11

The Hidden

Risks of the Auto

Lending Boom

CUNA Mutual Group Proprietary | Reproduction, Adaptation or Distribution Prohibited | CUNA Mutual Group © 2018, All Rights Reserved.

Share of Wallet Research Series

22

What Are the Hidden

Risks of the Auto

Lending Boom?

1

3

Source: CNNMoney, New York Times, Reuters and USA Today

Auto Sales Have Been on a Tear in Recent Years

4

0

200

400

600

800

1000

1200

2012 2013 2014 2015 2016 2017

$ B

illi

on

s

U.S. Total Outstanding Auto Loan Balances

$800B

$886B

$1,129B

$719B

$987B

$1,072B

Source: Experian’s State of the Automotive Finance Market – Q4 2017

Auto Loan Balances Are at a Record High

2012-2017 CAGR:

9.4%

5

0

200

400

600

800

1000

1200

2012 2013 2014 2015 2016 2017

$ B

illi

on

s

U.S. Total Outstanding Auto Loan Balances

$800B

$886B

$1,129B

2012-2017 CAGR

Finance Co.: 14.5%

Credit Union: 14.8%

Captive Auto: 4.3%

All Banks: 7.5%

$987B

$1,072B

$719B

Credit Union Loan Growth Is Among the Fastest

Source: Experian’s State of the Automotive Finance Market – Q4 2017

6

Forecast

0

50

100

150

200

250

300

$ B

illi

on

s

Total CU Outstanding Auto Loan Growth: 2012-2017

Source: CUNA Mutual Group – Economics; Experian

Indirect Channel Is Driving Credit Union Auto Lending Growth

CU Indirect Loans

CAGR:

20.1%

CU Direct Loans CAGR:

8.7%

CU Total Auto Loans

CAGR:

14.8%

7

0%

10%

20%

30%

40%

50%

60%

70%

CU Indirect Share of Total Auto Loans Outstanding

Forecast

Indirect Share of Credit Union Auto Lending

Continues to Increase

2012: 43%

2017: 56%

2021: 61%*Forecasted growth

*

Source: CUNA Mutual Group – Economics

8

Share of Wallet

Research Uncovers

Hidden Risks

99

Defining Share of Wallet

It's a marketing metric that

represents the percentage of a

customer's total spending within

a category, captured by a specific

brand, store or business.

1010

Have credit unions grown

their share of members’

auto lending wallets

since Q4 2015?

11

CUs Grew Overall

Number of Auto Loans

With Members by

Source: CUNA Mutual Group Proprietary Consumer Research: Competiscan

22%

CUs Grew Number of

Non-PFI Member Auto

Loans by

7%

44%

CUs Grew Number of

PFI Member Auto Loans

by

From Q4 2015 to Q4 2017…

12

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Q4 2015 Q4 2017

Au

to L

oan

s p

er

10

,00

0 M

em

be

rs

Credit Unions Banks Other Lenders

+11%

From Oct. 2015 to Oct. 2017, CUs Grew Share of

Member Auto Lending Wallets 4 Percentage Points

42%

31%

27%

38%

34%

28%

Credit Union Share of Wallet Among Members

Is on The Rise – ALL CU MEMBERS

+4 p.p.

Source: CUNA Mutual Group Proprietary Consumer Research; Competiscan

+22%

13

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Q4 2015 Q4 2017

Au

to L

oa

ns

Pe

r 1

0,0

00

CU

PF

I M

em

bers

Credit Unions Banks Other Lenders

41%

28%

31%

38%

31%

31%

While CU PFI member

wallet size grew,

Overall CU PFI Member Auto Loans

Credit Union Share of Wallet: PFI CU Members

PFI member SOW

decreased by

3percentage points

Source: CUNA Mutual Group Proprietary Consumer Research; Competiscan

-3 p.p.

14%

7%

14

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Q4 2015 Q4 2017

Au

to L

oa

ns

Pe

r 1

0,0

00

CU

No

n-P

FI

Me

mb

ers

Credit Unions Banks Other Lenders

35%

41%

23%

48%

31%

21%

Overall CU Non-PFI Member Auto Loans

Credit Union Share of Wallet: NON-PFI members

As CU non-PFI member

wallet size grew,

Non-PFI member

SOW increased by

13percentage points

+13 p.p.

