A year later. A world of change.
In barely 12 months, the priorities of retail banking jumped from mortgage and auto lending, to deposits, deposits, and, *checks notes* deposits. Rates are up and economic indicators are all over the place. Even poorly-regulated banks failed! What’s a credit union leader to do?
Keep on keeping on with rational financial policies, a strong focus on community growth, and consideration of products that create value while eliminating the need for punitive fee structures. Ok, that’s an approach you’ve heard from us before, but this is about leaders like you.
First, how did we get here?
Deposit accounts blossomed after the Federal government poured $3T in COVID relief into the economy. While it created an essential safety net at the time (something this country could use more of), today, those “cheap” dollars are gone, increasing the costs of your core deposits.
Challenge: You need liquidity.
In mid-2021, interest rates were near 0%. As of this article’s latest update (July 2023), they sit in the 5-5.25% range, with one or two bumps expected through 2023. This was the fastest rate increase since the 1980s, tamping down inflation partially caused by that monetary influx.
These policies are having an effect, with inflation hovering around 4.0%, though still higher than the Fed’s target of 2%.
On the positive side, jobs numbers show minimal impact from rate increases. The goal is to find the balance of tempering inflation while causing the least effect on employment while preventing a recession.
Challenge: Do you fight a rate battle? How do you avoid losing member funds to fintechs and other institutions offering high rate accounts (CDs, Apple Savings, etc.)? What creates member loyalty at your institution?
They may be financial lifelines for some members, but high costs for overdraft and other “privilege” features are easy to position as “junk fees” by the CFPB. It doesn’t help the image of credit unions as community stewards as big banks and fintech apps eliminate fees.
Regulatory pressure, a losing PR battle, and mindshare loss to fintechs are all struggles credit unions like yours feel today. It’s high time to consider updating your OD/NSF fee structures as well as reviewing how dependent your institution is on punitive fees.
Challenge: OD/NSF fees hurt the people most struggling but often make up a significant portion of revenues at credit unions. To eliminate those fees, you must find new sources of replacement revenue.
Digital wallets are a blessing and a curse. For one, having your cards “top of wallet” in a member’s phone or watch ensures you receive ongoing interchange income from their purchases. Plus, if your card graphic is current, they get reminded of your CU often.
However, those platforms can lead to use of embedded (Apple Card) or fintech-powered (Chime) spending and savings systems. No question, they’re easier to use and have fewer fees than your accounts. And like that, you’re no longer a member’s PFI.
This means a loss of interchange income and also continued reduction in liquidity. No wonder institutions like yours prioritize deposits.
And then there’s the Credit Card Competition Act. All evidence points to it being a windfall for large merchants at the cost of consumers and financial institutions, while the costs fall on those least able to pay, a practice we regularly advocate against.
Challenge: You can’t make money from a member’s purchase activity if they aren’t using your cards anymore, or the revenues are capped.
So What Are Bankers Doing?
Our partner, StrategyCorps, went out and asked. They surveyed hundreds of bankers, across a wide spectrum of institution types and sizes, on this topic and discovered their thoughts, concerns, and plans moving ahead.
These 5 charts highlight varied perspectives and strategies. Where do you fit?
For those of you needing screen readers or otherwise cannot see the images simply, the top-level data is shared below each chat. Also, if you’re using a modern Apple product (Macs included), did you know you can interact with text in images to select and copy?
Stuff Your Mind, Not Your Inbox. Get the info you need a couple times a month.
What are the top revenue concerns facing your financial institution in 2023?
- Top Concern
- 51% said “Increasingly higher costs on core deposits”
- 17% worried about declining overdraft/NSF revenue
- 11% stated “widening net interest margins insufficient to offset prospective loan demand charges”
From this chart, our main takeaway (that you probably already know) is that over half of financial institutions are thinking about the higher costs of core deposits. Nearly everyone put it as a top 5 or higher concern.
What are your action plans for overdraft/NSF policy and fee changes?
Over half of respondents plan to “offer new products and services that generate replacement fee revenue”. Funny, as we have some ideas… Almost half (45%) will eliminate or reduce NSF fees, while a slightly smaller group (42%) expect to do the same with overdraft. This goes well with mission-focused strategies.
