The Road Forward

When the U.S. economy started to bounce back from the recent recession, there was a lot of pent-up demand for automobiles. Consumers had put off buying a car, and then at a certain point, they couldn’t put it off any longer. Extremely low interest rates added to the sudden buying boom.

Now that that blip is over, the market for cars is still strong, but the market for auto loans has become extremely competitive. CUs that do indirect lending often find they’re one of a great number of financial institutions working with the dealerships. CUs that do direct lending have to struggle to get attention when consumers are constantly being bombarded with financing offers.

“Now that the economy is slowly rebounding, our challenge is to remain top of mind as more members start buying cars,” says CUES member Natalie Baker, CME, VP/marketing at $268 million/20,000-member Dominion Credit Union, Richmond, Va. “We have to maintain competitive rates and compelling offers as credit becomes more available elsewhere and dealers are able to offer more discounted rates. By offering the same rates and terms for used cars [as for new ones], we are able to capture a much larger portion of purchases, as well as refinances.”

The biggest problem with auto lending is that vehicle purchases are often made on the spur of the moment. Maybe someone’s car has just given up the ghost, or maybe they spotted the perfect car on a lot. Maybe it was just a really nice day and they decided to go shopping on a whim. If a credit union’s loan offer isn’t physically in their hand—or at the very least, fresh in their memory—that loan will almost certainly go elsewhere.

“Here’s the analogy I like to use,” says Mark DeBellis, president of CUES Supplier member PSB Integrated Marketing, Lake Forest, Calif. “Imagine you’re fishing at one spot along a river. Those fish that are coming by you are either going to be caught by you, or they’re not, and you’re never going to see those fish again. If you’re fishing aggressively, you may catch some of those fish that are swimming by. But if you’re not fishing, you’ve lost the chance to ever catch that fish. Ever.”

What that means, DeBellis says, is that credit unions need to stay 100 percent committed to the product category rather than marketing it sporadically.

“You can’t expect the loan market to be there when you want it to be if you’re not there for it all the time,” he stresses. “You need to be marketing auto loans all the time, every month, always, because you never know when people are going to need auto loans. You should be promoting them on your website, on your newsletter. You should be sending pre-screened offers out to qualified members every month. There are so many people clamoring for their credit dollar from so many different channels that if you just sort of pop in and pop out, you will fall off the radar. Whatever fish went by will be gone forever.”

Preaching to the Choir

What are the best ways to maintain that constant contact? DeBellis suggests a broad spectrum of marketing tactics.

“I would advocate having an annual auto loan marketing calendar that you commit to, and you put enough resources into it to cut through the clutter and be relevant in your space,” he says. “Even simple things will help. You want to have a conversation with people every month about this. Every statement should go out with a little mini-application for an auto loan. You should always be promoting your rates. You might have an auto loan buying seminar one month. You might bring an auto loan wholesaler into the lot and bring people in and have a big open house with specials.”

$370 million/33,000-member Financial Center Credit Union, Stockton, Calif., did $45 million in gross new and used auto loans in 2013, up from $40 million in 2012 and $37 million in 2011.

President/CEO Michael Duffy, a CUES member, says one big ingredient in that success has been his credit union’s “eye candy” campaigns—witty, bright, curiosity-inducing postcards the CU sends to the 20- to 30-year-old demographic on a once- or twice-monthly basis.

These postcards advertise auto loans, but they don’t necessarily look like ads, and they often reference social media memes or pop culture happenings.

“They’re different,” Duffy says. “They have a different tone to them, and they’re definitely targeted to that 20-something crowd. Their first and biggest purchase is usually a car, and that’s when they have the least availability of good financing. About 11 percent of our members are in that demographic. That’s your pipeline. Getting your first loan is not the easiest thing to do, and that’s what we’re here for. You help somebody out at the beginning of their adult life, and they’re loyal forever.”

Financial Center CU supplements these “eye candy” postcards with quarterly coordinated campaigns, also witty and dialed in to pop culture.

“For last year’s President’s Day sale, we had one called the Battle Royale, where it was Abe Lincoln vs. George Washington, and you had to pick,” he says, chuckling. “Of course they were in boxing gloves, and they were pretty ripped, too. Some people liked it and other people thought it might be approaching bad taste, but it went over very well.”

