Indirect Auto Loans Have Created a Direct Dilemma
The indirect auto loan source has historically been a dilemma for bankers of financial institutions. The good news is that it provides a relatively steady source of loans. They increase the assets of an institution and require far less work for internal staff compared to a direct loan. The bad news is that it generates some of the lowest net-interest margins, must be closely monitored at the dealership level, and extremely low retention rates once the loan is paid off. To date, most institutions have accepted these negative aspects in order to continue to grow their asset base. For some institutions, this has created a huge churn problem. Unfortunately, during the recent COVID-19 pandemic, dealer sales have almost come to a halt. This has caused many institutions to feel the truly negative effects of customer churn when the funnel of new customers has been cut off.
While institutions work to grow their asset base through indirect auto loans, they also spend significant marketing dollars attempting to grow their customer base and core deposits. Often, FI’s make the mistake of ignoring the auto loan customers they already have, assuming they aren’t retainable and marginally profitable. We strongly believe that replacing what has become a wholesale product play with indirect auto loans, into a Key Driver of PFI Relationships is a sustainable guarantee of retail and asset growth. In short, using auto loans as profitable relationship starters to create eventual long term PFI relationships. Build on the relationship you’ve already invested in.
The Direct Solution to Your Indirect Problem
Over the past three years, we have been asked by our auto loan clients to solve this problem for them. Experts say, “in selling your value, the goal should be to find something that gives your clients pain and solve the problem”. Fortunately for our company, most of the pieces to solve this problem had been used over many years to help our clients grow core checking deposits and direct auto loans. Our strong use of multi-level analytics across many communication channels has provided a turn-key solution to this opportunity. With the urging of our clients, we have combined the individual aspects and functions of past successful programs into one comprehensive program, The Stellar Indirect Tool Kit.
Throughout the rest of the newsletter, we lay out the individual steps necessary to take new indirect auto loan customers and focus on producing sustainable PFI relationships. We are confident the conversion of these new relationships into long-term relationships will be far more cost-effective than cold prospect marketing efforts. In closing, there are few groundbreaking marketing ideas that haven’t been executed before. Our research has shown that this type of solution has virtually been non-existent in the banking industry, particularly in the credit union space. Don’t look at indirect auto loans as a problem, embrace the opportunity that’s sitting there waiting to be seized. At the end of the day, a well-balanced auto portfolio that includes a mix of direct and indirect loans is the most profitable path forward to ensure sustainable long-term asset growth.