By Ray Birch
LOMBARD, Ill.—Credit unions face a period of unprecedented change in auto lending and their growing reliance on indirect is among the issues they will need to address, according to one expert.
Raddon is concerned that while indirect lending has certainly helped credit unions gain a larger share of the auto lending market—as industry data shows CUs are closing in on banks—the model where the consumer goes to the dealer to buy a car and receive financing is changing.
The evolution is being driven by an emerging Generation Z, on which Raddon has conducted new research it reports credit unions will find fascinating and insightful. The company plans to host an inaugural Raddon Research Conference Nov. 6-8 at the Hyatt Regency in Chicago. Additional coverage can be found here.
Bill Handel, VP of research and product development, said Raddon is concerned about credit unions’ growing reliance on indirect, and that the big numbers indirect is generating may keep many CUs from paying close attention to the changing car buying market.
“We do see this heavy reliance on indirect as a potential liability down the road for credit unions,” said Handel. “It’s something they really need to begin paying attention to now.”
Handel emphasized a process familiar to many credit unions and their members is evolving.
“We are beginning to see shifts in consumer car-buying behaviors,” said Handel, adding that car sales in general have been declining from their record levels. “In the historical model you walk into dealership, the dealer does a full court press, and you buy the car and get financing there the same day.”
Indirect Relationships Growing
Handel emphasized that credit unions in recent years have seen significant value in boosting their indirect relationships, noting that among Raddon client CUs indirect lending last year grew by 25% while direct portfolios increased by only 9%.
“Credit unions realized they could not separate the car buying from the car financing process, so more have gone to indirect,” said Handel. “So what happens when the younger buyers start buying their cars over their smartphones, like with Carvana? Just like the credit unions could not separate the car buying and car financing process at the dealership, will they be able to separate the car buying and car financing that will happen over the phone?”
Bill Handel, Raddon
He said such behavioral shifts could even threaten the future of dealerships, as they may become more warehousing points for cars than sales locations.
Handel said these kinds of behavioral shifts are real challenges and threats to credit union auto loan portfolios, especially as Gen Z emerges.
“They are truly the first digital demographic, more so than Millennials,” Handel said. “The notion of car shopping at the dealership is not engrained in Gen Z. Their impact on auto lending could be very profound.”
Handel pointed to an interesting statistic from the Federal Highway Administration that shows in 1985 44% of all 16-year-olds were licensed drivers. By 2015, that percentage had fallen to 25%.
“Almost cut in half,” said Handel.
What that illustrates, he said, is the notion of car ownership is not engrained in the younger generations—not like it is with Boomers and Gen X.
Handel also addressed how driverless cars are emerging, as well as car services, where someone does not buy a car but pays a dealership a monthly fee to provide them with cars to drive as needed.
Sky Not Falling
Handel stressed that the “sky is not falling,” but that since auto lending represents such a big part of credit union portfolios—35% to 40%—it’s certainly time to look down the road.
“Inside of five years we will begin to see a number of these behavioral shifts and in ten years these habits will be clearly proven out,” said Handel.
The most important step CUs should take today, insisted Handel, is to begin to diversify the loan portfolio away from such a large dependence on auto lending, especially indirect.
“Move more into equity lending, business lending, and find more areas in which to build niches,” advised Handel. “That would be prudent.”
It’s also time to begin paying attention to the shifts in consumer car buying and financing, and look for ways for the credit union to interject itself into these new processes, he said.
“Don’t just be involved with the indirect model because longer term it will provide less loan volume,” said Handel. “As I said, this won’t be a dramatic shift, but if you don’t pay attention to this change it will slowly have a negative effect on your credit union. So pay attention to this now. Think about new ways of lending—coupling with apps, etc.—that will allow you to stay in the game. And, longer term, think about how you can diversify your portfolio so you don’t have as much reliance on vehicle lending.”