The CU had great results. To calculate promotional ROIs, “we look at the resulting loans’ interest income vs. the associated expenses,” says Duffy. “Expenses include promotional (including design, production and mail costs), estimated charge-off, cost of funds and employee costs,” says Duffy. “When applying this calculation to the Battle Royale, we were able to calculate a 716.7 percent return on investment for the promotion.

“We also look at the promotional expenses vs. the net income (return on marketing investment). In doing so, we found that for every marketing dollar invested in the promotion, there was a $33.08 return.”

Baker says Dominion CU’s main strategy for attracting auto loans is keeping rates very low and promoting the benefits of its auto loan program as part of the onboarding process for all new members.

To help gain repeat business, the credit union sends a monthly email to members who have auto loans at maturities of 24, 30, and 36 months, touting the benefits of getting their next car loan with Dominion CU as well. That helps keep the CU top of mind at a time when members are likely to be shopping, she says.

Dominion CU supplements this constant effort with twice-yearly marketing campaigns that feature limited-time offers, such as a reduction in APR and a $300 gas card. One campaign happens in spring, when people are getting their tax returns; the other, in late summer when the new car models are coming out.

“It adds a sense of urgency,” Baker says. “Members come to expect [the special offers] and look out for them. Our rates are consistently among the best available, so that in itself attracts a lot of members. But we’ve found that when we drop the rate even lower for a promotion, business seems to come out of the woodwork.”

Calling in Reinforcements

In addition to marketing directly to members, some credit unions benefit from indirect-lending relationships with car dealerships. But it’s not for every credit union.

“We don’t do it, because our membership is very geographically diverse,” Baker says. “We serve members in numerous states up and down the East Coast, and a little bit in the Midwest. So trying to build those relationships with the dealers is hard. But a lot of credit unions have a community charter, so pretty much anyone from the community who walks into the dealer is eligible for the credit union. They can kind of have that relationship with the dealer and it works, because the [car shoppers] can join. With us, we’re single sponsor focused, so you have to be an employee, family member, or retiree of Dominion Resources, which is one of the nation’s largest energy providers. So having that kind of relatively closed field of membership, it really makes much more sense for us to work directly with the members.”

“For some credit unions, indirect is their biggest source of auto loans,” says DeBellis. “That’s a blessing and a curse, because if a dealership isn’t selling cars, you’re not getting loans. I think it’s a mistake for some to put too much credence on that, because you end up putting your future, your own effectiveness, in somebody else’s hands. And you do it at a lower rate, honestly. You’re brokering your loans to somebody else and you’re having to pay a percentage of that, and a fee, to get that loan.”

To negate these potential disadvantages, $1.1 billion/73,000-member Harborstone Credit Union, Tacoma, Wash., chooses its dealerships extremely carefully and fosters a close relationship with them, even using its own Auto Pass auto-loan website to help the dealerships do their job, explains John Renforth, SVP/chief sales/service officer, a CUES member. Members can shop for a car right on the Auto Pass site, which shows current inventory at all the dealers in Harborstone CU’s network. And if the members don’t want to go through the hassle of shopping and negotiating, there’s even a concierge-style buying service.

Going the extra mile is necessary in the indirect space, says DeBellis. “What I’m finding now is that it’s very, very competitive in the indirect lending space. Some of these dealers have three and four credit unions that they’re representing. You need to find a way to make your auto loans relevant in the marketplace, and you need to market them.

“Maybe it’s some out-of-the-box ideas. Maybe it’s more personal service and more education. But if you don’t find a way to own it yourself, the dealers aren’t going to do it for you, because they’re not in it for you. They’re just trying to get the best rate at the right time to get somebody in a car.”

Know Before you Go

Harborstone CU’s Auto Pass program combines a strong indirect network with the power of loan pre-approvals. Harborstone CU markets Auto Pass as a brand of its own, with billboards that say “Before you get the car, get the card.”

When community members apply successfully for an Auto Pass card, they’re issued an auto loan pre-approval good for 45 days. Not only does it come with a competitive rate based on the applicant’s finances, but the first 90 days are payment-free, and they have an option to skip two payments per rolling calendar year.

They can use that loan to buy a car at any dealership, whether it’s in Harborstone CU’s network of dealers or not—but if they use a Harborstone CU car dealer, they’re offered extra incentives, including a $200 coupon that’s redeemable for cash after the loan has been on the books for 90 days and they’ve made their first payment.

