By Ray Birch
SCOTTSDALE, Ariz.—Is it time for credit unions to downplay indirect auto lending and play up direct lending? One expert thinks so.
Cornerstone Advisors Senior Director Sam Kilmer believes it is time for CUs to shift strategies, and claims many large, aggressive-growth credit unions are already turning their ships in that direction.
The big reasons, according to Kilmer, the indirect auto pipeline won’t be as big as it once was and credit unions need to turn more members into profitable members.
“The direct relationship is looking more attractive to credit unions now because the indirect relationship is changing,” Kilmer said. “First, as has always been the case, the indirect loan generally does not make as much for the credit union as the direct loan because you have to pay the dealer for the business. But even bigger, the indirect loan does not allow you to earn as much over time with the new member because they are there just for the auto loan, and often nothing else.”
As CUToday.info has reported, unprofitable members have become an even bigger issue for credit unions. A Raddon report this year found that on average, only 29.8% of credit union members are profitable, down from 33.9% two years ago.
“You're not dealing directly with the member, so you don't get the opportunity to create what you might call a ‘whole member,’” said Kilmer. “Sure, you get the basic share account, but usually not more, as they are with you for the car loan and nothing else. These members don’t walk into the credit union much, and they don’t step through your doors looking for a checking account.”
The direct loan, on the other hand, offers many more opportunities to build a relationship, Kilmer said.
“You make a loan directly to a member and you have a better chance of your brand being top of mind, and in case of credit cards, top of wallet,” Kilmer said. “And you get a member who is loyal to the credit union because they learn the value you deliver, and they are not just with you because you offer the lowest priced auto loan. You can develop this relationship, and it is very difficult to do the same with an indirect relationship, as we know.”
Sam Kilmer
The Pipeline Empties
The other critical reason to focus on direct lending today, according to Kilmer, is that the indirect auto loan pipeline is not as full as it once was.
Kilmer said that might be due in part to the pandemic and all of the problems that have been presented to automakers during the health crisis, including a shortage of microchips, but more important is the significant volume of business indirect that filled the pipeline a few years ago was due to some of the very large banks exiting the indirect auto lending space at that time.
“That opened up volume for the local credit unions,” he said.
That indirect business from auto lending is not tapping the brakes, Kilmer contended. Moreover, there are emerging players in the indirect space, including online car buying.
One CU Changes Gears
“I won’t name the credit union, but I know of a very large CU that has totally changed its approach to auto lending, moving completely away from indirect,” said Kilmer. “The CEO saw the handwriting on the wall and he did not like how indirect lending left too much to chance. He said he did not like relying on everyone else to bring business to the credit union. He said he was going to refashion the credit union around direct lending and he has done it, and the credit union is very successful.”
Kilmer said that credit union is not in the lane by itself.
“The higher-growth, ambitious credit unions want to get really good at developing business, what you might call lead generation among members, and then close that business, which is very difficult to do with indirect members because they really don't view the credit union as being their primary financial institution,” said Kilmer.
It’s Fine, But…
Despite all that, Kilmer said he does not advise any credit union turn its back on indirect lending.
“These loans are perfectly fine to offer,” he said. “However, it's difficult to build a brand, establish value with members and build relationships with them. We have some clients that do so much indirect lending they have to collateralize the loans and sell them off. But the question is, how good are you at direct lending? When you do a direct loan, you get so much more information on a member, much more data, which you can use to build the relationship. Again, it’s not so much about getting out of indirect as much as it is getting better at direct.”