Blue Ocean Thoughts for Lending

Bill Vogeney
July 16, 2010 | COMMENTS

You may be familiar with the book, Blue Ocean Strategy. The basic premise of the book is that there are two competitive playing fields in business-the red ocean and the blue ocean. The red ocean signifies blood in the water, meaning the market is such that all competitors are after the same customers, with the same product, using the same type of strategy. A Blue Ocean strategy is one that pursues new markets, new customers, or presents a different value proposition for a product or service.

When I was first introduced to the book several years ago, theoretically, it made a lot of sense. In practice, I wondered, “where is the Blue Ocean in the lending business?” It was about the time we started to hear of the problems in the sub-prime mortgage business. “Gosh,” I thought to myself, “I guess sub-prime mortgages at 100% LTV to 580 FICOs are a Blue Ocean strategy. How's that working out?”

But recently, I had the opportunity to again review some of the concepts of Blue Ocean strategy at the same time my consumer lending managers were brainstorming ways to generate loan volume. I realized my earlier mistake; I was looking for big pieces of Blue Ocean. I knew there was no “home run” to build our volume, so I had to hit a few singles and decided to capitalize on some potentially promising niches. Other than mortgage loans, which have been strong performers since December of 2008, my credit union hasn't seen much consumer loan demand. You might be asking; what ideas did my lending group develop?

• The Mortgage Freedom loan. While home equity volume appeared to be almost non-existent at the time, we took an idea I heard at the 2009 CUNA Lending Council conference and built it into something we thought would resonate with consumers. Ent designed a low fixed rate, no-closing cost, 10-year loan as a first mortgage through our home equity department. We targeted members who owed less than $125,000 on their mortgage who were within 10 to 15 years of retirement. Since we knew that 2008 and 2009 were not kind years to 401(k) accounts, it made sense that selling the concept of retirement without a mortgage might hit our target market! If you're thinking that 2009 was the mother of all refinance booms and there weren't that many members who hadn't already refinanced, we believed that a lot of these people with smaller loans may not have refinanced due to the closing costs. After all, costs such as the appraisal and processing or application fees usually don't vary by loan size, so these costs are unusually high in proportion to a smaller loan. Using a maximum 70% of tax assessment allowed us to offer this loan with no costs including appraisal. Quite frankly, it's turned around our home equity department. We went from “dead in the water” to very busy in a matter of 30 days worth of targeted marketing. That was in March. It's now July and business has continued to be strong. We're again growing our home equity portfolio by an annualized rate of over 15%, with very strong credit and low LTVs.
• 60-month Home Equity loans. Two months ago, we started to promote our 60-month home equity loan at 3.75%. While home equity lending for purposes such as vacations and home improvements has dried up, there are still plenty of members with home equity loans elsewhere. In past recessions, I've tried to take the philosophy that I wanted to steal every piece of existing business my member had with other lenders. If people aren't borrowing for new purchases, get them to refinance the debt they have! With this rate (a little lower than what I charge for 60-month new auto loans) I'm capitalizing on the trend that started in 2009-consumers are paying down debt at a pace not seen in 60 years. We're typically lending only to 80% LTV, so we're not able to help every member with an existing home equity loan. It doesn't matter, as this program generated more than $3 million of loans in the first month!
• “Go against the grain” with Auto Loans. A lot of auto lenders have cut rates to record low levels in an effort to battle the 0% offers from the manufacturer. However, there are signs that 0% financing is not as effective as it was just a few months ago for manufacturers such as Toyota. So why would the banks and some of our credit union friends try to lower rates on 48 and 60-month loans down to as low as 2.9%? They're basically competing against themselves! It's not going to win any incremental business competing against 0%. What about targeting people who need longer term loans? Or emphasizing used car loans? I've seen too many credit unions try to copy their competitor's Indirect loan program, rarely with success. That's a red ocean strategy, one that's characterized by a constant rate war. Do something different: look at your competitor's rate and term sheet and do something they aren't. Our recent strategy included a “used is new” campaign, offering used cars at new car rates. While we typically have a higher loss ratio for used cars, we combined this program with some incentives for the dealers to send us loans with lower loan-to-values. The combination led Ent to have its best auto loan month ever in June-with extraordinary credit quality.

The bottom line is that even big companies fall into the strategy of “Me Too!” A company that mimics their competition can only compete on price, and quite honestly, there will always be competitors who are either too dumb to price properly, or are so efficient, you can't possibly match their price and make a reasonable profit.

It's time to find some of your own Blue Ocean.

Bill Vogeney is secretary/treasurer of the CUNA Lending Council, and Senior Vice President/Chief Lending Officer for $3 billion Ent Federal Credit Union, Colorado Springs.