All Auto Pass cardholders automatically become Harborstone CU members, so the program is a good way to attract new members; but it also helps to make sure existing members finance with the CU instead of elsewhere. Many members are sent pre-approvals without having applied for them, and those loan approvals follow them as they set out to shop for a car.

“If they go to any one of our dealers, and the dealer puts in their member number or Social Security number, it will tell them immediately whether they’re pre-approved or not,” explains Renforth. “We upload all of our pre-approvals into the CUDL system at the dealer. (CUES Supplier member CUDL is based in Ontario, Calif.)

“Since the launch of Auto Pass in 2012, we have increased our consumer loan volume by 146 percent as of 12/31/2013 from $80 million to $197 million,” Renforth says. “All of that growth is from Auto Pass. We increased our loan-to-asset ratio from 43 percent to the 63 percent. We did this while staying within our risk concentration levels for auto loans by type and volume for each risk tier.”

Pre-approvals are a smart marketing tactic for credit unions that do direct auto loans, too.

“We encourage members to get pre-approved before they shop,” says Dominion CU’s Baker. “By unbundling the deal [from the car-buying process], they increase their negotiating power. They can walk in there with a pre-approval letter from us, saying, ‘Hey, I’m already pre-approved by the credit union, so we don’t need to talk about the financing. Let’s just talk about the car.’ And that also helps us, of course, to get the loan, even if it’s during non-business hours.”

For a long time, she says, Dominion CU had shied away from pre-approvals because they involved compiling large amounts of up-to-the-minute information. But in the last several years, she says, it has become easier to gather that information, and there are even consulting firms that can help financial institutions access credit scores, do database queries, and so on.

Recently, Dominion CU contracted with Madison, Wis.-based image.works to create a loan generation program from the ground up. The marketing firm designed the direct mail pieces, worked with a third-party company to establish credit, and then plugged the results into the offers.

“Our promotions really help give us a huge lift in loan volume. For example, our auto loan volume was $2.1 million this February during our promotion, vs. last February when we did not have a promotion (until March) and volume in 2013 was $1.2 in auto loans,” says Baker. “Our $2.1 million in auto loans this February during our promotion is more than all consumer loans combined for February last year.”

Financial Center CU sends similar pre-approvals to its members. “Every one of our quarterly promotions has a pre-approved offer,” says Duffy. “We go all the way down to, let’s say, low C credit. Based on their credit scores and some other attributes that we get from both outside sources and inside sources of data, we make good, sturdy offers to them.”

Do members actually take these pre-approvals with them when they go car shopping? They do, to the tune of approximately a 2 percent response rate. That’s not quite the mind-bending 6 percent response rate garnered by Financial Center CU’s “eye candy” postcards, but it’s still a significant number of loans the CU otherwise wouldn’t have had.

DeBellis says loan pre-qualifications work because they take a big chunk of the stress out of car shopping, which is already an inherently stressful activity.

“With a pre-screened offer, informing the member that based on their good credit, they’ve already been pre-qualified for an auto loan through the credit union, they can just go out and shop,” he says. “They already know that they have this amount. Let’s say they’ve been pre approved for $40,000. They know that with just their signature, they would qualify for that auto loan. So that gives them the credibility to go out and shop with confidence.”

Auto loan pre-approvals are part of an overall trend in lending, he says—one that can help credit unions solidify their member relationships.

“Something that we’re doing, which, philosophically, is where I think things are going, is pre-approving people for everything up front, then telling them they’re pre-approved and giving them an [online] tool to access their loan proceeds 24/7/365,” DeBellis says. “We call it Loan Generator. We rolled out a program last year with Digital Insight, and we’re working on one with FIS.”

In a blanket pre-approval program like this, a CU might pre-screen the top 20 or 30 percent of its members—the ones who could get a loan anywhere and aren’t dependent on the credit union’s good graces (these, he says, are the people for whom a credit union most wants to remain front of mind). It might pre-approve them for a whole menu of different types of loans. Then, it would send out quarterly notifications, and make that menu of loans accessible to the members at all times through online and mobile banking.

“Once that happens, they are constantly aware of the resources they have,” explains DeBellis. “There’s no longer that ‘Ooh, will I qualify? What will they say, yes or no?’ It’s done. They have these things, and they can just tell us when they need them. We’re just trying to preempt them from going anywhere else.”

Jamie Swedberg is a freelance writer based in Athens, Ga.