Source: CUNA Mutual Group Proprietary Consumer Research; Competiscan

7%

44%

1515

CU PFI SOW

3 p.p.

CU NON-PFI SOW

13 p.p.

from Q4 2015 to Q4 2017

To recap:

Total CU member SOW: +4 p.p., however:

Credit Union Share of Wallet: A Complex Story

Source: CUNA Mutual Group Proprietary Consumer Research; Competiscan

16

Credit Union – Member for 13 years

• Checking Account

• Online Banking

• Money Market Account (Reasonable

Balance)

• Mortgage

• HELOC

• Line of Credit

• 2 Credit Cards (Absurd Balances)

• Kids Club Accounts

• Education Fund Accounts (2 Girls)

Other Financial Institution

• 2 Auto Loans (both with payment

protection products)

• Credit Card

• Unsecured Loan

• Line of credit

MY Share of Wallet…

17

Fintechs gaining your Member Share of Wallet

1818

“Unperceived Needs” Think Outside the Box and uncover

your members full financial needs!

CD’s

E-Statements

Consolidation loan

CU Credit Card

Car loan steal

Payment Protection

products

Online &

Mobile

Banking

Checking

account

Children’s savings and

college fund

Line Of Credit

HELOC

Referral to Financial Planner

Mortgage Referral

Insurance needs

Car Loan

19

On average,

a consumer’s PFI wins

64%of all their purchases.

Source: Bain 2016

Share of Wallet

Among PFI

Members

Should Be

Stronger

20

of CU PFI members intend

to give their CU most or all

of their future business.Source: Raddon 2015

Share of Wallet

Among PFI

Members

Should Be

Stronger

And a booming

88%

2121

Hidden Risk: Share of Wallet

Among PFI Members is

Lagging Behind

Non-PFI Growth. Why?

2222

Introducing the

Silent Churn Dilemma

The Silent Churn principle demonstrates

that while many PFI members maintain

existing accounts, they’re purchasing

additional banking products elsewhere.

Source: JavelinStrategy.com

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Q4 2015 Q4 2017

Au

to L

oa

ns

Pe

r 1

0,0

00

CU

PF

I M

em

bers

Credit Unions Banks Other Lenders

31%

41%

28%

31%

38%

31%

31%

Overall CU PFI Member Auto Loans

Source: CUNA Mutual Group Proprietary Consumer Research; Competiscan

+3 p.p.

2323

What Do We Know

About These Risks?2

2424

Price & Brand: Key Drivers of Auto Lender Choice

Top Reasons BANK Was Chosen

as New Auto Lender

Low interest rate and fees 15%

Reputable, trustworthy company 11%

Ease of application 11%

Likelihood of getting approved 10%

Simple, straightforward product 10%

Original Auto Loan – Top Selection Factors

Top Reasons CU Was Chosen

as New Auto Lender

Low interest rate and fees 21%

Simple, straightforward product 11%

Likelihood of getting approved 9%

Easy payment methods 8%

Reputable, trustworthy company 7%

Source: CUNA Mutual Group Proprietary Consumer Research; Competiscan

2525

26

Wisdom of the crowd: Burning Questions, interconnected

issues

27

How are you providing Financial Wisdom to Millennial's?

2828

Credit Unions Have Banks

Beat on Rates

Credit Union Advantage: Lower Interest Rates

*National average rate

Source: “Comparison of Average Savings, Deposits, and Loan Rates of Credit Unions (CUs) and Banks”, NCUA, 12/29/17

All Credit Unions* 2.87% 2.91% 2.79%

All Banks* 5.11% 4.75% 4.64%

Used Car Loan(36 months)

New Car Loan(60 months)

New Car Loan(48 months)

2929

Don’t just compete on rate…

Relevant Target Marketing – Pre-approvals with dollarization

Increase your Brand Recognition – Social Media Strategy

Outbound Program – Leveraging Data Analytics

Proactive Financial Check-up’s – Stay engaged with your Members

for every Life Stage

Upskill your staff to be more Consultative versus Transactional – All

Channels (Call Center, Branch, Web Loan follow up (phone & email)

3030

Hidden Risk: Credit

Unions Are Being Out-

Marketed

3131

Who sends the most

auto lending offers

to your members?

