Auto Loans Have Been a Boon for CU Business. Will It Continue?

Each time the Fed raises interest rates, it further turns the screw on traditional banks, which must choose between raising rates and losing customers or keeping rates the same and losing money. That catch-22 has put credit unions in a tremendous position to capitalize on the opportunity.

Most banks have chosen to maintain their profits, which means their volume of auto loans has gone down. Credit unions have taken advantage and are securing more auto loans – but is it sustainable?

While interest rates have risen in the last few months, it appears we’re entering a stable period. Banks have the luxury of multiple revenue streams, and many have adjusted their strategy in regard to auto loans to focus on more lucrative revenue opportunities. In turning away loans, they’ve tightened policies for loans to protect themselves. This has created a great opening for institutions, but one they can expect will start to close as interest rates decrease and banks are able to recapture some market share.

The good news for institutions is the answer to continuing to win on auto loans is right under their nose.

Personalization Is the Key to Keeping the Good Times Rolling for CUs

Institutions are already adept at providing great customer experiences because their livelihood depends on it. Unlike banks, credit unions are not-for-profit, enabling them to focus on member satisfaction and loyalty instead of being beholden to shareholders. This includes offering lower interest rates on loans, higher savings rates and a more personalized approach to customer service for their members.

Despite the benefit of lower costs, credit unions are at a disadvantage with auto dealerships, which always go directly to banks or are captive lenders. Direct loans are the only way for credit unions to compete, which puts the onus on providing borrowers with personalized offerings. As banks have a natural advantage because of their relationships with dealerships, credit unions must keep new auto loan customers engaged.

To stave off banks and maintain market share, credit unions must adopt the technologies and capabilities of banks, in particular, advanced analytics. While banks have sophisticated analytics practices in place to make smart decisions and deliver personalized offerings, both have troves of data. To stay competitive, credit unions must seek to leverage their members’ data to better understand their needs and provide the offerings they want.

The feedback we hear from credit unions is that they don’t have the resources to deploy what larger banks do or that their data sets are too small. If credit unions fail to step up their game, the banks will be better positioned to regain market share because of their innovation. Failure of credit unions to grasp this opportunity will give the auto loan market back to banks. Today’s technology market offers analytics and advanced automation at every price point and the capability to yield precise pricing no matter the data set size. The key is to combine optimization algorithms with predictive models that enable lenders to determine optimal price points at a very granular level, even down to individual consumers.

If concerns for the cost of new technology and the volume of data available persist, there is precedent for credit unions partnering with other institutions and smaller banks that are not competitive to share analytical models between them. When the banks were being victimized by digital fraud, they used their resources to reduce those vulnerabilities. Community banks and credit unions came together quickly at that time to reduce exposure for their customers and members. Whether it was fraud protection, risk management or another challenge, time and time again we’ve seen these partnerships deliver technology solutions to their members to keep them safe – and satisfied.

One way institutions can increase the overall sophistication and speed of their pricing strategies is with real-time pricing. Credit unions can no longer use old ways of thinking and approaches to pricing. Instead, they must increase their overall agility and take advantage of powerful analytics and other innovations such as machine learning and artificial intelligence to update models, offer the most compelling prices and get them to market extremely quickly – even making changes daily.

Credit unions can use analytics to be first movers in regard to pricing strategies by:

• Quickly and proactively assessing how trends and changes in the market could potentially affect their total portfolio. This can include shifting treasury rates, aggressive competitors’ pricing, delinquency rates, car prices and other economic metrics, and should include the latest data possible.
• Developing a detailed, intelligent plan and response. In terms of pricing, this should include a highly agile pricing function (driven by the latest AI-powered pricing) that combines analytics, go-to-market strategy planning and competitive intelligence.
• Using technology to innovate the way bigger competitors are. Today’s pricing solutions offer powerful automation capabilities, which are critical for eliminating excessive internal handoffs and accelerating time to market – as well as ML and AI capabilities that use self-learning cycles to improve pricing strategies and results over time.
• Monitoring pricing performance in real-time. Ideas to consider here include real-time price deployment, dynamic A/B testing capabilities and ongoing monitoring to make the best decisions possible.

Credit unions will face a reckoning with auto loans soon. Will they be ready to deliver personalized offers to help their members or will they cede the market back to banks? Time will tell, but the power to maintain their lead remains in their hands.

Be’eri Mart is the Global Head of Banking for Earnix, a provider of intelligent insurance and banking operations based in Tel Aviv, Israel.