Credit unions have always had a love hate relationship with auto dealers. On the one hand, cooperatives value their dealer partners for extending the credit union’s reach into the dealership, where members purchase a vehicle. On the other hand, dealers don’t always send members back to the credit union for the loan.
One solution is to partner only with dealers who guarantee that any member you send their way will be returned to you for financing. The best dealer partners also have competitive pricing, a good selection of vehicles in your members’ price range, and showrooms near your branches. Still, sometimes the relationship just doesn’t work out, and when that happens, there’s another option: car buying companies.
These services can help take your auto lending business to the next level whether you partner with them exclusively or use them to augment your relationships with dealers. Either approach is fine, but credit unions, like the two profiled below, often use car buying services as part of a broader business plan. As a result, the credit unions featured here selected car buying partners, which may be national or regional, and structured incentives to support vastly different strategies.
A Dual Strategy For A National Membership
At BCU ($2.0B, Vernon Hills, IL), partnering with both car buying services and dealers was the logical way to serve a membership that has gone steadily national since the 1990s. Although BCU began by serving the community in northern Illinois, a series of mergers over the past two decades and partnerships with a number of national select employee groups has taken its membership national. At the same time, as Illinois’s fourth largest credit union, BCU still needed to provide top service for members at home. That led to the dual strategy of using both car buying companies and dealers.
“We use the national auto buying service primarily to serve members who are across the country,” says James Block, vice president of consumer lending at BCU. “Whereas people who are in the northern Chicago suburbs, we primarily work with through our direct dealer relationships.”
The two strategies complement each other well. Where the credit union doesn’t have a critical mass of members to justify forming its own dealer relationships, the auto buying service gives BCU access to the dealers that members are likely to shop at. BCU has had relationships with local auto dealers for more than a decade, but the auto buying service partnership developed in the past two and a half years. During that time, the credit union’s auto loan penetration has grown from 18% in mid 2011 to 22.6% as of March 2014, according to Callahan & Associates Peer-to-Peer data.
When choosing which car buying service to work with, BCU looked at two things, national coverage and good referrals.
“We tested it internally before marketing to members,” Block says. “Relationships are driven by dialogue and a clear, shared definition of success. That way each side knows what it needs to deliver.”
Although BCU refers national members to the car buying service and local ones to its dealer partners, the loan costs the same for both the member and credit union. Sometimes, however, BCU lowers the rate as an incentive for members to use the car buying program.
Working with car buying companies does have a downside. Because BCU doesn’t have a direct relationship with the dealer, it must rely on the car buying service’s relationship with that dealer instead. That’s why communication with the car buying company is so important.
By going through a third party, “you lose control of the messaging,” Block says. “It’s difficult to manage the behavior of the dealers when you’re not directly interfacing with them.”
BCU has built strong relationships with local dealerships over the years so that the two parties can find a mutually beneficial agreement that serves the best interests of credit union members. As a result, BCU rarely loses financing to other financial institutions because of the dealer. In the credit union’s experience, that scenario is more common with national car buying services, though it only has happened a few times. As BCU strengthens its relationships with the companies, it expects the number to become smaller still.
Ensuring Quality Service
Unlike BCU, Excel Federal Credit Union ($96.5M, Norcross, GA) works only with car buying services and has two partners: Car Solutions, a Georgia-based service that works exclusively with credit unions, and Enterprise, which has customers nationwide.
That strategy made sense for two reasons. Excel’s footprint, which extends throughout Georgia, is too large to pinpoint the dealerships its members are likely to patron. More importantly, though, the credit union doesn’t participate in any indirect lending, the kind of partnership many dealers prefer to have with cooperatives. The credit union generates all auto loans through its branches or website.
Excel has concerns that dealers don’t always have the members’ best interests at heart, and the credit union doesn’t want any negative experiences to reflect poorly on its own organization. Excel is so wary of dealers that it has a video on its website explaining how they can advertise seductive low rates that ultimately end up costing the consumer more.
The credit union is also troubled by the inherent inequities of the dealership experience, which requires customers to haggle over pricing. That means some members may get a bum deal, and “we do not want the member to be disappointed,” says Bonnie Trappe, a senior vice president at Excel Federal.
With some car buying services, though, the incentive structure is different. For instance, instead of paying commissions on high price tags, Excel rewards car buying services for finding the right car for the member at the best price, a philosophy that is more in sync with the not-for-profit model members are accustomed to seeing at the credit union.
In a sense, the right car buying service can also help reduce some of the credit union’s risk with the loan. After all, when reviewing a loan application, underwriters consider both the borrower’s qualifications and the car’s condition and price.
“When we approve a member to purchase a car, we’re looking at the member’s credit as well as the quality of the car they’re buying,” Trappe says. “We feel that by having them go through Car Solutions and Enterprise, they’re getting a good quality car.”