Capture More of the Member’s Wallet through Technology

Great consumer business are usually successful for one of three reasons:

  1. They manage to build a brand and charge a premium for what otherwise would be a commodity
  2. They earned their consumers’ trust, which allows the businesses to up- and cross-sell other products without incremental marketing expense
  3. They locked their consumers in by making it very costly to switch to a competitive product offering

Apple is a good example of a company that checks all three boxes: the iPhone is orders of magnitude more expensive than competitive products. Once Apple acquired an iPhone customer, the customer is very likely to purchase more Apple products. Lastly, once you’re used to the Apple platforms, switching to an Android phone and PC comes at a high cost.

What can credit unions learn from market leaders such as Apple?

 

COVID Compresses 5 Years of Digitization into 5 Months

When the pandemic hit the U.S. in March 2020, retail businesses had shut their doors following the national guidelines. Messages about length and severity of the crisis were conflicting. Nobody imagined how the next 3–6 months would pan out and change our economy.

The ways the healthcare crisis impacted credit unions seemed counter-intuitive at first:

  1. Within days, the stock market fell off a cliff and credit union members pulled their money out of equities. As a result, credit unions had an unprecedented influx in deposits.
  2. Meanwhile, the FED lowered the interest rates to the rock bottom to stimulate the hard-hit economy.
  3. As a result, credit union CFOs started feeling pressure to deploy capital: since bond portfolios generated no more yield and margins were getting compressed, indirect auto loans or buying wholesale loan portfolios seemed like an attractive option.
  4. The Chief Lending Officers, however, pushed back: indirect loans lead to ghost members who perform poorer. Originating direct loans and ensuring the financial well-being of the community is most aligned with the credit union’s mission.
  5. However, due to the pandemic, the branches had to close, and credit unions felt caught off guard when forced to move 100% of their business online.

The weeks after the shutdowns must have felt paralyzing for credit union leaders. With a couple of months of reflection, the path forward, however, has become crystal clear: credit unions must invest in technology and compress 5 years of digitization efforts into 5 months to stay competitive.

Digitization enables credit unions to capture more of the members’ wallets in a turnkey way. Through technology, credit unions can for example rapidly scale their direct auto loan portfolio: most credit union members currently have auto loans with other lenders and at worse rates. Our turnkey auto loan refinancing product therefore enables credit unions to address the otherwise conflicting pressures while doing right by their members.

 

75% of Credit Union Members Have Auto Loans with Another Lender

Credit unions are usually in one of two camps with regard to auto lending: they either have strong relationships to local car dealers and can effectively deploy capital through indirect lending. Or they really dislike the idea of leveraging dealers to try to acquire new members, fearing poor loan performance and ghost members.

The challenge is this: direct auto lending is very hard—if not nearly impossible. Dealers are known for swapping credit union members out of pre-approved loans to increase their own profits. With decreasing front-end margins, dealers are always looking for ways to boost their economics and earning financing margin has proven to be lucrative.

As a result, the majority of credit union members have auto loans with other lenders and at excessive rates. Even though credit unions run quarterly or semi-annual pre-approval campaigns, dealers own the point-of-sale: consequently, 79% of all auto loans are originated at the dealership.

One channel to acquire more members and provide direct auto loans is through refinancing. A number of car loan refinance brokers provide these services. Most of them, however, work very much like the F&I manager in a dealership. Hence, the loans are stuffed with high margin protection products and the borrowers—just like in the indirect model—don’t really become active credit union members.

 

Three Steps to Get Those Loans Back and Increase Share of Wallet

Seven years of digital car retail and helping build Carvana has taught us unique lessons about digital retail. Technology, when used effectively, can create unparalleled customer experiences and help credit unions capture more of their members’ wallets.

Credit union leaders need to leverage technology for three critical touchpoints:

  1. Campaigns: credit unions need to leverage the details they have about their own members and enrich it with third party data to be relevant. Consumers have gotten used to receiving personalized offers. Pre-approval offers that aren’t heavily personalized look like spam and sadly often go from the mailbox straight to the trash bin.
  2. Conversion: once a member receives a personalized offer, credit unions need to make sure that no more than 3 clicks and 1 e-signature separate the member from her new loan. Instead, loan applications on credit union websites are forms with 15+ fields requesting data that credit unions have already collected from its members multiple times.
  3. Workflows: last but not least, if an optimized outreach campaign converts successfully, credit unions need to be prepared for / be able to handle a drastic influx in member interest. Therefore, credit unions can’t rely on its branch employees but instead need software to power its workflows.

These may be new challenges for credit union leaders. However, these challenges remind us a lot of the experiences we’ve gained in digital car retailing. For leaders who want to be on the forefront of technology and turn their institutions into the ‘Carvana of Credit Unions’, get in touch with us now. We’d be excited to borrow some of your time and expertise and involve you as a co-creator in our agile software development process.

Christopher Coleman and Nicholas Hinrichsen went to Stanford Business School before they started a digital car retailer in 2013. The two founders raised $10M and originated thousands of indirect loans for dozens of Credit Unions before they sold their business to Carvana in 2017. While at Carvana, Chris and Nicholas launched the Sell To Carvana vertical i.e. Carvana’s efforts to buy cars from the public. The two MBAs teamed up with Kirk Drake to support credit unions in their digitization efforts.