Long-Term Customers: The Indirect Auto Finance Opportunity

Most auto loans booked by banks are originated through indirect channels like Dealertrack and RouteOne, but how many of those new auto loan customers end up becoming long-term cust…

by Tom Johnson

March 20, 2018

Most auto loans booked by banks are originated through indirect channels like Dealertrack and RouteOne, but how many of those new auto loan customers end up becoming long-term customers? Not enough. Banks competing in the indirect auto lending channel can’t stop once they successfully book the loan. That is just the beginning.

Banks spend a lot of money to win auto indirect loan customers—from investments in automated decisioning technology that can turn around credit decisions in seconds to special pricing and promotions that will help customers afford the car of their dreams. However, these investments do not guarantee a relationship with the customer that last longer than the term of their new auto loan. So how can banks transform these investments into a sustainable return for their business? We believe it is by applying specific best practices that build relationships with customers that will extend far beyond the terms of their auto loan.

Communicate Constantly

Communication is one of the most important aspects of building a relationship. You have just acquired this customer via their purchase of a new vehicle. They are excited and happy with their new car. This is the honeymoon phase — possibly the best time to engage with your customer.

Introduce yourself. They may have never even heard of your bank before. Educate them about your institution and the services you provide. Invite them to download your mobile banking app.

Gather and track customer consent and then gather data on communication preferences. Learn more about the customer — their behavior, preferences, financial aspirations—so you can communicate with them more effectively.

Use analytics to help understand your client better as well as help yourself communicate more effectively. It is crucial to communicate with your customer in the channel that is most familiar and comfortable to them.

These best practices, while they may seem inconsequential, can have a large cumulative impact and will help your organization connect with your customer on a more personal level. The more comfortable they feel with your company, the more likely they are to make payments on time, and consider additional products and services, and the less likely they are to attrite.

Deliver Value to Indirect Auto Finance Customers

Providing your customer with value is another important component. While this goes hand in hand with good communication practices, it is critical to provide your customer with relevant content and valuable insights. Examples may include information such as the trade-in value of their vehicle, recommendations for vehicle servicing or maintenance, or insights into the total costs of their loan over time and how their repayments are impacting their FICO® Score. If the customer has complaints or problems, be available through all relevant communication channels to help them resolve it.

Be Prepared for Moments of Truth

Finally, be prepared to effectively handle the key moments of truth in the lifecycle of the loan.

As your customer nears the end of their loan term, it is imperative that you have gathered enough data to make relevant offers that can extend or broaden your relationship. Having acquired the right insights into your customer’s financial needs and aspirations, you may be able to anticipate their desire to trade in their current vehicle and help them acquire new auto financing. You may recognize their need for a home equity loan, or a student loan for a child getting ready to head off to college. You may extend the invitation to open a new checking account with you or pre-approve them instantaneously for a new credit card. The success of these cross-sell tactics often hinges on establishing a positive brand affinity with the customer and tailoring offers to the customer’s unique financial needs and goals.

It’s possible that your customer will experience financial difficulty that imperils their ability to make their payments on time. Be prepared for this eventuality. Establish a consistent, personalized communication cadence with the customer. Understand their communication preferences. Apply what you know about them to tailor your payment reminders to be most impactful. Remember—tone, timing and channel are all critical. People always have a choice in which bills they pay first. If you have put the time and effort into developing a relationship, the customer will most likely prioritize paying your bills over others.

Time to Get to Work

In today’s finance environment, every profitable customer is a precious asset. By incorporating these best practices, banks will have a better chance of growing their relationships with the indirect auto loan customers that they so diligently acquired in the first place. The moment the customer signs the paperwork in the dealership, it’s time to get to work.

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FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores. As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>. But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores. In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO® Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score. <a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a> Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li>Credit history. Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li>New credit. High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li>Pay on time. As you might expect, the further in the past the delinquency, the higher the score – and that’s if a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li>Balance and utilization. Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of available revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards. The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li>Benchmarks. I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data. In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage. In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances. Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!

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