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This is bonus coverage from “The Pricing Spectrum” in the March 2016 issue of Credit Union Management magazine.
Like executives at many credit unions, the team at Ent likes to recognize milestones. A key record at the $4.3 billion Colorado Springs credit union serving 240,000 members has been the number of consecutive business days funding more than $1 million in indirect car loans. Up to the spring of 2014, the longest streak was nine days.
In July 2014, the credit union launched an effort to win business from big direct lenders in its market area. “These lenders were offering 1.99 percent for 60 months. Our rate was close to a percent higher than that,” recounts CUES member Bill Vogeney, senior EVP/lending and finance. “We saw the opportunity to match some of those rates, when needed, but we couldn’t charge 1.99 percent and pay the normal dealer fee.”
Fortunately, some of Ent’s higher-volume dealers were willing to accept a lower flat rate in exchange for being able to match the competition. “The dealers don’t like it either when customers come in and say, ‘I’m going to go through USAA or Navy Fed for my car loan,’” Vogeney says. “We’re in a big military town, so those types of national lenders do big business here.”
And so Ent began another series of consecutive days booking more than $1 million in car loans when it introduced its low rate/low dealer fee combo—a streak that was still going strong 17 months later in mid-December 2015 even though the rate had inched up to 2.25 percent.
Using a marginal pricing model he developed, Vogeney had calculated that the credit union would need to generate at least a 30 percent increase in indirect lending volume to make money on these low-rate loans. Actual performance was even higher, up from an average of $20 million to $21 million in monthly loan volume to $35 million and, in a couple months, doubling typical volume to $40 million. The credit union’s market share of auto loans in its home base increased 60 percent—to about 25 percent of vehicle loans issued in El Paso County in some months.
Vogeney attributes the success of this indirect initiative—its “secret sauce”—to a successful combination of low rates and dealer buy-in. “The whole was bigger than the sum of the parts,” he says. “For one, the dealers really appreciated that we were willing to try something a little out of the box to help them out.
“I’m a big believer in business models and value propositions,” he adds. “If your value proposition is that you’ll buy paper, there’s no differentiation because hundreds of lenders will do that. You need to be willing to understand the business and work collaboratively with the dealers.”
Typically, the indirect business is not driven by offering the best rates, but by being able to structure loans and work well with dealers, Vogeney notes. Ent does not promote direct auto lending, instead referring members to its partner dealers.
“With this rate offer, dealers felt like we were trying to do something to help them. I think we started getting some of the business they were losing to direct lenders, but also some business dealers might have been sending to other lenders,” he says.
A second attribute of the initiative was that it has generated enough volume to produce higher earnings, or sufficient marginal income to make the lower rates worthwhile. With such strong competition, the margins on auto loans are tight, with lenders typically working hard to eke out an additional 10 to 15 basis points on loans. The marginal pricing model indicated that a loss of 25 basis points by lowering rates would be offset by a 30 percent or more increase in volume, and that has proved to be the case, Vogeney says. For 2015, the indirect channel brought in an estimated additional $650,000 in interest income over the previous year.
A final factor powering the profitability of the program has been an increase in the average life of loan by four or five months, which results in amortizing the dealer fee over a longer period. Members are less likely to find an option to refinance such a low-rate loan.
“The longer the life of the loan, the smaller the impact of that dealer fee,” Vogeney notes. “While our gross yield went down close to 20 basis points, the impact to average life was such that dealer fees amortized over the life of the loan reduced that to 10 basis points and in some cases put us in positive territory.”
Karen Bankston is the proprietress of Precision Prose and a longtime credit union writer.
