone believes that if credit unions work together to operate as a single force in the auto lending industry, credit unions of all sizes will benefit. “That's one of the things that is a central part of what we're doing – leveraging the strength of the system as a whole,” he explained. “Credit unions have trusted membership of 130,000,000 members across the [entire] system.” He added that credit unions also enjoy great consumer trust, a claim that most auto dealers can’t make.
The Costco Model
Another way that credit unions and auto dealers can work together is to leverage new technology in innovative ways, noted Rindone. For example, he said that CMG-owned CuneXus offers an online “digital storefront” that credit unions can add to their websites and use to make preapproved credit offers to members. However, said Rindone, the same type of technology could be used to allow dealerships to make special offers to a credit union’s members. A program like this would most closely resemble Costco’s car-buying program.
“As we began discussing this situation,” said Rindone, “we asked ourselves who credit unions compare to. In terms of member trust and member loyalty, it had to be Costco.” The big advantage for credit unions is their access to much more financial data about their members.
“We can start from a trusted position similar to Costco,” said Rindone, “but we can provide much deeper insights into what the membership really wants.”
Concluded Rindone, “What dealers want from credit unions is somebody who’s easy to do business with and funds fast —who is there consistently in good times and bad.”