No margin, no mission: Credit unions push to reclaim market share

From the September issue:

Credit unions are feeling the sting of tighter margins as banks leverage used-car financing to spur higher yields.

In the past year, banks have grabbed an extra 5% of the used-car financing pie, accounting for 36% of the market, while credit unions have lost 7% to drop down to 26%, according to Experian. For example, 45% of Chase Auto’s originations were for used vehicles in June, a 12% increase compared with the prior-year period.

Moreover, Ally Financial’s used-car loan originations hit $5.24 billion last quarter, the highest level in the lender’s history. Credit union share has been slipping since the credit crisis. “It was pretty easy pickings for credit unions during the fallout [from the recession],” Chris Whittaker, vice president of consumer lending at Oregon Community Credit Union (OCCU), told Auto Finance News.

But banks are increasingly leveraging the strength of the used-vehicle market to turn a profit, he said, which is tough for a credit union like OCCU, whose portfolio consists of 65% used vehicles.

“We’ve seen a resurgence of the banks after they pulled back,” noted Greg Brown, senior vice president and chief lending officer at Golden 1 Credit Union, predicting that banks will “end up pulling back again” when an economic downturn strikes.

In fact, the looming downturn may be credit unions’ saving grace. “The recession is not an ‘if’ but a ‘when’ — it’s cyclical,” Whittaker said. “If [auto] margins aren’t what banks need, they’re going to seek more business elsewhere to yield what they need. It’s a place we’ve found ourselves in before.”

Until then, credit unions grapple with the question of how to strengthen technology and refine offerings to recapture market share.

To market, to market

Marketing and technology initiatives can position credit unions ahead of the competition, said National Association of Federally Insured Credit Unions President and Chief Executive Dan Berger.

“Credit unions have to leverage technology for lead generation and work with targeted marketing to close [financing] deals quickly,” Berger said. “Credit unions have to be on their toes and be aggressive with their marketing while having lower rates and better service than other financial institutions or big banks.”

Pentagon Federal Credit Union is doing its part by implementing a loan origination system that will “leverage omnichannel offers and targeted non-member and member campaigns,” said Ivan McBride, vice president of automotive lending products and sales at the McLean, Va.-based lender.

PenFed’s auto division will migrate to the LOS in early 2020. “[PenFed] will continue to refine and optimize underwriting policy and processes to deliver on expected automated decision levels to better serve our members and attract new members,” McBride said. PenFed’s auto portfolio reached $3.4 billion in 2018, according to Auto Finance Big Wheels data.

“The banks will always be competitive, but we can’t get distracted with chasing what they do or overreacting to market news,” McBride continued. “We serve our members, and we will continue to be a value proposition for folks who are looking for more flexible terms and payments.”

Charles Goss, executive vice president and chief lending officer at Security Service Federal Credit Union (SSFCU), attributed lower origination volume this year to increased competition. “We have seen other lenders buying market share by either buying more loans in the higher credit risk tiers or having extremely low rates with very high dealer compensation models,” he said.

San Antonio, Texas-based SSFCU, which boasts a $5.1 billion auto portfolio according to Big Wheels data, leverages marketing and word of mouth endorsements as “complement efforts” for retaining members and attracting new ones, Goss said. In addition, “maintaining strong dealer relationships, understanding the various markets we compete in, and having a competitive rate allow us to continue to provide industry leading service,” he said. SSFCU auto loan rates range from 4.2% to 17.5%.

Meanwhile, Eugene, Ore.-based OCCU, which originated $350 million in auto and RV loans last year, focuses on a “human-centered design” for marketing campaigns, Whittaker said. “We’re trying to look at our members’ experiences and what touchpoints are driving engagement,” he noted. “We want to make sure awareness of our brand is always in the market.”

Automated direct email campaigns propel OCCU members down the right product path. “We might have an email campaign that provides information on auto loans, credit cards, or some other relevant offer,” Whittaker said. “As we get that back-end data, we know what will be relevant for specific members.”

Deriving consumer data from marketing campaigns and OCCU’s latest digital initiative — a platform called MyOCCU Online & Mobile — the credit union uses predictive analytics to target messages based on member preferences, including customizing auto loan rates for individual members.

“If I have three different members, they see three different ads,” Whittaker said. “We have messages that are built into our [online] platforms.” Sacramento, Calif.-based Golden 1 Credit Union — with a $4.8 billion auto portfolio — keeps competitive with direct email campaigns, billboards, and periodic updates of its mobile applications.

Additionally, dealer representatives touch base with the CU’s 1,100 dealership partners. “Marketing is about building a strong reputation, which we have,” Brown said. “But we started thinking proactively about how we expand into all communities whether we have branches there or not.”

As such, the credit union plants the seed for its auto loan offerings in “emerging markets” by placing “consultative” home loan officers in cities where the lender lacks a physical presence, Brown said. At Golden 1’s new home loan centers in Campbell and Pleasant, Calif., loan officers meet with members about home loans, which naturally spark auto loan conversations.

“We try to show a consultative approach to our members,” Brown explained. “What fits a member’s needs best? We try to build that full relationship for every product — that’s how we [keep up] with the market.” Golden 1 expects to open two loan advisory offices next quarter in Southern California. “It’s a way to get down there without having to build
a whole brick and mortar,” Brown noted.

In addition, Golden 1 is keeping an eye on implementation of artificial intelligence “down the road,” Brown said. “[AI] is something we are looking at prudently,” he explained. “We can jump in the water full body, but maybe we don’t see the little shark at the bottom — that’s how we think about AI.”

In the Midwest, Forum Credit Union has felt the pressure of shrinking market share, said Dealer Division Manager Ben Wire. “What we’re hearing from our dealers is that business is good, but not as good as it has been,” he said.

As a result, the Fishers, Ind.-based credit union will adopt Dealertrack’s e-contracting tool for its 150 dealership partners by yearend. “With thinning margins, we are looking into anything we can do to keep auto loans coming in and remain profitable,” Wire said. Forum CU serves 120,000 members and anticipates originations will total $330 million by yearend.

Members versus stockholders

No matter what the lending landscape or economic environment, credit unions’ marketing and technology advances will have a singular focus.

“Credit unions want to know they are beneficial to their membership not their stockholders,” Golden 1 CU’s Brown said. “Be steady, consistent, and be there for your members — it’s what credit unions pride ourselves on. I’m not here for an investor.”

To that end, credit unions have to stay abreast of consumer preferences, like digital platforms and more personalized loan rates.

“Yes, we’re owned by our members, but at the same time: no margin, no mission,” OCCU’s Whittaker said. Credit unions have to increase market share to stay afloat for their members. “Instead of putting our profits to stockholders, we get to put it back in the form of lower rates and better product offerings for our members,” he added.

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