Do Indirect Auto Lending Members Stick Around?
By Xav Harrigin-Ramoutar
In the financial services ecosystem, credit unions have embarked on a journey of growth and expansion, leveraging indirect vehicle lending as a strategic pathway. This model, predicated on partnerships with auto dealerships, enables credit unions to offer competitive financing options at the point of sale, ostensibly expanding their reach and membership. However, this route, while promising in terms of growth, unveils a complex terrain of challenges that hinder the cultivation of deep, meaningful relationships with members, particularly when these members are geographically distant from the credit union’s operating footprint.
The Engine Behind Indirect Vehicle Lending
At its heart, indirect vehicle lending serves as a conduit between credit unions and potential members, facilitated by auto dealerships. This financial matchmaking has propelled credit unions to notable heights in terms of loan portfolio growth. Yet, the initial connection made at the dealership rather than with the credit union itself introduces a significant gap in the relationship, often relegating the credit union to a secondary or tertiary role in the borrower’s financial ecosystem.
The Scale of the Journey and Its Implications
In 2023, a collective of 1,100 credit unions within the CUDL network, which boasts a membership of 64 million, reports successfully financing vehicle loans totaling $46.7 billion. Despite these impressive figures, the probability of new members from indirect auto lending becoming engaged muti-product members remains low. This shallow relationship underscores the limitations of indirect lending as a strategy fully aligned with credit unions’ missions to foster community well-being and meaningful member relationships.
Financial Implications and Strategic Misalignment
The economic landscape of indirect lending, characterized by slim margins and dealer reserve fees that can range from 1-3%, necessitates a thorough evaluation of the practice’s sustainability and alignment with credit unions’ foundational missions. The challenge of converting indirect borrowers into engaged members represents not only a potential loss in revenue but also dilutes the very essence of credit unions’ member-centric approach.
Regulatory and Risk Management Considerations
Beyond the direct financial implications, indirect vehicle lending introduces a layer of regulatory and risk management complexities. Credit unions must navigate the regulatory landscape, ensuring compliance while managing the inherent risks associated with lending practices that extend beyond their immediate geographic and operational boundaries. These considerations require robust risk management strategies to safeguard against potential delinquencies and defaults that could stem from a less personalized lending approach.
Navigating Forward: A Call for Strategic Reevaluation
Faced with these multifaceted challenges, credit unions are called upon to critically reassess the role of indirect vehicle lending within their strategic frameworks. This reassessment emphasizes the need for innovative engagement strategies and technological solutions that bridge the physical and relational gaps between credit unions and their members. By adopting such strategies, credit unions can ensure their growth initiatives not only reach wider audiences but also foster deeper, more meaningful connections with members, in line with their core values and mission.
Embracing Technology and Personalization
The future of indirect vehicle lending for credit unions may lie in the strategic integration of technology and personalized member services. Digital platforms and data analytics can offer insights into member behaviors and preferences, enabling credit unions to tailor their services and communications effectively. Furthermore, personalized financial education and advisory services could help transform the initial transactional relationship into a more substantial, engaged membership.
Strengthening Community Ties and Member Education
Enhancing member engagement in the context of indirect lending also involves reinforcing the credit union’s role within the community and its commitment to member education. By actively promoting financial literacy and offering guidance on a range of financial services beyond auto loans, credit unions can underscore their value proposition as trusted financial partners.
Navigating Forward
The journey through the paradoxical landscape of indirect vehicle lending highlights a critical balancing act for credit unions: pursuing growth through loan portfolio expansion while adhering to their mission of fostering member engagement and supporting community well-being. As the financial services sector continues to evolve, credit unions must navigate this terrain with caution and strategic foresight. By aligning their growth strategies with their commitment to member interests, credit unions can chart a course toward long-term success, marked by financial stability and enriched member relationships.
One alternative approach to new member growth starts with a thorough analysis of lending opportunities within the credit union’s branch footprint to ensure that new members have regular contact with the credit union’s brand (e.g. they live a mile from a branch). A free analysis of near-branch lending opportunities, based on 230MM credit records updated weekly is available from Micronotes here: https://micronotes.ai/growth-opportunities-analysis/. Near-branch new members are more likely to deepen their relationship with the credit union, over time, than members brought in through indirect lending from another state.
