Service-Centered Growth: How Member Experience Drives Loyalty

[00:00] Dave Ledwell: People ask us about our scale and size, and obviously, we are a very large credit union, but at the end of
the day, I don’t think members care how big you are. I think they care about what your service looks like. When they have a problem, can you help solve their problem? Are you there for them 24 by 7? When they need you, do you pick up the phone? That’s what they care about.

[00:25] Narrator: Welcome to 22 Minutes in Lending, your go-to podcast for insights on all things lending, from lending practices, regulatory updates, how to enhance lending efforts and more. In each episode, Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive in to the latest in lending.

[00:48] Vince Passione: Welcome everyone to 22 Minutes in Lending. I’m your host, Vince Passione. I’m excited to welcome Dave Ledwell, Senior Vice President of Consumer and Business Lending at Navy Federal Credit Union. Dave has over 30 years of experience in banking and lending, having held leadership positions at Chevy Chase Bank and HSBC prior to joining Navy Federal Credit Union in 2009. Dave currently manages the team at Navy Federal responsible for personal loans, commercial loans, and the largest direct auto lending
origination business in the credit union industry. So, without further delay, let’s jump right into these 22 Minutes in Lending. Dave, thank you for joining us.

[01:22] Dave Ledwell: Well, thanks, Vince. I really appreciate the opportunity to come on your show.

[01:26] Vince Passione: Excellent. So Dave, look, we had Tony Boutelle on from Origence recently on the podcast, and he’s running the largest indirect… He’s basically the largest indirect lender in the industry today in the credit union space. And he’s basically done this over 20 years. He’s helped credit unions generate about $420 billion in loans. That’s about $2 billion a month in aggregate over time. Now, based on our conversations, Navy is doing about $2 billion a month in direct lending. Now, assuming the average used car price is
$27,000, that’s about 70,000 cars you’re financing a month. So how do you drive that kind of loyalty amongst your membership base?

[02:08] Dave Ledwell: Well, we have been very fortunate and I’ve gotten to know Tony over the last few months and what a great guy he is. I really admire the work he’s doing in the indirect space. So there’s no short and simple answer, but I think that our bedrock is always member service. So we try to keep it simple for our members and we have 13.5 million members and they are very loyal to Navy Federal and we just try to keep it simple for them. We answer their questions very succinctly when they have problems. We try to solve them. When they want to buy a car, we try to make the finance process very easy and quick and basically if we feel like if we’re competitive and we’re easy to use, members will use us, and that’s paid
off for us.

[02:55] Vince Passione:  So now, we’ve had this conversation about relationship recognition and the impact it has when you’re pricing an auto loan for a member. Can you take us through what that means and what’s the difference between relationship pricing versus relationship recognition?

[03:13] Dave Ledwell: Yeah, so there are relationship pricing models that are out there that if you do this, you get this. We don’t really have that kind of model. However, we do have custom models that we’ve built. Part of the attributes that have been embedded in those models has to do with how you’ve done with us. How long have you been a member with us? What kind of products you take in, how you perform? All of those things add up to a better risk profile and a better experience. It’s like we want to take advantage of the fact that we know
you, we know the member.

[03:49] Vince Passione: And now, we’ve also had this conversation, which is so now your member is walking in with this loan that they have from Navy, and please, if I have the process wrong, correct me, but they’re walking in and typically they might be walking in with a bank draft or they’re going to call you once they find the vehicle. And having spent time in dealership at my days at Dealertrack, they’re going to wind up in the F&I office at some point and the dealer has every incentive to try to take that deal and flip it. So how do you avoid that happening and do you give instructions to the member and how do you deal with that whole situation where you’ve now lost ball control, right? You’ve got the member, he or she’s got the
loan, now they’ve got to go in and we’ve got to close.

[04:35] Dave Ledwell: Yeah, so it’s not that we prevent that from happening all the time, but to be honest with you, it’s trust. The whole thing is about trust. Members trust us. The majority of our members come to us and get their loan approved before they ever go to the dealership. So they’ll come to us and if they know what they’re going to buy, we can do it that way. Or if they’re just going to go shopping, we could pre-approve them for just a fixed amount. And so when they go to the dealership, they’re empowered and they know that. And we tell members, “Hey, look, if you’re getting a 0%, we can’t beat 0% or a 1.9. If you can get that deal, take that deal.” And then after a while we’re going to try to refi that and give them a little money to come with us anyway.

