Regardless of the industry, there comes a time when certain business practices are followed even though they aren’t the most efficient or most profitable. The legendary Rear Admiral Grace Murray Hopper, a pioneer of computer programming, used to say that the most dangerous phrase in any language is, “We’ve always done it this way.”
The auto lending industry is no exception to this phenomenon. Within our industry, certain accepted practices have become part and parcel to our work—even if they impede potential revenue.
One of these practices is especially clear given the vast number of subprime lenders who send letters at the end of the loan term, which invite borrowers to either extend their loans or purchase a new vehicle. Although it may appear to require less work, sending these notices through the mail is a counterproductive and extremely ineffective way of generating more business or building a relationship with your borrowers.
South Florida-based fintech company Aclaró has developed an innovative, advanced method of avoiding this entire process. Instead of sending out thousands of letters with the hope that customers will open them and follow up with the lender, Aclaró has made the process much simpler and easier.
As in other businesses, customer retention is extremely important in the auto lending space. The general principle holds that it is much cheaper to obtain business from a current customer than generate business from a new customer. In fact, a rule of thumb is that it costs five times as much to attract a new customer than keep an existing one.
Because of this, it is critical to increase retention rates within the automotive subprime industry. Sending letters to borrowers at the end of the loan term is a step in the right direction, but it is an archaic and inefficient way of finding repeat business. Yes, this marketing strategy might appear cheap since the only up-front costs are postage and printing. However, this cheap strategy often leads to unsatisfactory and costly results. An auto lender’s follow-up letter essentially is fighting for attention and often lost among every other piece of mail in a borrower’s mailbox. More so, even if the borrower opens the letter, lenders have no way of knowing whether the borrower immediately tossed the letter out or took some time to contemplate a call to that financial institution.
In addition, lenders are sending the same generic notice or follow-up to each of their borrowers. While this may seem more efficient on a larger scale, not every borrower is the same. Each has their own individual needs and wants and, by sending a mass mailer, lenders are foregoing a chance to treat each borrower as an individual.
Ultimately, we are living in a world where digital technologies are becoming a prerequisite for succeeding in any type of business. And while the auto lending industry does use technology for things like evaluating the risk within their portfolios, lenders are missing out on massive opportunities to optimize these technologies to increase customer retention.
Aclaró noticed these inefficiencies in the auto lending market and developed a platform to correct them by offering the first and only machine learning system for subprime lenders. As part of this system, Aclaró predicts risk and helps lenders complete the loan lead lifecycle to help increase their customer retention rate. From Aclaró’s Nexus Score to the new Aclaró AutoMarket, the company’s many tools have been built to help subprime lenders consistently generate business from their current customers.
Moving beyond letters
Instead of sending out a mass mailer and hoping for positive responses, auto lenders can use the alternative data developed by Aclaró to present compelling, personalized offers to current borrowers. This intense customization undoubtedly increases the odds of making further sales to those current borrowers. Lenders who utilize Aclaró’s ES software can offer lower rates to those customers who qualify via a machine-predicted low propensity of default, even though this lower risk is not indicated in the traditional credit score.
To put it simply, customer retention is an important key performance indicator in the auto loan market, yet it is often overlooked and undervalued. While a lender may think that letters are the best way to generate new business from current borrowers, they are archaic and inefficient.
Instead, auto lenders who apply the tools offered by Aclaró can leverage cutting-edge technology that is designed to address this specific task, putting the lenders in a much better position to increase the number of returning borrowers.
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