Credit unions love an auto lending boom – what’s not to like? According to one analyst, however, there could be more happening than meets the eye.
Vehicle sales continue to hover around the 17 million mark, according to the latest Credit Union Trends Report from CUNA Mutual Group, and CU auto loans amounted to more than $354 billion as of April 2018 – an increase of nearly $80 billion from just two years prior. Auto lending at credit unions has grown by double digits (as a percentage) for the last two years.
“I’m not saying the auto boom is bad, but this level of growth – this record member and lending growth we’ve seen over the last few years – could potentially be masking some troubling trends bubbling under the surface,” said Susan Hochsprung, VP of sales at CUNA Mutual Group.
Hochsprung spoke during a breakout session at CUNA’s America’s Credit Union Conference in Boston recently, and she reminded the audience of an old saying: “Success breeds complacency and complacency breeds failure.” In other words, she said, only the paranoid survive.
Despite the strong auto sales of recent years, there’s been about a 2 percent reduction in auto sales during the last 12 months, said Hochsprung. Still, credit unions have plenty of reasons to be pleased – between 2012 and 2017, auto loans at CUs grew by 14.8 percent, nearly double that of banks (7.5 percent). The only lender category that even comes close to credit unions, she added, is finance companies, with 14.5 percent growth.
Much of that has been driven by indirect lending, which is projected to continue to grow in the next few years even as direct lending levels out. According to CUNA Mutual data, indirect lending made up 43 percent of all outstanding credit union loans in 2012, jumping to 56 percent by 2017 and is expected to hit 61 percent by the end of 2021.
Share of wallet concerns
But as auto lending grows, are credit unions growing their share of members’ wallet?
Between the end of 2015 and the end of 2017, credit unions saw a 7 percent rise in loans among members who count their CU as their primary financial institution, while loans among non-PFI members were up by 44 percent – not surprising, said Hochsprung, since CUs have been so successful in capturing indirect loans.
The problem, continued Hochsprung, is that in that same time period, as the size of credit union members’ wallets grew, CUs’ share of wallet among PFI members shrunk by 3 percentage points while non-PFI share of wallet rose by 13 points – again, she said, thanks to indirect lending.
“Eventually people are going to slow down their auto lending and then what’s going to happen?” asked Hochsprung. “If someone is sneaking into our world and stealing away our PFI … then what’s going to happen?”
That shrinking share of wallet, she continued, is one of the risks being masked by the large overall growth the movement has seen in recent years.
Competing in ‘an Amazon world’
Hochsprung cited a 2016 study from Bain showing that, on average, a consumer’s PFI wins 64 percent of all of their purchases. Credit union members say they love their CUs and they want to be loyal, “but we live in an Amazon world and convenience will always trump loyalty,” she warned.
A 2015 study from Raddon indicated 88 percent of PFI members intend to give all or most of their future business to their credit union, but Hochsprung pointed out that fintechs, start-ups and other new competitors aren’t trying to steal away the entire member relationship – they’re just picking away at the most profitable products like student loans, P2P lending and credit cards. In other words, PFI members are still PFI members, but those members don’t leave or slow their debit card usage, they merely go elsewhere for the products that could be most profitable to the credit union.
When it comes to auto loans, CUNA Mutual’s research shows credit unions are still being out-marketed 3 to 1 by the competition. In other words, said Hochsprung, for every four auto loan offers a consumer gets, three aren’t from that member’s credit union. And it gets even worse when looking at consumer loans and student loans, she said, where CUs are being out-marketed 5 to 1 and 7 to 1.
Consumers may still select a lender based primarily on fees and rates, but banks are out-marketing CUs massively across a variety of channels, including email, where credit unions are down by 15 percentage points (53 percent of bank marketing is done via email compared to 38 percent of credit union offers).
So what can CUs do to close these gaps? One strategy Hochsprung suggested is doing journey mapping for the auto lending process in order to find potential friction points and then removing those elements to make the process easier. The emphasis, she added, should be on convenience, since that’s a high priority for consumers.
Credit unions can also work with third-party vendors to find information such as rising incomes, improving credit scores, life events or debts being paid off in order to target specific offers to members’ individual needs.
As of Q4 2017, credit unions have $313 billion in outstanding auto loan balances on the books, but those same members have $432 billion in outstanding loans with all other lenders.
In other words, said Hochsprung, “We’ve got $432 billion of opportunities to go after.”