COVID-19 & the Emerging Path for Indirect Auto Lending

The pandemic has been life altering for the transportation industry in many ways, from the new work-from-home generation to a diminished ride-sharing industry, and now to the beginnings of a more digitally focused auto industry. In fact, what was at first a body blow for the car sales and auto finance businesses in the early days of the pandemic has instead become an opportunity for a resurgence.

Despite massive supply chain issues, auto dealership profits are hitting record highs. Consumers value vehicle ownership more than ever, which makes them willing to pay the historically high prices dictated by a shrinking pool of vehicle choices. At the same time, dealers are enjoying greater efficiencies from the increased digitization of the sales process forced on them by the pandemic, as well as lower carrying and operational costs from no longer needing to bear the overhead of keeping hundreds of vehicles in inventory. Interestingly, these inventory shortages are leading auto dealers down a path of pre-sales and even build-to-order sales, models that align well with the auto industry’s increasing shift to digital retailing.

So how will this digital shift affect indirect auto lending, particularly for tradition-bound credit unions? According to one auto dealer and a credit union leasing partner, the answer lies in making people your priority.

A Crisis Is a Terrible Thing to Waste

To quote Nobel prize-winning economist Paul Romer, “a crisis is a terrible thing to waste.” The auto industry has made the best of pandemic-driven crises, including lockdowns and inventory constraints, by changing how they conduct business. For years, auto industry innovators have pushed dealerships to move to digital retailing and to take the auto finance industry with them.

Digital retailing offers a more consumer-friendly process, and also the potential to increase efficiency and profit in what is generally a low-margin business. And dealers have long been challenged with high overhead from maintaining rows and rows of vehicles on their lots. By forcing dealers to change their habits, the pandemic arguably has pushed the industry forward by a decade or more within two years. With dealers forced into a nearly contactless model, they’re selling cars almost before they hit the ground.

Cody Carter, internet sales manager at Tustin Toyota in Southern California, one of the top five Toyota dealerships in the U.S., said that pre-pandemic “we would typically hold over 1,000 new cars on a daily basis, but when I left last night, we had six. Today, when cars arrive, 80% of them are already sold.”

As a Toyota franchise, Tustin’s inventory is based on allocation rules, but Carter can work with customers online to match them with incoming vehicles. Carter can have the vehicle pre-qualified, pre-financed and pre-sold before it arrives, all of which saves significant dealership resources. He said COVID-19 has pushed them to be far more efficient. “When the car comes in, we have printed all the paperwork, and [buyers] are in and out in 15-30 minutes.”

A recent survey of auto dealers by eLEND Solutions showed that the pandemic drove a vast majority to accelerate their digital retailing efforts; most do not plan to adjust back. Carter concurred: “I don’t think we are ever going back, you won’t see a store like ours ever holding a thousand cars and having to push as many vehicles out by offering incentives. Today, the dealer can make more money, the manufacturer will make more money and it streamlines the process for the consumer.” It’s a win for everyone.

How Can Credit Unions Be Part of This Paradigm Shift?

Where does credit union auto finance fit in this “win”? That same survey indicated that auto dealers stop short of enabling a full digital finance experience for consumers. Carter said he believes this will change and sees a more transparent future where every piece of the financial process can happen online: “Even today, consumers can see multiple different banks, and this is so important, especially when it comes to credit unions, so we can give consumers options. In the future, consumers will have more control and choice once all the banks collaborate.”

Credit unions have a big role to play in this transition because of their more personalized approach to lending, which dovetails well with an industry moving toward greater transparency and consumer control. Today, though, they typically trail behind progressive dealerships and bigger banks in digitization, partly because of their smaller size. But, Carter said, “Once credit unions catch up, and once states allow digital contracts, the move down the digital path will be much smoother.” Simply, consumer-focused technology is becoming the price of entry, and once credit unions come on board they’ll enjoy the same efficiencies and savings dealers are seeing.

For Carter, whose business is 90% leasing and works closely with CULA, the ability to offer lease programs through credit unions has been particularly significant. In the current landscape many of his customers are priced out of the market because of today’s record high prices. “Leasing makes it much more affordable and flexible,” he said. “There are very few customers a lease won’t work for. And as the market normalizes, having an alternative bank, such as a credit union, means that we can hit payments that work for our customers and gives us an edge that no one else has.”

It’s the People, People!

While an end-to-end digital path to purchase looks like the future of auto sales and finance, cars and credit unions have always been people-first businesses. Despite the progressive tech approach taken by many dealerships, people are still at the core of these businesses and the need to build strong relationships to help customers will never go away.

Jeanine Corpuz, chief lending officer for SCE Federal Credit Union ($973 million, Irwindale, Calif.), which currently serves more than 60,000 members in Southern California and Southern Nevada, agreed. A future that ensures dealerships have the same automation and access channels in credit unions that they enjoy with captive lenders and banks is important, but it still comes down to people: “Our work with dealers is based on the partnership we form with them. For us it is less about pre-selecting the deals that come in and more about a good old-fashioned relationship.”

SCE launched its leasing program with CULA in July of 2020 and, in spite of industry inventory constraints, is getting good leasing volume. “Even as some dealers are struggling with supply issues, because we have that personal relationship they want to give us more. Even in a world where we are completely digital, and can turn loan decisions around more quickly, the strength will always be in that trusted partnership.”

So, while the auto sales paradigm moves inexorably toward a more digitized model, people will always drive the business. At CULA it has been our relationships with our credit union partners and dealers – and the people they serve – that have helped us not only survive the pandemic, but thrive. As an ever-changing landscape continues to shift the industry into new ways of doing business, it’s important to remember that new technology is simply a tool for helping those who matter most: The people.

Mark Chandler is Vice President, Business Development for CULA in San Diego.