When Car Ownership No Longer Equals Adulting

When “American Graffiti” opened in theaters in the summer of 1973, many moviegoers thought it was novel that the entire plot took place within a span of 24 hours, but the fact that it occurred almost entirely in and around cars was entirely expected.

The movie was a tribute to teen culture and their appetite for freedom in 1962 America, but it was just as much a celebration of the iconic role of cars in that decade – then barely 60 years after they had appeared on the transportation scene.

The cruising scene depicted in the movie continued for decades, especially in small towns where the route might be just a few congested blocks on a Saturday night.

Cars and individual car ownership still dominate American transportation, and lending for them is one of the largest portions of credit union portfolios and the most common gateway for new members.

As of Nov. 30, credit unions held $370.5 billion in car loans, accounting for 35% of their total loan portfolio. Moreover, car loans are one of the most common ways credit unions attract new members.

But there are signs that the automotive age is, if not ending, entering a profoundly new era.

Streetcars, the first enabler of the American suburb, were scrapped and their routes paved over for cars after World War  II. But New Orleans, La., has begun expanding them, spending $75 million in recent years to add lines on Rampart Street and Loyola Avenue.

Electric cars, once seen as dowdy badges of environmental virtue, are giving way to being perceived as conspicuous displays of consumption – even eye candy. Last November, Germany’s minister for economic affairs, Peter Altmaier, asked rhetorically when German automakers BMW, Daimler and Volkswagen would build an electric car “half as sexy as a Tesla.”

The Filene Research Institute published a report last summer that laid out the trends arguing for lower levels of car lending to individuals in future decades as the use of autonomous vehicles rises. The report, “Consumer Insights on Autonomous Vehicles as an Impending Market Disruption,” identified three broad trends that will diminish the iconic role of the automobile in our lives:

• Rising ambivalence about individual car ownership;
• Improving technologies for enabling autonomous vehicles; and
• A changing vision for the rationale for electric vehicles.

Evidence of the ambivalence includes the continued rise of leasing and decline of driver’s licenses. The percentage of people ages 16 to 44 with a driver’s license has been dwindling since 1983.

“Whether you’re talking about autonomous vehicles or not, fewer people are driving, and that still has a huge impact on credit unions when 86% of new cars purchased are through a loan and 35% of credit union loans are through cars,” Ryan Foss, managing director of innovation for Filene, said.

Filene and Long Island, N.Y.’s Bethpage Federal Credit Union ($8.1 billion in assets, 371,890 members) sponsored a day-long seminar in New York City last summer that drew about 65 managers from more than 20 credit unions to start considering the implications of a shift to autonomous vehicles.

Speakers included Sudha Jamthe, a Stanford University business professor and autonomous vehicle expert, Corey Ershow, Lyft’s transportation policy manager, and Brian Hamilton, who runs the Innovation Lab for CU Direct, an Ontario, Calif.-based CUSO specializing in online lending technology.

The goal was to spur attendees to envision practices well outside the box of their current lending, Foss said. “Not necessarily problem-solving around the future, but just getting credit unions thinking about it.”

Foss, a father of teenagers, said the surge in popularity of ride-hailing apps has completely changed the conversation about alcohol. “Kids don’t even have a car, so they’re not going to be driving home from a party. And most of their friends don’t have a car either, they all just Uber or Lyft to places.”

Foss continued, “Do I need to have that conversation around alcohol with them? Of course. But it’s completely different. It was centered around drinking and driving when I was a kid, and now it’s just about making smart decisions.”

The divide between millennials (born from 1981 to 1996) and Generation Z (born after 1996) is shown vividly in “Mary Poppins for Adults,” a CollegeHumor video posted on YouTube in December (and, no, it’s just PG-13).

In the skit, three college students summon Mary Poppins, who arrives surprised at the age of her charges. They explain that they’re “terrible at adulting.”

“Adulting?” Mary Poppins asks.

“Yeah,” one of the guys says, “Doing grown-up stuff like going to the doctor, cooking, paying taxes …”

“Cars,” the gal says absently as she stares through a magnifying glass she has pulled from Poppins’ bag.

“Cars?” Poppins asks. “Just the concept of cars?”

The young folks nod in agreement.

“Yes, I do see that you need my help.”

When Todd Harris, president/CEO of Technology Credit Union ($2.7 billion in assets, 107,532 members), talks with new employees, part of his stump speech is telling them to recognize change, but not fear it. “We look at disruption in two ways: How do we manage the risk of that disruption, and what’s the opportunity in that disruption?”

Harris can see signs of change in traffic around the bicycle-sharing racks within view of his corner office in San Jose, Calif.

Picking up and dropping off bicycles and using a smartphone to hail a ride show that the next generation of credit union members is adopting radically different approaches to getting around and meeting other needs. But those trends aren’t showing up yet in car loan volume.

“That day is coming, and it will probably come sooner in the Silicon Valley than in other markets,” Harris said.

One trend Harris is watching is the rise of electric cars, which is not surprising since Tech CU’s membership includes Tesla employees.

Electric cars are cheaper to operate than cars powered by internal combustion engines. Right now, their adoption is being hindered mainly by their sticker price, Harris said.

“Electric cars are coming, and they’re coming fast,” Harris said. “The point where you see the cost of acquisition of an electric car become materially cheaper than the equivalent internal combustion engine car, then I think you’ll see a big shift. I don’t know if that’s two, three, five or 10 years away, but that inflection point is coming because the cost of manufacturing electric cars is getting cheaper and cheaper.”

Because electric cars have fewer moving parts, they are more dependable and will last longer than gasoline- or diesel-powered cars. That in turn could affect loan terms.

“If the current loan length for a new car is seven years, it might stretch to nine or 10 years for electric cars,” he said. “That will materially change the auto lending market because those cars will have longer lives and you will see a general slowdown in auto lending.”

The rise in autonomous vehicles is likely to mean fewer individuals buying cars, and more large fleet purchases by companies like Uber, Lyft or others yet to be imagined.

Harris said one way credit unions can prepare is to encourage CUSOs like CU Direct, which operates CUDL, to negotiate with fleet purchasers, perhaps by creating consortiums of ready credit union lenders to bulk up and spread the risk.

And, as always, credit unions should be following disruptive trends for opportunities to meet emerging needs of their members. That’s one of the reasons Tech CU expanded its lending to homeowners installing solar energy systems.

“We realized auto loans will be waning at some point,” Harris said. “We wanted to stay committed to that marketplace, but we wanted to have more options.”