Rule Breakers Set the Rules
Some people seem to love shopping for cars, but for most, the process is more like a root canal without the painkiller.
Selling cars has been confined to businesses that own a lot and hire sales personnel, usually on commission.
That model is being disrupted by companies without a sales force and with few, if any, physical locations.
In the case of Uber, a company that exists almost entirely online has been able to make real money by connecting people who want to generate cash from the cars they drive with people who want to arrange their own rides.
Credit unions don't have to care about how people buy cars or meet friends on the weekends. Narrowly, they should only care about loaning money to car buyers.
And companies like Uber, Carvana and Lending Tree don't have to make loans to utterly disrupt the lending business.
Michael Cochrum believes it behooves credit unions to understand why.
“The people who are disrupting their market segment are typically tech companies that have figured out a way to ease the customer's pain point,” said Cochrum, vice president of analytics and advisory services for CU Direct, a Los Angeles-based CUSO that provides services for credit unions making auto loans.
“We make a mistake by looking at emerging businesses independent of where they fit in the whole scheme of things,” he said.
The insights can be nuanced. Credit unions need to be curious about why these trends develop, and what risks and opportunities they present.
For example, lenders need to be concerned about the extent to which the assets backing their car loans are wasting away faster than anticipated because the cars are being driven tens of thousands of more miles each year than assumed in the lending models because the borrowers are now driving them for ride sharing.
On the other hand, research is showing millennials are more open to having shared assets. So, there might be a future for loans for three or four people to buy a car intended for ride sharing, Cochrum said.
Then there is the emerging trend of online car sales.
Randolph-Brooks Federal Credit Union, based near San Antonio, Texas, cares about car buying. It originates about $100 million a month in car loans, about 60% of them used cars. On Dec. 31 Randolph-Brooks ($7.7 billion in assets, 673,130 members) held $1.4 billion in loans on 98,154 used cars in the San Antonio, Austin and Dallas areas.
Sonya McDonald, Randolph-Brooks’ chief lending officer, said the credit union wanted to show members it would help them skip hiking around car lots and sitting in the dealer's office.
McDonald wanted to change buying cars from an “ow!” to a “wow!”
She believes they might have achieved it with Carvana. “They’ve got the ‘wow’ experience down,” she said. “Carvana has taken that whole process and turned it on its ear.”
First of all, the shopping can be done online. “You can peruse at your leisure — in your jammies if you want,” she said.
The website has 360-degree views of each car with flaws tagged. The company screens the cars, and it offers a seven-day no-questions-asked money back policy and a 100-day, 4,189-mile guarantee.
The cars can be delivered to the buyer's home or office, or the buyer can pick it up from one of several vending machines Carvana has built in larger cities.
Randolph-Brooks announced in March that it had formed an alliance with Carvana at an event in Austin, where Carvana had recently opened one of its vending machines that houses six stories of cars in a glass-encased building.
There, a Carvana employee hands you an oversized coin, or token, which the buyer drops into a slot. The buyer watches as an elevator platform rises up to the car's bay, picks up the car and carries it back down to the buyer with the keys in the ignition and a ribbon on top.
The buyer just has to sign a couple sheets of paper (and perhaps remove the ribbon) before driving off.
“When we talk at the strategic level about the member experience, and then you see a company like Carvana that has taken that member experience to a new level, you want to be part of that,” McDonald said.
“People don't buy that many cars in their lifetimes, but they’re going to remember buying a Carvana car,” she said. “It's fun. It's exciting. It's different.”
For six months, Carvana will have an exclusive relationship with Randolph-Brooks in the Austin and San Antonio markets.
“We’re assuming it will be a younger demographic. The Carvana model seems to appeal more to the millennial,” she said.
The Phoenix-based company is only five years old but already has relationships with 20 credit unions.
Reuters reported in March that Carvana has hired Wells Fargo and Bank of America to lead an initial public offering by mid-year that is expected to raise more than $2 billion. Its revenues have risen from $140 million in 2015 to more than $350 million in 2016, but it is not yet profitable.
Carvana has been called the “Amazon.com of used car sales.” Cochrum said the analogy is even more apt because it's quite possible Amazon.com itself might want to sell used cars someday.
Others are already parking their brands in online spaces. For example, Wal-Mart and Auto Nation will launch a pilot program in April to sell cars that buyers will pick online through CarSaver. They have chosen Ally Financial as their preferred lender.
Investors in online car sales see lending as just a part of the process, not the reason for their business. If the online process succeeds, Cochrum said, “The traditional routes to financing will no longer exist.”
Then there's Tesla, a tech company interested in building electric vehicles and selling them directly to drivers. No dealers. No middlemen.
“Their buyers seem to be OK with that,” Cochrum said. “People are very comfortable buying directly from the manufacturer.”
Tesla is picking just a few lenders. Fortunately, he said, the Chicago-based Alliant Credit Union ($9.5 billion in assets, 345,193 members) is one of them.
Tansley Stearns, chief impact officer for Filene Research Institute, has witnessed how Uber has been reducing personal car use in her household and among friends.
She has watched San Francisco-based Social Finance Inc., or SoFi, become an online lending boutique for millennials. It's catching them early with ways to easily and prudently refinance their student loans, while leveraging that trust for early investment services.
The overriding lesson from SoFi, Uber, Carvana and other disruptors is that credit unions must figure out how to make their functions simpler, faster and easier.
“The one thing we all want back in our lives is time,” she said. “Unfortunately there are frequently a lot of hassle factors when we are attempting to use a financial institution.”
On the plus side for credit unions is research shows that millennials are open to a cooperative model and prefer to do business locally.
“We have this great opportunity because people are hungry to do business with organizations that do right by the world, and that's who we are,” she said. “The challenge for us is we haven't always told that story in a big way.”