Used Car Loans. Linking Member Satisfaction to Loan Decisions: A Wallet Allocation Rule Approach

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1 Used Car Loans Linking Member Satisfaction to Loan Decisions: A Wallet Allocation Rule Approach Lerzan Aksoy Professor of Marketing, Fordham University

2 *FOCAL CU 3 OTHER CU 4 The purpose of this study was to investigate the multi-institution behavior of credit union members. The goal was to gain insight into how and why members choose a loan provider among competing financial institutions; specifically, the focal credit union (*the credit union participating in this research), competing credit unions, and banks. It was designed to measure attitudinal and behavioral loyalty at both the brand- and respondent-levels (i.e. institution- and member-levels). Original mortgage (first mortgage) Refinanced mortgage (first mortgage) 3 Second mortgage 4 HELOC (Home Equity Line of Credit) New Car Loan Used Car Loan Personal Loan BANK

3 CREDIT UNIONS AVG AGE 4 48% % ONLY ONE LOAN DISCUSSED PER RESPONDENT, credit union members To link member perceptions and attitudes to their selection of a loan provider, this study applied the Wallet Allocation Rule approach to uncover the primary reasons members selected the studied credit union, a competing credit union, or a bank as a loan provider. 3

4 The Wallet Allocation Rule is designed to predict the share that customers allocate to the brands that they use. In polygamous (multi-brand use) categories, it strongly links to share of wallet (i.e. the share of business that customers allocate to a brand in an industry category). In single brand use categories, the Wallet Allocation Rule can be used to understand the share of mind that customers allocate to the brands customers consider using, or to establish the relative importance of various attributes customers use to decide which brand to use. CUSTOMER LOYALTY OTHER DRIVERS Did members seriously consider using the credit union for the loan? 0 Did members actually apply to the institution for the loan? Did the institution approve the loan? Did the member use the institution for the loan after it was approved? CUSTOMER BUYING BEHAVIOR 4

5 Credit unions have an opportunity to gain a greater share of loans at the expense of their bank competitors in a number of loan categories. But this will not be done by focusing exclusively on the relationship aspect of their offering, particularly since credit unions tend to 0 8 SATISFACTION Focal CU Other CU. Bank NET PROMOTER SCORE Focal CU Other CU Bank already be perceived by members as performing significantly better than their bank competitors. Instead, credit unions need to identify and minimize the specific reasons that members have chosen to use a bank for a particular type of loan. TYPE OF PROVIDER USED FOR VARIOUS LOAN SERVICES DID YOU COMPARE SEVERAL OPTIONS BEFORE DECIDING ON A LOAN PROVIDER? DID YOU DO ANY RESEARCH BEFORE APPLYING FOR YOUR LOAN? % OF MEMBERS WHO ONLY CONSIDERED ONE INSTITUTION FOR LOAN % OF MEMBERS WHO ONLY APPLIED TO ONE INSTITUTION FOR LOAN 3 high 0 low IMPORTANCE ( RANK ) OF HAD EXISTING RELATIONSHIP Focal CU Other CU Bank = 00% YES NO similar ranking * Due to rounding, not all numbers add up to 00 FOCAL CU BANK

6 4% COMPANY WEBSITES ENTER ESC? 4% TOP THREE SOURCES OF RESEARCH 3% MY BANK/CU INFO SITES DAYS SPENT RESEARCHING/ EVALUATING INFORMATION With used auto loans, credit unions will purchase a used vehicle in full while in return the member is given a secured loan to be repaid in monthly installments. While credit unions in our investigation are doing a much better job of getting their members used auto loans than banks, they have an opportunity for improvement in generating stronger connections with auto dealerships..8% < DAY 4% 44% %.%.%.0% - DAYS 3- DAYS - DAYS COMPARED OPTIONS DID RESEARCH 4% TYPE OF LOAN PROVIDER USED %.% 8-0 DAYS 8.8%.% -4 DAYS > 4 DAYS OTHER CU BANK FOCAL CU

7 Provider offered lowest (fixed) rate on the loan Easy application process (e.g., required documentation, forms) I had an existing financial relationship with provider other than the loan in question (e.g., other currently held account) Speed of application process Offers competitive fees Excellent in-bank service I was comfortable with/liked the specific agent assigned to my loan application Offers competitive interest rates on deposits Provider was recommended by the car dealership Has warm and welcoming branches Not in top Provider was recommended by the car dealership Provider was associated with the car dealership Provider offered lowest (fixed) rate on the loan I had an existing financial relationship with provider other than the loan in question (e.g., other currently held account) Speed of application process Easy application process (e.g., required documentation, forms) Other Requires smaller down payment than other providers Offers excellent Internet banking options Offers competitive fees FOCAL CU OTHER CU BANK % % 3% % 8% 3% % % % % 4% %

8 IMPLICATIONS Used Car Loans For new and used auto loans, an analysis of why members choose the studied credit union shows that price was the primary factor. Relationship, however, was the second most important reason. Banks demonstrated much stronger connections to auto dealerships, specifically the bank being associated with or recommended by the car dealership. These results indicate that credit unions are able to compete effectively on price against their bank competitors, but they are losing out on loans influenced by auto dealerships. Therefore, credit unions must work to build stronger relationships with new and used auto dealerships. They need to first determine why they are not recommended more frequently, and then actively work to address the issues new and used auto dealers have with recommending the credit union. If the problem lies in a lack of awareness or consideration by dealerships, credit unions could create awareness by actively enhancing their communications strategy. Alternatively, credit unions could find ways to preemptively encourage or incentivize members to initiate contact with their credit union before considering a referral from an auto dealer. 8 Download insights on other credit union loan products at filene.org