Auto lending: Stay ahead of the competition using data

A number of years back, there was a movie titled “The Perfect Storm,” which told the story of a fishing vessel that was caught in the middle of a disastrous storm created when a number of rare conditions all occurred at the same time. Without trying to sound too dramatic, credit unions are currently facing a perfect storm as it relates to auto lending: rising inflation, supply challenges and increased competition. New auto loan volumes are down, leaving many credit unions wondering how to help drive a return to normal.

New-car loans at credit unions fell by $5 billion, or 3.4%, in the first quarter from a year earlier, according to data recently released by the National Credit Union Administration.

Unlike the outcome in the movie referenced above (spoiler alert), all hope isn’t lost and there is an opportunity for credit unions to change the trajectory and find smooth sailing again. To win in this competitive market, you’ve got to stay one step ahead of your competition.

Macroeconomic Challenges Impacting Consumer Behavior

In pure economic terms, we have entered an inflationary period, and new auto loan rates are suffering as a result. Consumer purchasing power is declining due to rising prices and issues with supply chains that have had a negative effect on inventory levels. There is some debate regarding how long this inflationary period will last, but it’s clear we are feeling the consequences right now.

Supply chain disruptions resulting from the global pandemic in 2020, particularly in the area of computer chips, have forced slowdowns in auto manufacturing. With lower supply, free markets naturally push prices higher. Prices on new cars have skyrocketed, driving consumers to keep their cars longer or resort in larger numbers to buying a used car.

In a recent article on CNN, “the average new car price hit a record $38,255 in May…up 12% from the same period a year ago. About two-thirds of car buyers paid within 5% of the sticker price in May, with some even paying above sticker.” In the auto lending market, the impact of the economic conditions is fewer loans on new vehicles, but rising numbers of used auto loans. The good news is that overall, there are still loans out there, but tactics have to be adjusted if credit unions want to continue to capture them.

Increasing Competition Putting a Premium on Relevance

The economy isn’t the only issue. Increased competition from new market entrants including tech companies that want to get into banking (Google, Amazon, Amex), neobanks (Chime, Current, Varo), niche banks (Greenwood Bank, Majority, Laurel Road), and even retail giants such as Wal-Mart, mean that it’s getting harder to capture the attention of the consumer. While it’s true that a large number of auto loans originated by credit unions are indirect through a dealership, the number of alternatives in the banking industry is putting everyone on notice. If you are a financial institution trying to make an offer and are not in the right place with the best offer at the right time, you are likely losing that new account to your competition.

Data is Your Secret Weapon

While things look bleak in the lending market, credit unions have a secret weapon…data.  Here are four strategies that you can employ right now to stay ahead of the competition and in front of the consumer.

1. Use data to be smarter about targeting relevant offers

The credit unions that are having the most success competing…and winning…in the battle for new members and accounts are the ones who are leveraging data to make informed decisions.  Understanding which of your members are likely candidates for a new car, or even a “new” used car, already puts you ahead of your competition. How do you know which of your members may fit these categories? Start with analyzing their spend data.

Knowing which members are spending a significant amount on maintenance can indicate those who may be thinking it’s time for a new vehicle. New parents may be looking for an upgrade to a larger vehicle. And a member who paid off an existing vehicle loan may be looking for a new one. “Things get more interesting when credit unions layer in geo data to their marketing campaigns,” says Nate Shahan, Chief Product Officer for Segmint. Geofence data is an asset available to credit unions to refine an audience within certain proximities/demographics. In this case, those candidates visiting car dealerships can be targeted with hyper-local messaging across a myriad of devices and channels with exact timing, making the relevance of this tactic a powerful advantage. Credit unions can even geofence their own branch locations to show conversions and lift directly attributable to a campaign. These are just examples of the types of lending decisions you can make when leveraging data.

2. Timing is everything

In banking, as in most things in life, timing is everything. That’s why you need to do more than just understand which members may be candidates for a loan. You need to be there when they are ready, and sometimes, just give them a gentle nudge. One tactic to employ is to engage the members most likely to need a loan with a pre-approval. Present the offer to them in the channel in which they spend most of their time. Web traffic is up significantly since early 2020 with so many more people working from home. Leveraging modern marketing techniques, married with your first-party data, can empower your credit union to target users as they shop, read the news, or make a grocery list online. Make it easy for them to do business with you, and to execute on the transaction when the time is right. That means not only connecting with members where they are, but making sure you have the tools to decision loan applications in real-time, with no branch visit required.

3. Get creative with your decisions

So much has changed in the last 16 months in terms of consumer finances, that the old models used to make lending decisions are no longer applicable. They were based on data that is not relevant in many cases, and far too out-of-date to be useful today. This means that in order to identify the risk profile of an individual consumer, there may be a need to get creative with both the models used to make decisions, and the underlying data that feeds them. Consider augmenting traditional credit scores with non-traditional data such as the consistency with which they pay their bills, their presence of hardship deposits, and utility payments. This will provide a view of the consumer that goes beyond FICO, which can be used to help members with a less than perfect credit score.

4. Don’t forget to network

In business we understand the value of networking. Shift resources to focus on building relationships with more dealerships in an effort to capture a greater percentage of the indirect loans that are available. Now that the economy is opening up, pitch opportunities at which your institution can be part of a dealership’s upcoming event schedule. This is a specific opportunity for engagement directly with the consumer – make it easy for them to apply for a loan, whether it be digitally or on the spot. Don’t forget about those Powersports retailers – this is an established market with significant dollars spent providing opportunities for lending.

Finally, recent data shows that while new auto loan volumes are down, used auto loan volumes are up. Now is a great time to establish new relationships with used auto dealerships in your area. Effort spent in building your network today can pay big dividends in the future and help diversify your lending portfolios.

Change the Trajectory

Consumer behavior can shift as a result of many variables outside the FI’s control, including macroeconomic forces like the inflation we’re currently seeing. These shifts can wreak havoc on operations, and create challenges maintaining loan and deposit volumes.  Your competition is struggling to keep up too, but this is the time to double down and prevent them from stealing wallet share. Use data – the rich transaction data you already possess – to weather the storm and make the strategic business decisions that will continue to drive revenue and growth within your institution.  

Segmint, Inc, is a provider of an industry leading data insights platform and marketing automation platform, best known for the speed, scale, and accuracy of our Merchant Payment Cleansing solution.