Increase Revenue with Direct Lending.
Most credit unions have multiple strategies to grow their membership base and spend hundreds of thousands of dollars annually to market to potential prospects. But what is the actual return on investment for acquiring new members?
Research suggests that acquiring a new member costs between $350 to $700 in marketing efforts and employee labor. So, how long does it take for the financial institution to break even or make a profit?
Value Penguin reports that the median checking account balances in the US is $2,900.2 If you were to lend out 100% of that deposit, the 5% interest income generated would be $145 per year. It would take 3-5 years just to break even.
Yes, there are other sources of income from new checking accounts that add to overall profits: debit card transaction fees, overdraft income, and so on. But again, this takes some time to accrue. This strategy has merit, but it takes years just to recover your acquisition costs.
“Loaners” vs. “Lifers”
Auto lending can provide profitable new members year after year. I am not talking about indirect lending, in which the dealership has a real relationship with the member.
Most institutions can attest, only 5% to 7% of these new “members” will open an additional product or service. A SVP of Lending from one of our partnering credit unions has coined a phrase for these types of members. He describes them as “loaners”, and that he wants “lifers”. “Loaners” are members that only open an auto loan from the indirect dealership relationship, and close that membership once the loan is paid off. “Lifers” are members that have a direct relationship with the credit union, and often purchase their next auto loan using the credit union. “Lifers” are opening additional products and services, such as checking accounts, credit cards, and home equity loans.
No Risk to You
Stellar’s Auto Loan Recapture Program helps generate new members that have a direct relationship with the credit union. Stellar pays for all of the up-front costs to solicit potential new members to refinance with you. These potential new members meet all of your lending criteria and reside within your charter footprint. Best of all, you only pay for the loans you refinance. We use each institution’s underwriting parameters as part of our proprietary credit bureau selection model to develop prequalified potential members to target.
Applications are submitted to your financial institution’s loan team for credit approval, using their standard approval process. With an almost 50% Look-to-Book ratio nationwide, our credit union partners benefit greatly from our program! Nationwide, our average refi balance is $27,261 for an average of 61 months remaining term. The average blended interest rate for this past year for all paper grades from 6.90%. These loans are, on average, 31 months in duration before being paid off.
In addition, most credit unions are seeing 30% of these new members opening a checking account. During the first 30 months, these institutions average a little over $200 per loan in checking/debit card transaction fees.
Lastly, unlike an indirect dealership loan, these FI’s keep the cross-sell opportunities, GAP, MBI, AD&D, and so on. Our credit union partners are
averaging over $325 per loan funded in non-interest income. These new members, on average, generate $4,702 in interest income within 30 months. In that same time frame, these credit unions generate another $525 in non-interest income, for a total average of $5,227 in new income. With our contingency-based fee structure, the cost per new member is between $550 to $650. This means that our credit union partners generate positive income less than five months after they onboarded. Cumulative interest alone at month five is $761.66!
In summary, it is wise to look at auto lending as a source for profitable new members instead of investing in checking accounts. ■
George Monnier is a founding partner of The Stellar Financial Group, which offers pay-for-performance auto refinance programs to the banking industry.
Contact him at georgem@stellarfg.com or 402-708-2425.
References
Hudson. (2021, July 19). A Quick Guide to Credit Union Member Acquisition Costs. CU 2.0. Retrieved July 30, 2022, from https://cu-2.com/cu-member-acquisition/
Moon, C. (2022, January 20). Average U.S. Checking Account Balance: A Demographic Breakdown. Value Penguin. Retrieved July 26, 2022, from https://www.valuepenguin.com/banking/average-checking-account-balance/
Other Articles from Stellar Insights Fall 2022
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It doesn’t have to, even with today’s rate increases.
Stellar Insights Fall 2022 Introduction
We hope the content presented in this edition of Stellar Insights will be helpful during the year-end process.