It’s no secret, indirect lending has been a critical component to the credit union industries rising domination of the auto lending market. Credit unions with indirect programs have experienced consistent double digit loan growth with a rich supply of new members who may have otherwise financed with a bank or captive lender. But are these relationships profitable?
According to a 2015 report by GreenProfit Solutions, Inc over 54% of auto lending is now being done at the dealership. These numbers have caused a lot of credit unions to jump into the indirect market and push even harder ahead. They’re afraid of losing their members business without an indirect presence, and they are probably right. But with the cost of running an indirect program and dealer financing fees most indirect loans aren’t profitable until year 2 with an average runoff term less than 2.5 years. And once the loan is paid off as many as 98% of those new indirect members close their account.
With profitability so low and the member relationship so short I am surprised by how many credit unions I come across who are still not effectively engaging their indirect members with a value adding, onboarding strategy.
Onboarding of new indirect auto and RV loans is the critical step to shortening the time to profitability and retaining those new indirect relationships. When I first started in the credit union outbound call center 10 years ago it was to do this very thing, onboard new indirect loans. Credit union leadership saw the onboarding call as an important process for a few reasons. First, to reduce first payment defaults by contacting members before their payments were due. Second, to create value in the minds of those new members with a personalized welcome phone call. And third, to capture profitability and loyalty through cross sell opportunities.
Indirect loans, especially new indirect members, are a treasures trove of cross sell potential. What richer opportunity could there be? You have a new member, a new account, and all of the financial information you could ever need and want to sell additional products and services. You have their application information, their employment information, their credit information, and in some cases their asset information. You also have a new loan with a variety of products and services you can offer such as insurance, automatic payments, and online and mobile banking. There is no reason why a credit union can’t see high profitability right away with an effective indirect onboarding process.
Here are 3 tips on how to do this.
First, give your indirect onboarding process a home. The indirect onboarding process is best owned by a centralized location like an outbound call center. This makes it easier to monitor progress, train and track. This isn’t to say that success can’t be seen at the branch level, it’s just a little more time consuming.
Second, specific training for employees. Give the employees access to the indirect lending system and show them how to find critical information. Give them specific phone training on how to up-sell auto pay, online and mobile relationships, direct deposit, extended warranty, payment protection insurance, and GAP with ADR (or is that ADR with GAP?). Train them how to cross sell loan recapture, deposit recapture, credit cards and so forth, and to build primary financial relationships.
Third, measure and track success. The right strategy means a credit union will not be making a token effort with their indirect onboarding calls. They will be measuring calls made, contacts made, products and services offered and sold. They will then use this information to coach, mentor and improve employee performance with the goal of increasing profitability and loyalty by adding value to the members financial lives.
Let’s look a little closer. First, let’s assume a $25,000 auto loan with a 2.5% flat paid to the dealership. The loan was financed at 72 months at 2.99% with a net interest spread of roughly 75%.
In the first year this indirect loan will generate about $521.00 in interest. With the dealer flat factored in the loan is still in the negative $104.00 and will take a few more months before breaking even. But if the credit union onboards effectively and they are able to sell GAP ($150 profit), recapture a $5,000 credit card balance (roughly $382.00 interest earned 1st year), and set up e-statements ($12.00 first year savings to credit union) that same member now nets the credit union $444.00 in the first year.
In addition the outbound agent also helped the member set up their online account, download the mobile app, set up automatic payments, and discussed the members future mortgage needs.
Creating an effective indirect onboarding strategy isn’t necessarily easy but is definitely worth it and something your credit union needs to do right way if not already in place.
Please take a moment share what great things your credit union’s indirect lending onboarding process is doing for your members, and what you can’t eat your pizza without.