[05:18] Vince Passione: Dave, why do you think more credit unions don’t do business this way? Because the majority of credit unions A, are indirect as opposed to your direct business and B, the idea of relationship pricing. Even a dealer, you can go on Dealertrack, I guess, and put a scorecard up and do relationship recognition somehow, but is it systemic? Is it philosophical, or are they doing it and we just don’t know because the dealer now has the deal in hand and is getting compensated?

[05:47] Dave Ledwell:  Well, people go indirect, I think, a lot of times. I started off in the indirect business and so people go the indirect route to get application flow. And so if you’re a small credit union, you don’t feel like you can get enough application flow out of your own base, then that’s the way to get volume. We’re fortunate in that we’re big enough that we can get all the volume that we want from our dealer base. So we really don’t need the dealer to perform the application flow story for us. We’d get our application flow.

[06:21] Dave Ledwell: We like the direct model because we have a direct relationship with our members and they have a relationship with us and we are very fortunate that we’re able to do that. I think that the barriers for everybody to do that is just how much flow can you get out of your member base? For large credit unions, it’s a little easier, but it’s very tempting for people just to hook up with the setup that’s already there, which is indirect. After all, but probably 95% of the auto deals that are settled in the United States are settled indirect. So it is the lower volume for sure, and to be able to set it up and have somebody else work on marketing the customers and then you just have to compete for the business. We understand that
model, but we like the direct model a lot better.

[07:11] Vince Passione: So now, I was looking at your 5300 Report, and correct me if I’m wrong, but it looks like current portfolio
is about 30 billion outstanding on direct auto.

[07:20] Dave Ledwell: Yes, a little bit. Yep, right at that.

[07:21] Vince Passione: And that’s about double since the pandemic. So how much of that was due to increased sales versus car values going up?

[07:30] Dave Ledwell:  Well, there’s a bit of both. Obviously car values went up a lot, but we made a decision right when COVID hit. We decided to lean in and get some share, quite frankly because we were thinking that the business was going to go for a while and then shut down because the economy was shutting down. Well, so we leaned in, we dropped rates and we picked up some share. Well, what happened was our members never stopped buying cars. It was crazy a little bit. And so we dropped our rates, we got share, and we just kept chugging. So we grew by double digits all through COVID, and we had two or three years of pretty remarkable growth.

[08:16] Dave Ledwell: So on top of that, cars were more expensive. We were financing more, but not as much as you would have thought because members were also very liquid during that time. And so they were actually putting more money down than usual. So we did finance more as our LTBs did go up, but not 30% or 40% and they’ve actually started to come down again. So although we did do elevated LTBs for a while, that abated and I wouldn’t say normal, but we’re back closer to normal. It’s not back to where it was and maybe it never gets back to where it was, but we were comfortable where we sit as far as LTBs.

[09:01] Kara VanWert: This is Kara VanWert, Chief Lending Officer at Veridian Credit Union. Since 2016, we’ve been working with LendKey and joined the member student lending CUSO to help provide student loan solutions to our members. As the current CUSO board chair, I’m proud of the CUSO LendKey partnership, as this has allowed Veridian to help over 12,000 of our credit union members finance their education and improve their financial health. LendKey streamline processes simplifies the lending experience, making it easier for our members to access the financial support they need.

[09:40] Vince Passione: So I was looking at some Manheim data and to your point about what’s happening on pricing, and basically it was showing what the dealers paid on a used car this past April at the auction versus last April, and they said they saw almost a 14% reduction year over year, April to April. And then obviously you talked about it, roughly 20% of new vehicle sales involving a trade, they’ve got negative equity now. And I saw some data from Edmunds and they were saying, “Look, the average amount of negative equity being rolled forward by the consumer is about $6,000.” So this becomes a real challenge. And I think we’re at record levels, I think, when it comes to negative equity. So how do you, as a lender, adjust your underwriting given what’s happening because it’s going to work its way through the system, and we saw this in 2001, 2002 in the leasing business, and you view it in there, but what do you do to protect the lender? What do you do to protect the member?

[10:38] Dave Ledwell:  This is an issue that we see. Really, there’s only a couple ways to actually get through this negative equity situation. People really need to keep their cars longer and they need to pay it through. What’s happening is people are increasingly taking out… 72 months is the new 60. When I started, 48 months was the deal. That was average. Now it’s 72. About 45% of the business we do is 72 months, and about 15% is 96 month financing. Now, cars last longer than they used to, and they’re more expensive. People are always searching for a payment. Everybody that buys a car, they’re looking for payment. The issue is that people are taking 72 month and 84 month loans and they’re keeping the car three years. So you are never going to pay your loan, you are never going to pay your car off or get rid of any negative equity that you bring in, do it that way. All of our members, they need to eventually pay those loans down.

