Don’t Allow Your Indirect Auto Lending Program to Become “Commoditized”
by. Bill Vogeney
Indirect lending has turned into one of those commodity products, where features and benefits are the same and credit unions eventually can only compete on price, much like “real’ commodities like soybeans and corn. Unfortunately, those credit unions involved in Indirect are operating in an era of insane pricing brought upon by:
- A lack of alternative investments for credit unions.
- A lack of alternative investments for institutional investors; this has driven down yields on auto backed securities (ABS), allowing for very low interest rates offered by non-depository lenders.
- Many lenders again competing for loans after severely curtailing their business during the financial crisis; thus, they’re engaged in market share pricing to recapture lost volume.
- Strong auto loan performance over the last 24 months; it’s as if no one in the business remembers that losses can quickly escalate in the auto market.
Let me get this off my chest: price (low rates) is not a sustainable competitive advantage. How much business you get from a dealership has really very little to do with your rates, at least in the long term (beyond three to six months). I hate it when I hear a credit union talking about “how much paper they’re buying.” If that’s your value proposition, that you’re buying paper from the dealer, you don’t stand much of a chance in sustaining loan volume or quality. If you can’t offer a somewhat unique set of benefits to a dealer, you likely will compete solely on price or liberal credit quality. That being said, how can you avoid the commoditization process?
- Avoid trying to copy someone else’s program. This unfortunately happens a lot in credit union land. Credit unions try to match flat fees, special underwriting programs, and rate promotions in order to earn business. Virtually every leader in a given industry or line of business is there not by copying the competition, but by innovation and differentiation of their product or services.