Indirect lending has been a critical component to the credit union industries’ domination of the auto lending market. Credit unions with indirect programs have experienced consistent double digit loan growth with a rich supply of new members who may have otherwise financed with a bank or captive lender. But are these relationships profitable?
According to a 2023 MarketWatch report, over 53% of auto lending is being done at the dealership. These numbers have many credit unions participating in the indirect market. It’s likely your credit union is a big indirect lender, and there are a few reasons for that. First, lending is the lifeblood of any credit union. Indirect lending provides a steady stream of lending opportunities that the credit union can turn up or down based on need. Second, with over half of membership financing at the dealership, not participating may mean missing the opportunity of capturing their own membership’s loan business. Third, it can provide an opportunity to get in front of potential new primary members.
If your credit union does not participate in indirect lending, they are indeed missing out on their members’ business. These credit unions better have an effective auto loan recapture marketing and sales strategy. But that’s a different topic for another article.
Indirect lending comes with some challenges and problems
1: It is expensive. With sales kickbacks of 1% to 2% of the loan amount and the average financed balance reaching around $35,000, the credit union could pay as much as $700 for each deal. With the added expense of running an indirect program and slim margins, many indirect loans are not profitable until after year one.
2: The average hold time for an auto loan is 22 to 26 months, meaning the credit union will only have between 8 to 12 months of profitability. Far lower than direct lending initiatives.
3: It is difficult to convert indirect members into primary financial relationships. These members did not choose the credit union to finance their loan, in many instances they didn’t even know what institution provided the financing (one of the reasons first payment default is so high with indirect loans). Some studies estimate that 98% of new, indirect members close their account or allow it to go dormant after the loan is paid off. In these situations, the credit union is not able to recoup the acquisition cost.
With account profitability so low and the member relationship so short, I am surprised at how few credit unions are effectively engaging their indirect members with a value-adding, onboarding strategy.
Onboarding of new indirect auto and RV loans is the critical step to shortening the time to profitability and retaining those new indirect relationships. When I first started in the credit union outbound call center in 2006 (yes that seems like the stone age now), my primary responsibility was to onboard new indirect loans. Our credit union leaders saw the onboarding call as an important process to reduce first payment defaults by contacting members before their payments were due, and to create value in the minds of those new members with a personalized welcome phone call. They also saw a chance to capture profitability and loyalty through cross-sell opportunities.
Indirect loans, specifically new indirect members, are a treasure trove of cross-sell potential. What richer opportunity could there be? You have a new member, a new account, and all the financial information you could ever need and want to sell additional products and services. You have the new member’s application information, employment information, credit information, and, in some cases, asset information. You also have a new loan with a variety of products and services you can offer such as insurance, automatic payments, and online and mobile banking. There should be no reason why a credit union couldn’t see high profitability right away with an effective indirect onboarding process.
Here are three tips on how to do this:
First, give your indirect onboarding process a home. The indirect onboarding process is best owned by a centralized location like an outbound call center. This makes it easy to monitor progress, train, and track. This isn’t to say that success can’t be seen at the branch level, it’s just a little more time consuming there. Additionally, centralizing the indirect onboarding means you have tightly controlled systems with simplified tracking and reporting enabling you to set clear goals and measure progress towards those goals. Also, on a dedicated outbound team your credit union can hire true salespeople with a single, proactive sales focus.
Second, provide specific training for employees. Give the employees access to the indirect lending system and show them how to find critical information. Give them specific phone training on how to up-sell auto pay, online and mobile relationships, direct deposit, extended warranty, payment protection insurance, and GAP with ADR. (Or is that ADR with GAP?) Train them how to recapture loans and deposits, cross-sell credit cards, and introduce additional products and services such as checking and home equity loans.
Third, measure and track success. The right strategy means a credit union will not be making a token effort with their indirect onboarding calls. They will be measuring calls made, contacts made, and products and services offered and sold. They will then use this information to coach, mentor, and improve employee performance with the goal of increasing profitability and loyalty by adding value to the members’ financial lives.
So then, what are the best onboarding strategies for indirect loans? And what are the best cross-sell opportunities?
Most credit union senior leaders feel that unless the onboarding strategy can produce primary financial relationships with active checking accounts and deposits, it is not worth the effort. This is grossly misguided. In fact, this focus is exactly opposite from what the onboarding strategy should be.
To clarify, I am referring to brand new members who finance with the credit union through the dealership in this section. However, many of the points I am making could certainly apply to existing members.
An effective indirect onboarding strategy should focus on welcoming and introducing the new member to the credit union. In that welcome phone call, which should take place within two weeks of the loan funding date, the salesperson should:
- Thank the new member for their business.
- Review their new loan, payment, and set up automatic payment.
- Set up online and mobile banking.
- Discuss assurance products that the dealership did not sell such as GAP, Extended Warranty, and Payment Protection.
Next is the opportunity to cross-sell additional credit union products and services. In this order, the salesperson should:
- Discuss any loan recapture opportunities and capture them if possible.
- Sell the credit union’s credit card as an “add-on” product.
- Identify and sell home equity products and start the application to see what the credit union can “qualify them for.”
- Review deposit and check promotions and identify if an opportunity exists.
Checking accounts and deposits is the last step on the cross-sell list because it is the least likely to yield results. It doesn’t mean it should be skipped, but it is much more probable that the salesperson is going to sell one of the other loan opportunities.
Recapturing a loan provides additional, instant revenue for the credit union and invites this new member to increase and further their relationship with the credit union in the future.
Selling a credit card or home equity loan is also ideal because it captures a long-term relationship. Even when the auto loan is paid off, with a credit card or home equity line on the account the relationship continues on. It is also profitable when the member actively uses those products, so adoption is critical.
Creating an effective indirect onboarding strategy isn’t necessarily easy, but it is necessary. If a credit union has an indirect lending program but does not have an effective sales-focused onboarding strategy being executed by a trained sales team, it is losing out on significant opportunity and missing the point of indirect lending…ouch.
If your credit union is running an indirect lending program, it must have an effective onboarding initiative tied to it. This onboarding initiative cannot be haphazardly put together. It needs to be run by trained salespeople and sales leaders. The performance needs to be tracked and measured, and it needs to have the proper focus and vision of excellence.
When this is in place, the indirect onboarding program will welcome new members to the credit union and see them as a valued financial partner. The salesperson will also engage the new members in upselling profitable ancillary products and services, capture additional loan business, and sell relationship solidifying products and services which will keep them engaged even after the loan is paid off.
Without an effective indirect onboarding initiative, any credit union’s indirect lending program is missing out on its full potential. The credit union is also not likely to meet the originally intended purpose and justified existence of an indirect program, which is to attract new, profitable, engaged members for the credit union. That being the case, a credit union must consider this question, should it have an indirect program without an onboarding initiative?
