LAS VEGAS–It isn’t all the new electric vehicle (EV) models or the still high prices or the replenished dealer lots that should have credit unions’ attention when it comes to auto lending—instead, it’s the fundamental shift in the “top of funnel,” according to one person.
During Origence’s Lending Tech Live event, CEO Tony Boutelle stressed on several occasions the need for credit union lenders, especially those who have been in their positions for some time, to recognize how the lending process is not just changing, but has changed.
“From an auto lending perspective, 85% of all auto loans are originated at the dealership,” said Boutelle in an interview with CUToday.info during the event. “The ways the dealers have worked is, (the customer is) shopping on Saturday but not thinking of buying. Well, they have all the financing right there and the next thing you know you're buying. Even when people are shopping online they don't necessarily always pick the car they’re going to buy, they go to the dealership. That’s why we’ve been so successful at (CU Direct); we have been able to get the loans.”
Financing Gets Embedded
But now all those dealers’ websites as well as the big brand name auto shopping sites have the financing embedded. Rather than waiting to go to the dealer to close the financing, the shopper increasingly gets the financing online, too. Just like decades-old model credit unions are accustomed to, under that model, the lender with which the auto buying site has a relationship typically shares some of the revenue in some form with the auto dealer, too. That’s not the part that’s different.
“The top of the funnel is changing; the financing is not necessarily at the dealership anymore,” Boutelle explained.
That’s one of the reasons Origence is currently working on a proof of concept with CarGurus.com.
It’s Not Easy, But…
What all of that means is lenders may need to get uncomfortable and adjust their traditional thinking.
“So many people have been in the indirect lending game and there are a lot of people who’ve been doing it for 20 to 30 years and they don't want to believe it,” observed Boutelle. “They’re saying, ‘You know my dealers are all working the same way.’ Well, it’s not going to be an instant change, it’s going to be a gradual change.”
As an example, Boutelle pointed to Carvana, which has its own finance company that is now capturing approximately 40% of all the financing on vehicles the company sells. Dealership groups, which have gotten increasingly larger and become regional and even national in size, as well as retailers such as AutoNation have also set up their own finance companies.
Tony Boutelle
“We have to diversify beyond just the franchise dealership to how people are now sourcing these loans,” said Boutelle. “The EV car companies are going direct; there is no franchise dealer. EVs were 4.7% of all the new cars sold last year in the United States and in the first quarter of this year it was 7%. Of that 4.7% last year, Tesla was 72%; in the first quarter they were 60%, so the pie is getting bigger. There are so many EVs coming to market now.”
The Other Funnel
The funnel—or in this case, funnels--has also changed for Origence, which as part of its rebranding from CU Direct has also expanded the types of lending beyond the bread-and-butter auto financing to include home equity loans, consumer lending, solar loans, and more.
Origence has also launched FI Connect, a lending-as-a-service solutions provider that offers complete systems and program management.
“People are always going to buy cars,” said Boutelle, “but we definitely want to diversify into any consumer loan. We do everything from credit cards and unsecured to home equity and everything in between…We’re preparing for the future.”
To that end, Boutelle said the goal is to have credit unions present at any point a loan needs to be financed.
“With FI Connect, I'm not sure everybody gets we're a finance company now, because if we want to connect with these big players, they don't want to deal with four or five banks or credit unions, and basically, there's no one credit and that will serve them well enough to be able to take on a billion dollars of loans in a month,” Boutelle said. “We did $80 billion on the network last year, so we should be able to get the loan, approve it and then be able to immediately sell it to a credit union. We have software we have built that allows us to source those loans, to ‘memberize’ them, with different credit unions. It's a complicated process, obviously, but we can round-robin the loans to these different credit unions. They can get back the members they already have and then round-robin the new members.”
Boutelle acknowledged the company does occasionally hear from credit unions concerned they will be passed over in that round-robin process of loan distribution, but said there are rules in place and the credit unions—given that Origence is a CU-owned CUSO—also have “trust” in the company.
The Growing Focus Around AI
In his opening keynote address to credit unions at the Lending Tech Live 23 event, Boutelle joked that the company was changing its name to OrigenceAI, after which its market capitalization would soar given how much attention and funding artificial intelligence is now getting.
But behind the humor is a recognition that AI has the potential to change just about everything, from Origence’s own internal operations and models to auto financing itself.
“I think AI scares everybody a little bit,” said Boutelle, noting each organization is going to need to get in place polices around the use of AI. “People are loving AI or hating AI for a lot of reasons and I think we have got to be in the middle and respect it. This is a game changer.”
The game has changed for Irvine, Calif.-based Origence’s HR department, for example, which has been using AI to write job descriptions, review pay and more, according to Boutelle. In addition, the company’s software developers are using AI to check their code and soon will be using it to write code, he said.
“We have to lean into it. They're talking about a 50% reduction in costs for most organizations if you use it properly,” Boutelle explained. “The question is how fast do we get to that 50% reduction? I think it will take some time, but we definitely think it's an opportunity. The biggest expense for our organization is software development, so we're going to see what we can do with that.”
AI Partnership & Decisioning
The use of AI isn’t new to Origence, which in 2022 announced partnerships with ZestAI and Informed.IQ. Boutelle said both relationships have been delivering on their promise.
“(ZestAI is a) leading player in this field and they're focused 100% on lending, which is right up our alley,” said Boutelle. “We can't do everything, so we have this platform that we want to connect as many people to for their decisioning. A credit union cannot be below 80% (on auto-decisioned loans). You have to have Amazon-type instant decisioning. A credit union isn’t going to survive (if members) have to wait two or three days for a decision anymore. The data is there that says (some CUs are) getting comfortable with the fact that they're letting the machine say yes and no. But many credit unions still look at every single one, many of them big credit unions, and you can't do that anymore.”
Two Other Issues
Boutelle touched on two other issues in his discussion with CUToday.info:
- Liquidity & Opportunity. “There have been a lot of credit unions that couldn’t make many loans because of liquidity issues. Now that they're not slammed with loans, I’ve been trying to tell a lot of people to lean into new technology. With FI Connect, I think we're going to have lots of opportunities, but not if you’re not in line to get connected. We probably have a dozen (credit unions) signed up to get connected, and it will probably be a hundred next year. Even if you’re not ready to make those loans right now, look at your technology and see what you can change out for when the next boom comes so that you're able to process things faster. It’s really a tech game right now. They should be evaluating and making sure they’ve got the best software to make their loans in all the different channels.”
- Delinquencies. For now, Boutelle said he does not believe auto loan delinquencies show any reason for concern. But he said an issue worth watching is that so many borrowers paid substantially above MSRP for new cars and well above what had been the values on used cars that spied during the pandemic. Should values retreat to the norm, credit unions could see “some people turn in their keys,” he said.