Organic loan growth is a popular phrase these days. Today, a growing number of credit unions are looking for ways to attract more loans directly. The growth of direct (vs. indirect) lending may be more attractive, removing middlemen to improve returns and leveraging direct contact with members to increase cross-selling and higher revenue per member.
Growth in direct loans is easier said than done
Organic loan growth can be difficult for credit unions operating in a competitive “red ocean”. W. Chan Kim and Renee Mauborgne of Blue Ocean Strategy support that companies succeed by creating “blue oceans” of an undisputed market space, as opposed to “red oceans”, where competitors fight for dominance – the analogy being that an ocean full of fierce competition turns red of blood. When it comes to consumer loans, credit unions operate in a very red ocean. Organic loan growth is difficult because everyone is literally using the same product, pricing, promotion, criteria, process, and service to attract the same group of people. The auto loan market is crowded and cutthroat.
To be successful in direct organic growth, you need to do something different. We work with many 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 achieve better results.
- Five years ago, a mid-sized ($ 250-500 million) credit union (let’s call it Best Practice CU) decided to no longer focus on an indirect auto program. As stated above, Best Practice CU wanted to increase loan returns and interact more with new lender members to build deeper relationships. Credit union management believed that cross-selling results would be higher for new direct than indirect loan members.
- CU best practice identified prime and near prime credit consumers who already had auto loans would be the ideal target. If you think this sounds like a common car loan “payback” 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 refinancing offer. Common payback programs often fall flat because the promotional rate offered is not much lower than the current consumer rate and because credit unions generally limit criteria to a static credit score range. Static credit scores, without trend data, can be tricky. I would rather finance a “C” level loan for someone with an improving credit profile rather than someone with a deteriorating credit profile. Best Practice CU wanted to find blue chip borrowers who might have qualified for better rates at the time, but who were simply overcharged. He also wanted to find consumers close to the premium whose credit profiles were improving. The credit union used Experian Trend 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 improve).
- Second, Best Practice CU took advantage of the interest rate data provided by Experian to customize rate offerings for each target group. In this way, the credit union only targeted people whose rates were high enough to result in a refinancing offer. Data played a critical role: It increased acceptance of offers, and Best Practice CU was not wasting its time or money targeting people with low rates and less incentive to go through the refinancing process.
- Best Practice CU has undergone many changes and adjustments, but has stuck with the new process and used it every month to find new consumers and collect their car loans.
- Finally, to support regular target marketing, Best Practice CU used its call center to place outbound calls to track offers. The personalized rate offer made the refinancing opportunity more attractive to the consumer (for example, the refinanced payment went down a lot), and it made it easier for the call center to close the deal and sell money. ‘other opportunities.
Over the past five years, Best Practice CU has migrated nearly $ 50 million from the indirect auto pool to a direct auto loan pool. This is a more profitable loan portfolio and it represents new members who have more of a relationship with the credit union.
“Experian’s trend data helps credit unions identify members who are improving their finances by reducing debt and paying on time. Additionally, our interest rate data can then be used to help these members by offering better interest rates than what they are currently paying, ”said Paul Desaulniers, Senior Director – Trend Data, Scores and collections at Experian.
Why is this important
If you want to constantly compete and win, you’ve got to do something different (and better).
In this case, Best Practice CU has put in place a regular car loan recovery process (like the one that many credit unions pursue) and devised a better method. In the midst of a very red ocean of consumer auto loans, they found blue water.
If, like CU Best Practice, you want to do a better job with organic growth in direct loans, I encourage you to consider the red ocean that your team is currently swimming in. Invest time to identify opportunities where you can compete more effectively. Invest the time and resources to build something successful. Don’t skimp on the technology, data, and people needed to create a best practice. Best practices are rarely “one and only”.