32

0% 5% 10% 15% 20% 25% 30% 35%

Online Lenders

Credit Unions

Banks

Other Lenders

Mfr Financing

Auto Loan Offers Received by Members

In Reality, Credit Union Offers Lag The Competition

Auto Acquisition Marketing Targeting CU Members by Lender Type

*Direct mail & email offers

Source: Competiscan

Credit unions are being

out-marketed

3:1vs. non-CU lenders in

terms of auto loan offers*

targeting CU members

33

0 C

RE

DIT

U

NIO

NS

1 C

RE

DIT

U

NIO

N

Tale Of Two Credit Union Members

Credit Union MemberAGE: 30-39

NUMBER OF LOAN OFFERS IN 2016

1

Credit Union MemberAGE: 60-69

NUMBER OF LOAN OFFERS IN 2016

2

by Credit Union

Banking

14

4

2

1

1

1

1

1

5

5

3

2

1

1

1

1

Source: CUNA Mutual Group Analysis

3434

What Can Be Done To

Counter These Risks?3

35

Four Keys to Greater Share of Wallet

1) Measure & Track Share of Wallet

2) Optimize Your Member Experience

3) Defend Your Share of Wallet

4) Grow Your Share of Wallet

36

Measure & Track

Share of Wallet

3737

Share of Wallet Is Measured in Two Ways:

Example #1:

Product Count BasisA sugar-crazed consumer

purchases six Cokes and four

Sierra Mists over the course

of a month.

Each soda’s respective SOW is:

Coke – 60%

Sierra Mist – 40%

Example #2:

Dollar BasisA dual-wielding credit card spender

charges $1,000 to their American

Express card and $500 to their credit

union’s card over the course of a month.

Each credit card’s respective SOW is:

American Express – 67%

Credit Union – 33%

Source: “Marketing Metrics: Understanding Market Share and Related Metrics”, Glen Berg, 3/22/2017

3838

The Main Challenge of

Calculating Share of Wallet

To calculate SOW,

you must know how

much business

members are doing

with other lenders.

Source: R. Y. Du (Univ. of Georgia), W. A. Kamakura (Duke Univ.), and C. F. Mela (Duke Univ.)

39

Gathering Data: Third-Party Firms Can Help

Source: AdvantEdge Analytics

Data Management Services

Advanced and Predictive Analytics

Reporting and Performance Management

40

Gathering Data: Third-Party Firms Can Help

Source: AdvantEdge Analytics

Data Management Services

Advanced and Predictive Analytics

Reporting and Performance Management

Prospect TriggersTRANSACTIONS

41

Optimize Your

Member Experience

4242

Consumer Pain Points

When Purchasing a Vehicle

Digital Channels

Have Not Been

Fully Integrated

Into the Process

Fear of Getting

a Bad Deal

on Car and

Financing

Takes Too

Long and Is

Frustrating

Lack of

Personalization

Lack of

Guidance,

Expertise

and Control

4343

Consumer Pain Points

When Purchasing a Vehicle

4444

Preparing for a Digital-First Future

As more members migrate toward digital channels,

successful credit unions will:

• Prioritize the user experience (UX)

• Deliver a streamlined, efficient end-to-end lending process

• Offer all the channels members require at each stage of the loan application

• Provide credit union employees with digital tools to help them better

meet member expectations

• Continue investing in new ways to reduce friction and provide convenience to

their members

45

2.7 3.23.8

4.4

0

1

2

3

4

5

Digitallyunengaged

Less digitallyengaged

Digitallyengaged

Highly digitallyengaged

Average Number of Products Consumers HoldWith Their Primary Financial Institution To boost digital

engagement,

consider:

• Evaluating and

improving digital UX

• Improving digital

on-boarding

• Responding more

rapidly to technological

innovation

Source: “Global Retail Banking Cross-Sell Report”, The RFI Group, 2015

High Digital Engagement Can Lead to Higher Share of Wallet

46

Defend Your

Share of Wallet

47

Valuable TIPS for Member Retention

Engage New Members Right Away

Utilize Predictive Analytics to Identify At-Risk Members

Monitor Members’ Hard Credit Inquiries

Target Members With Relevant Offers and Communications

4848

What do a newly married couple, a recent college

graduate, and an expectant mom all have in common?