[11:40] Vince Passione:  You mentioned something about you could have stay in the car longer and then you get into issues of delinquencies and delinquencies are up. We’re saying they’re up this half by about 20 basis points, which is frightening. And then if you ever have to go after that vehicle and repossess it, now you, as the lender, are going to deal with this residual value concern. But you’re saying even in light of that, you won’t modify your underwriting just yet?

[12:05] Dave Ledwell: No, we’re not seeing that. In general, our loans perform better than average. That’s the affinity that we’ve built up every years with our members. So we see it, we see it. But also, over the last few years, because used prices have been up at auction, we’ve actually been able to get more at auction for repos than normal. So there’s a plus to minus side to all of that.

[12:32] Vince Passione: So, we’ve also had the conversation recently about auto refi and is A, auto refi a way to solve the negative equity issue?

[12:43] Dave Ledwell:  Maybe indirectly. We have a big refi program and it’s about 15% of the car business that we do. We generally can give people a better rate, which will reduce a payment. That doesn’t really solve the negative equity issue. There’s really no substitute for just paying the car off or paying it down, keeping it longer or paying down, just getting through the curve so that you are starting to build equity in the car. Really, no substitute for that. But we do save a lot of members… They’ll go in, they’ll go to a dealership and maybe they didn’t come to us, and we see members that have sometimes 18%, 20% rates, really crazy rates, but we’re easily able to save significant money on their monthly payment. And that’s why we do a
lot of refi business.

[13:36] Vince Passione: So another big conversation we’ve been having is EVs. It’s everywhere in the press. The growth is good, the sales group by about 50% through 2023. But we’ve seen some of the residual values flip around, especially given the fact that Tesla has changed pricing a few times. So how should credit unions approach this market given the volatility that’s existed in the past when it comes to pricing?

[14:04] Dave Ledwell: The EV market is very interesting, and, of course, being led by a very interesting fellow who tends to be very mercurial and changes his mind a lot. I think we are trying to meet the member’s need. Members want to drive EVs and hybrids, and we have elected to finance those just like we finance anything. Therein, might be a little bit more collateral risk in those. We will see how that goes. That’s an unknown. What happens when the batteries start to wear out. How do people value EVs five years from now? An unknown, but we’re going to go on that journey with our members. We do a lot of EV financing.

[14:45] Vince Passione: So step away from Navy for a minute, just looking at the EV market and what Tesla’s done, they’ve gone down a different distribution model. The entire car industry is based on this independent franchise dealer to basically distribute the manufacturer’s product for them. And there have been others in the industry in the past who have made statements about does this model work? Does this model make sense? And dealers are obviously extremely sensitive. That’s their entire business is taking this manufacturer’s product and then turning it around and selling it for them. But Tesla has crossed the line. They’ve started off from the beginning saying they’re not going to use that model. They’re directly distributing their own product. Do you think that the industry is going to change? Do you think we’re going to see Ford and other US auto manufacturers follow the Tesla lead?

[15:41] Dave Ledwell: Well, that’s a very interesting question. I just remember reading about Amazon. Amazon is getting into the auto business. They’ve made some arrangements with Hyundai and maybe a couple of others to distribute cars. The thing about the dealer is it is one thing to talk about the sale. I think manufacturers would say, “Hey, we could sell cars direct. We don’t need a dealer to do that.” But really, it’s the life of a car, the service, that’s the body work. All the stuff that happens after the sale, that’s really where a dealership makes most of their money, not on the sale itself. So is there room for a hybrid model where manufacturers sell direct, but all the servicing remains with the dealership? Manufacturers don’t service,
with the exception of Tesla. They have service centers, but manufacturers don’t service. So what are they willing to do?

[16:39] Dave Ledwell: And I would tell you, I have a lot of empathy for dealers. We are a direct model, but I grew up in the indirect business, and those dealers have invested millions of dollars in those dealerships. And they’re small business people in there and I have an affinity towards small business people, as you know. I think it’s like everything else, it’s got to evolve some way. I don’t think 50 years from now it’ll be the same. Is there room for a hybrid solution? I hope so, because the dealers, they’re vital pieces of the community. I hate to see them go away, and I don’t think they will. I think that people want to shake hands with a person. They want to kick the tires. They call it kicking the tires for a reason. People like doing that. And
I don’t think that you can mass market cars in the United States without having boots on the ground. I think that’s the dealership.

