The anatomy of a successful organic loan-growth strategy

Organic loan growth is a popular phrase these days. Today, an increasing number of credit unions are looking for ways to attract more loans directly. Direct loan growth (vs. indirect) can be more attractive, cutting out the middle man to improve yields, and leveraging direct member contact to increase cross-sells and higher products per member.

Direct loan growth is easier said than done

Organic loan growth can be difficult for credit unions operating in a competitive “red ocean.” W. Chan Kim and Renée Mauborgne of Blue Ocean Strategy argue that companies succeed by creating “blue oceans” of uncontested market space, as opposed to “red oceans,” where competitors fight for dominance – the analogy being that an ocean full of vicious competition turns red with blood. When it comes to consumer loans, credit unions operate in a very red ocean. Organic loan growth is difficult because literally everyone else is using the same product, pricing, promotion, criteria, process and delivery to attract the same group of people. The auto loan marketplace is crowded and cutthroat.

To successfully achieve organic direct growth, you must do something different. We get to work with a lot of credit unions, and we hear (see) what works and what doesn’t. The purpose of this article is to share a best-practice organic loan-growth model to help your team find greater results.

Setting the stage

• Five years ago, a mid-sized ($250-$500 million) credit union (let’s call it Best Practice CU) decided to shift its focus away from an indirect auto program. As stated above, Best Practice CU wanted to increase loan yields, and it wanted to interact more with new loan members to build deeper relationships. The credit union’s leadership believed that cross-selling results would be higher for direct versus indirect new loan members.
• Best Practice CU identified that prime and near-prime credit consumers who had existing auto loans would make for the ideal target. If you’re thinking this sounds like a common auto loan “recapture” program, read on.
• The credit union worked with its partner, Experian, to identify specific auto trades that had interest rates high enough to warrant an effective refinance offer. Common recapture programs frequently fall flat, because the promo rate offered is not that much lower than the consumers existing rate and because credit unions typically limit criteria to a static credit score range. Static credit scores, without trended data, can be tricky. I’d rather finance a “C” tier loan for someone with an improving profile than for someone with a deteriorating credit profile. Best Practice CU wanted to find prime borrowers who could have qualified for better rates at the time, but were just overcharged. It also wanted to find near-prime consumers who have improving credit profiles. The credit union used Experian’s Trended Data to find consumers with improving credit profiles. This allowed them to lend a little deeper, at higher rates, and better manage risk (i.e., profiles are improving).
• Next, Best Practice CU leveraged the interest rate data provided by Experian to customize rate offers to each target group. This way, the credit union only targeted people with rates high enough to result in a refinance offer. The data played a critical role: it increased offer acceptance, and Best Practice CU didn’t waste its time or money targeting people with low rates and less incentive to go through the refinance process.
• Best Practice CU went through many changes and adjustments, but it remained committed to the new process and used it monthly to find new consumers and recapture their auto loans.
• Finally, to support the regular target marketing, Best Practice CU utilized its Call Center to make outbound calls to follow up on the offers. The customized rate offer made the refinance opportunity more attractive for the consumer (e.g., the refinanced payment went down a lot), and that made it easier for the Call Center to close the deal – and to cross-sell other opportunities.

Measuring success

During the past five years, Best Practice CU has migrated nearly $50 million from indirect auto pool to a direct auto loan pool. That is a more profitable loan portfolio, and it represents new members who have more than one relationship at the credit union.

“Experian’s Trended Data enables credit unions to identify members who are improving their financial situation by lowering their debt and paying on time.  Further, our interest rate data can then be used to help those members by offering better interest rates than they are currently paying,” said Paul Desaulniers, Senior Director – Trended Data, Scores & Collections at Experian.

Why it matters

If you want to consistently compete and win, you must do something different (and better).

In this case, Best Practice CU took a run of the mill auto loan recapture process (such as the one so many credit unions are pursuing), and designed a better way. In the midst of a very red ocean of consumer auto lending, they found blue water.

If like Best Practice CU, you want to do a better job with organic direct loan growth, I encourage you to consider the red ocean your team is currently swimming in. Invest the time to identify opportunities where you can more effectively compete. Invest the time and resources to build something successful. Don’t skimp on the technology, data, and human resources needed to create a best practice. Best practices are rarely “one and done.”