Interesting to us was the 18% who plan to “raise fees and/or conditions to avoid a fee on existing bank products”. These institutions are taking a PR and member satisfaction risk, as no one likes being charged more for something for no obvious reason, or having terms change in a worse fashion.
In other words, with large banks and fintechs eliminating fees, it doesn’t look great to be raising yours. We recognize that fee revenue is important; just recognize there’s other ways to keep income flowing.
What are your action plans to address slow/no growth payment card interchange fees?
In little surprise to any reader, over half (57%) of respondents will be marketing debit card usage more aggressively, with only 17% doing the same for credit cards. Our experience time and again says that members who use your credit union debit card are most active.
They also are the most loyal, generating the most revenue across a range of products.
And that’s to say nothing of the interchange revenue. Think about why a member would want to use your debit card more. How does it make their financial and physical life better? Can it protect their family, their purchases, or even actively assist in financial wellness?
Just marketing your debit card doesn’t set your institution apart from Chime, Varo, or other credit unions.
It’s about the mission…
What are your plans to address the higher cost of core deposits?
This set of responses is interesting. While over half of your peers will be raising interest paid on core deposits, over a third (36%) will stay out of the “interest rate game” altogether. Our take? Find the middle ground. People know rates are up, and they expect their financial institution to act in kind.
However, if your biggest draw is “highest rate”, you’ll always be battling another institution who is a few basis points higher. It’s not sustainable, and you’re not building loyalty. What can you do alongside better savings rates that convinces members to make your accounts their preferred space?
What are your action plans for new customer growth?
We’re thrilled to see that 70% of those surveyed said they will be increasing marketing investment to attract new customers. More so, nearly half of respondents will be investing in a sales culture, with 44% launching new products and services. We’ve written about the need and challenges of marketing numerous times. Who’s your ideal persona? Is your team ok with selling?
Becoming a sales-and-mission-focused institution is more than making compelling marketing pieces. You need staff buy-in, a process to track and manage these processes, and a culture that understands why you’re making that shift. If you’d like guidance in this process, we’re long-time students of numerous platforms and teachers over many decades!
Set up a chat and we can help you decide the best approach for your institution, members, and team.
Liquidity Low-Hanging Fruit
Building deposits and gaining additional liquidity is a top concern across many of those surveyed. From the results, we see a lot of “do the same thing” strategies, coupled with a focus on marketing.
Ok, we’re all friends here. Let’s be honest: Has that worked in the past? Do you believe the same approach makes sense today? Will it be sufficient to confront new and emerging challenges?
And given you manage a credit union, the paragon of community financial institutions, might you be overlooking a lucrative “low-hanging fruit” which could both boost that bottom line and also deliver increased loyalty and financial wellness to members?
Credit unions can generate recurring non-punitive, value-added income by connecting with and, frankly, delighting your existing unengaged member base. Our partners at StrategyCorps use a deep-dive data analysis into your entire membership to identify opportunities. It’s accessible for both data nerds and “just give me the executive summary” people alike!
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Challenges? Just Solutions In Disguise.
Need liquidity? The program encourages greater checking and savings account usage.
Tired of fighting the rate battle? Offer rewards worth far more than a few percent and keep members close.
Concerned about the loss of fee income? Generate revenue from value, not from punitive programs.
Struggling to keep that interchange revenue flowing? Connect massive rewards and member financial protection to their regular use of your cards!
With the StrategyCorps data team at your side, you learn how your membership is truly engaged…and gain the tools to grow those numbers. Over 350 community-based financial institutions build their revenues and engagement with the power of this data.
On average, combining the data understanding with an appealing value-added checking system generates $500,000 annually for every $1B in assets. I don’t know about you, but that seems like it’s worth a few minutes of your time.
Learn more during a short conversation with our team. Schedule here.
Barring that, I suppose you could try giving away toasters?
Blogger. Speaker. Futurist. Part-time Jedi.
Dedicated to helping your credit union, large or small, deliver mission-focused financial empowerment to your members. And make a positive impact on your community while you’re at it.