By Amy Nelsestuen, CUNA Mutual Group
The consumer shift to digital, spurred by the pandemic, has often been characterized as meeting a need for speed and convenience. New research reveals that there are more and deeper factors affecting consumer behavior, and in many cases digital experiences are more a means to an end rather than the end goal itself.
COVID’s economic impacts caused consumers to become more cost-conscious, searching for ways to save money. Ability to pay bills and manage cash flow effectively were among their top financial concerns in 2020, according to CUNA Mutual Group research. These worries contributed to the consumers’ shifting approach to their auto-buying experience.
Consumers in charge
While the initial appeal of emerging digital experiences was speed and convenience, financially impacted consumers discovered a new benefit — control. Auto shoppers could now apply for financing, quickly compare vehicle options, select add-on products in minutes, without the same stress, frustration, and slow pace that often came with a dealer experience.
Along with this new ability to control the process that had traditionally been managed by the salesman, the digital buying journey allowed the consumer to remain anonymous. They felt empowered to make a decision that’s right for them without the social pressure of working with a salesperson.
Similar to digital car buying experiences, the availability of refinancing information has become more transparent and reliable, offering the ability to shop digitally for options, link to educational resources, and quickly reach customer support. As consumers continue seeking ways to save and manage their money, many more are turning to vehicle refinancing and investigating digital options. In 2020, 16% more Americans applied for a vehicle refinancing than in 2019, according to a RateGenius study. This trend is significant for credit unions, who captured 69% of all refinances in Q1 of 2020, according to the study.
This growing segment has different financial motivations including:
- monthly payment: consumers who focus on APR;
- rewards: consumers who want to take advantage of perks and loyalty programs offered by refinance programs; and
- debt reduction: consumers who simply want to get rid of their loan as soon as possible.
Given consumers’ growing preference to control the process, credit unions should be aware of emerging digital competitors looking to capture some of credit unions’ majority share of the auto refinance market, specifically:
Brokers: They are relatively new to the automotive space, but have been part of other lending verticals, such as mortgage, for quite a while. Automotive brokers essentially let the borrower take a back seat during the purchasing journey and line up all the details that matter most to the buyer before committing to a new loan. Brokers make little margin on refinance loans but often generate revenue from document fees and splits from selling protection products.
Refinance brokers have capitalized on the use of “auto refinancing” as a search term, utilizing this search engine data to market refinancing options to interested consumers.
Digital Affiliates: Affiliate websites, such as Credit Karma, myAutoloan.com®, and LendingTree allow consumers to compare rates and see which products are available to them. The affiliates profit by selling that consumer data back to brokers and earning an affiliate marketing fee. With consumers increasingly concerned about their credit score, often checking it monthly, affiliates also profit by selling this personal data and subtly marketing products to these consumers.
Although the desire to lower monthly payments continues to drive this industry, the lack of buyer education and advertising campaigns have kept this market relatively untapped.
Credit union auto refinancing strategies
Credit unions have typically gained market share when banks and other lenders have tightened their underwriting policies, considering a broader range of credit scores for auto refinancing. They have also focused on consumers looking for used vehicles and have been able to offer better pricing with lower rates than the competition.
Refinancing currently makes up a small percentage of the overall auto finance market. Three factors: 1) the emerging cost-conscious, take-control consumer, 2) increasing digital access and 3) continuing low interest rates, are expected to grow the category in coming years. To address this growth segment, credit unions may want to consider:
- marketing to auto buyers within the first two years of their original purchase;
- focusing refinancing messaging on payment savings versus APR reduction; and
- providing members with more control within the digital application: Instead of simply declining an application, offer alternatives the member can consider; automate conversations, allowing the member to ask a question without having to leave the application or wait for someone to help them; and pre-fill data to eliminate an often-tedious task.
Be aware of your members’ approach to borrowing money. It’s a decision not based primarily on convenience — emotion plays an increasingly significant role, especially as effects of the pandemic continue. The digital process provides control, reduces stress, and makes them feel better about their decision. Strategies that help re-enforce that experience can go a long way to driving a credit union’s lending business.