49

School Years

New Home

Living on Own

New Baby

Deployment

Divorce

Marriage

Empty Nesters

Retirement

Life Stages –

Financial Check-in

Death

50

If you don’t ask for their business…someone else will!

“Have there been any Personal, Professional

(job/career) or family changes recently that made

you think it might be time to review your

financial goals/situation and options—like

retirement plans, savings, new home or vehicle

purchases, that kind of thing?”

51

Moderate financial literacy,

high financial confidence.

“I don’t get into all that fuss about

stock markets and 401ks – I’m doing

fine on my own.”

“I make enough money, my farm’s

insured and I have a little cash

hidden away.

“I’ve grown up on this farm and hope to pass

it onto my kids some day.”

“I make decent money but still struggle to make ends meet for me and

my kids.”

“I live in the city and have credit

cards for the stores I shop in

most often.”

“I’m frustrated with trying to save.

Sometimes I wonder why I bother.”

Low financial literacy, low

financial confidence.

vs.

UND ER S T A NDING T HE MEMBER

Member A

$30-50k income / Age 35 / $15k investable assets

Member B

$30-50k income / Age 35 / $15k investable assets

52

Grow Your

Share of Wallet

53

Optimize Your Direct Marketing

Communications

with 25%+ open

rates featured lower

rates, relevant

offers or a better

experience in the

email subject lines.

Lender Email Subject Line Email Open %

USAA Bank is driving

down auto loan rates52%

Mary, Interested In a

Lower Car Payment?41%

Congratulations

on your PenFed loan

pre-approval!35%

Introducing a new car

buying experience at

chase.com29%

Get a check the day

you’re approved with a

USAA Bank auto loan29%

Source: Competiscan

5454

Members Demand More Relevant Offers

66%of engaged account holders indicate

they’re not satisfied with offers they

receive from their financial partners.

Why?Because they’re not relevant.

Triggers–or signals–can help

you tailor loan offerings to

a customer’s needs.

Trigger examples available through third-party

suppliers include:

- A member’s rising income or improving credit score

-- Paying off debt

- Major life events–marriage, home purchase, etc.

55

Credit Unions Get Ahead With Auto Loan Recapture

15%

36%32%

6%

11%

Bank PFI AutoLoan Recapture

11%

54%

27%

3%5%

Credit Union PFI Auto Loan Recapture

Captives Credit Unions Banks Online Lenders Other

For both bank and credit

union PFI members,

credit unions captured

the largest share of

refinanced auto loans.

Source: CUNA Mutual Group Proprietary Consumer Research; Competiscan

56

Maximize Your Auto Loan Recapture Program

Use Bill Pay and Credit Bureau Data in Predictive Models

to Identify Refinance Candidates Among Members

Focus Messaging on Monthly Payments, along with your low Rates

Use Multiple Channels to Reach Prequalified Members

and Provide Several Easy Response Options

Offer Incentives to Encourage Actual Applications

57

Source: CUNA Mutual Proprietary Research; Experian’s State of Automotive Finance – Q4 2017

Credit Union Share of Wallet Opportunity

Auto Loans Outstanding Held by Credit Union Members

Outstanding Auto

Loans With CUs

$313B

Outstanding

Loans With All

Other Lenders

$432B

5858

Will Credit Unions Seize

The ‘Share of Wallet”

Opportunity?

59

Q A&

6060CUNA Mutual Group Proprietary | Reproduction, Adaptation or Distribution Prohibited | CUNA Mutual Group © 2018, All Rights Reserved.

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