From a member’s perspective, taking out a loan is just one of many required interactions that puts them one step closer to achieving a life goal, such as owning a home or securing reliable transportation.
So what if a lender could adjust its business model so that it owned more of those critical activities?
This is the strategy at Redwood Credit Union ($2.4B, Santa Rosa, CA). In 2004, it created an auto dealership known as RCU Auto Service under its wholly owned credit union service organization (CUSO) RCU Services Group, which also offers insurance services.
Working together, these two business lines “provide a one-stop shop for members and the community to sell, purchase, finance, and insure their vehicles,” says Bobbi Beehler, the CUSO’s executive director.
CU QUICK FACTS
REDWOOD Credit Union
data as of 09.30.14
HQ: Santa Rosa, CA
12-MO SHARE GROWTH: 5.91%
12-MO LOAN GROWTH: 13.38%
Here, Beehler shares four tips any credit union can follow when expanding into an external business line.
#1. Establish Strategies For Collaboration AND Independence
Redwood finances approximately 80% of all purchases at RCU Auto Services. In 2014, RCU Auto Services generated more than $14.2 million in new and used auto loans for its parent credit union.
The CUSO and the credit union also have other areas of overlap where they can temporarily or permanently repurpose existing resources to elevate the CUSO to the next level.
“We pay Redwood for providing the CUSO’s accounting, IT, and marketing support,” Beehler says. “Most people don’t expect their credit union to be associated with an auto dealer, so we’re working together to build referrals and create more word-of-mouth awareness.”
Before going into the auto business, Redwood spent more than a decade working with an outside auto-broker to facilitate auto purchases. It learned a lot along the way, but moving into a new industry also meant dealing with a new set of business challenges, regulations, and operational learning curves.
We don’t believe in doing anything half-heartedly. You can test the waters for a time, but this is a volume business, so at some point you have to jump in.
For example, RCU Auto Services must hire and manage its own employee roster — consisting of a manager, four salespeople, and two sales assistants — which requires a different skill set than that of a traditional financial services provider. In 2015, it also plans to add several new employees to the mix in order to facilitate future growth.
“We don’t believe in doing anything half-heartedly,” Beehler says. “You can test the waters for a time, but this is a volume business, so at some point you have to jump in.”
#2. Understand The Rules Of Retail
Maintaining an in-house inventory comparable to other auto dealers is a major differentiator for RCU Auto Services and the credit union, Beehler says. But acquiring, managing, and selling these vehicles is a complex undertaking.
RCU Auto Services opened its physical retail lot in 2005. Today, the majority of its inventory comes from trade-ins or direct purchases from consumers, auctions, car rental companies, and local brokers.
“Redwood works with members to help them avoid repossession whenever possible,” Beehler says, “There are only a few cars on the lot acquired that way.”
However, when the credit union must repossess a vehicle, having the option to sell it at retail rather than at auction prices helps Redwood reduce the deficiency balance for the member.
Aside from its brokered vehicles, RCU Auto Services also puts all incoming automobiles through a 125-point inspection and backs them with a short warranty.
“This lets us know our buyers aren’t driving away in a vehicle that could break down,” Beehler says. “It also means we have higher-quality collateral to back our loans.”
#3. Don’t Compete, Enhance
RCU Auto Services is the No. 1 dealership in terms of driving loans back to Redwood Credit Union, Beehler says, but both RCU Auto Services and the credit union still rely on a large network of affiliate and indirect dealer partners to complement their efforts and facilitate special tasks — for example, locating a specific vehicle make or model for a member.
Additionally, the market’s lack of an established user base for online auto-buying websites like TrueCar or Edmunds has helped RCU Auto Services corner some specific buyer segments, including those seeking a no-haggle, streamlined experience.
“Our up-front pricing policy combined with the fact the same person can assist you with your vehicle search, purchase, and financing makes this much faster than the traditional auto lot experience,” Beehler says. “That’s what some buyers are looking for.”
In some cases, the credit union will even go the extra mile of delivering purchased vehicles from its Santa Rosa lot to one of two Marin County branches, the furthest of which is nearly an hour away.
#4. Create Value Before, During, And After
RCU not only sells vehicles but also helps consumers sell them, either directly to RCU Auto Services or to others using its online and real-world resources.
“Some members might not be comfortable selling a vehicle themselves, Beehler says. “But they may not be looking for a trade-in scenario if they are not purchasing a vehicle or they want to get the best possible price.”
That’s why in 2013 the group created its Sell Your Ride program, which offers a free ad on the RCU Auto Services website, a spot on the auto lot, inspections and repairs, and a three-month or 3,000 mile powertrain warranty for the buyer. In return, the seller pays RCU Auto Services 12% of the car’s sale price.
Sell Your Ride is not a major segment of Auto Services’ income stream, but was introduced to provide an additional service to members. In addition, serving both buyers and sellers has brought additional opportunities to promote after-market products like GAP, mechanical breakdown protection, and auto insurance, which another arm of the CUSO provides.
As of third quarter 2014, these add-ons contributed to an extra $3.5 million in non-interest income for the credit union when compared to similar-sized peers, according to Callahan & Associates.