[17:30] Vince Passione: So let’s switch off cars, although you and I could probably talk about cars all day. Let’s talk a little about FinTech and embedded finance. So lots of big buzzwords in the industry. Everybody’s talking about embedded finance. They’re looking at, “Hey, you get your Uber and you never have to take money out of your pocket. You get paid automatically.” And now LendingClub has announced that they have plans for embedded finance. They announced in the last earnings call. And Stripe is going to be decoupling its payment service so it can be a provider of infrastructure for that. And then you got millennials, 80% of them are shopping and purchasing online, which is up very significantly, almost 33% in the last five
years. So when you think about your tenure at the credit union, even when you’re at the bank, what does this mean to the credit union system, both in the short-term and the long-term? Is it a good thing? Is it a bad thing?

[18:21] Dave Ledwell: Well, good or bad, it’s a thing. So it is disintermediation. This is the way it is now. People like the convenience of buying online. They love the convenience of having the finance piece be a seamless part of their transaction. They love the fact that they can defer payments, and they love the fact that sometimes it doesn’t cost them anything. So this is here to stay. The question for financial institutions is how do you adapt to this new world? Because we always say here, “We can’t live in the museum.” Well, the museum is different now, it’s different. So there is opportunity though, as there always is. And maybe partnering with retailers, partnering with people who are doing embedded finance. The embedded finance is
probably the next big gold rush for someone. And if it’s going to be financial institutions, they’ve just got to be adaptable and they got to be listening to their members.

[19:25] Vince Passione: Navy Federal really relies on one of the big strengths is service, service to the member. Do you think that embedded finance for your business proposition is sticky enough? Because isn’t it episodic, like, “Okay, I’m driving my new Uber. I’m going to pay for my car ride, or I’m at the store and I’m going to make a payment?” Do you think that it’s top of mind that if Navy were there and you had your embedded platform there at the point of sale, that it’s top of mind or is it not sticky and almost it’s pushing the brand of the retail in front and now you’re sitting not even the back, I don’t even know that they see you there?

[20:09] Dave Ledwell: Yeah, that is true. It’s very transactional. So our whole business is not based on transactional relationships. We want to be the trusted advisor. So I think that what we have tried to do is educate members about what this means and how it works and what to look out for. So I think in the long run, the opportunity is for education. The opportunity is to make yourself relevant to your young members, especially, by being there to talk about the old nuts and bolts about how you build wealth. It’s what we learned when we were kids probably, but it’s save a little bit, spend less than you make, pay your credit cards off. Funny for a bank to be saying that, but it’s true. It’s a financial help of the member we’re talking about. That is time trusted advice, and still the same advice today. It’s just getting to our young members to get them to listen to that about budgeting, things like that. They need that information, whether they know it right now or not. All that stuff is still true and still relevant today. So it’s all about relevance and education and listening.

[21:29] Vince Passione: What about the smaller credit unions? What did they do to stay relevant?

[21:34] Dave Ledwell: People ask us about our scale and size, and obviously, we are a very large credit union. But at the end of the day, I don’t think members care how big you are. I think they care about what your service looks like. So small credit unions, mid-size credit unions, if you’re focused on serving your member and listening to them and trying to be relevant to what they’ve got going on and you’re responsive to them, I think that people don’t care whether you’re 7 billion in assets or 700 million or 170 billion, they don’t even know that. What they know about is when they have a problem, can you help solve their problem? Are you there for them 24 by 7? When they need you, do you pick up the phone? That’s what they care about. And
so I think that credit unions and for that matter, community banks, banks all have an opportunity, but you have to be responsive and listen to the member. And that’s what we really try to do is put the member first, keep that as our North Star and service them heavily, invest in service.

[22:47] Vince Passione:  Well put, Dave. I’m going to leave it there. I think investing in the member, paying attention to the member, doing everything you guys have done all these years to create an amazing franchise. So it’s a great story. Thanks for sharing it. And that wraps up our 22 Minutes in Lending. Dave, thanks again for taking the time with us today. Thanks as always to our listeners, and don’t forget to subscribe so you can enjoy future episodes. And I’ll meet you back here at our next 22 Minutes in Lending. Dave, thanks again.

[23:14] Dave Ledwell: Thank you, Vince. Appreciate it.

[23:16] Narrator: Thank you for listening to the 22 Minutes in Lending podcast. We hope you enjoyed today’s episode. You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, be sure to subscribe and leave us a five-star review.