What credit unions need to know about lending and deposit acquisition
Sponsored by Harland Clarke
For nearly a decade, the Federal Reserve held interest rates at historically low levels. With a target rate of just 0.25%, the net interest margins of credit unions have been compressed, putting a heavy strain on profitability. Now, the prime rate for borrowers sits at 5.5%, the highest interest rate we’ve seen since the Great Recession.
Unprecedented Environment for Lenders
While interest rates remained artificially low during the most recent 10-year span:
- Debit interchange rates were reduced by more than 70% for covered credit unions under the Durbin Amendment.
- Fee income was dramatically reduced by changes to Regulation E.
- Costs of compliance with the Office of the Comptroller of the Currency, the Federal Reserve, and the newly formed Consumer Financial Protection Bureau skyrocketed.
• As the economy has recovered, consumer debt is on the rise again.
However, the industry is now facing some uncertainty on the direction of interest rates. In late January, the Federal Open Market Committee chose to stop interest-rate increases, at least temporarily, saying it would be “patient” in determining future adjustments and leaving open the possibility the next move could be actually be an interest rate cut.
Increasing Consumer Confidence (And Income)
Unemployment sits at 4.9% and median household income is also up 5.3% to over $61,000 in 2017. Consumer confidences are also rebounding, up to 96.2% (as of August 2018).
Consumers feel good about borrowing because they know they’ll be able to pay the money back. Where and how do bankers create value to remain competitive?
One lever still available is pricing. A few basis points here and there on either side of the balance sheet can add up quickly. What is so unusual now is that we have not been in the throes of an up-rate environment since August 2004.
Because credit unions have not had to navigate this environment in so long, the learning from past experiences may be distant or nonexistent.
The acquisition and retention of non-interest-bearing deposits is paramount in an up-rate environment. Yet, the market for new checking accounts is incredibly limited; according to this article, only 9% of households are switching checking account institutions on an annual basis and only 7.5 percent of consumers open their first checking account in any 12-month period.
With a limited consumer base making swift purchasing decisions, credit unions would do well to consider targeted, “always on” multichannel acquisition campaigns to stay in front of the consumers who are truly in the market for a new account.
Use This Environment to Your Advantage
What if a financial institution’s funding strategy has relied too heavily on time deposits and other higher and more rate-sensitive deposits? In this case, as loan rates rise, deposit rates will rise as well, almost in lockstep.
On the other hand, a financial institution that has a long-term commitment to acquiring net new checking-based households is now in a position to take advantage of the leverage the new rate environment affords.
Conclusion? Outrun the Competition
With everything going on in the market, credit unions need a steady and growing supply of core, non-interest-bearing demand deposit account balances. Highly targeted prospecting combined with intelligent pricing optimization tools and techniques can help drive steady growth in deposits while minimizing the effects of re-pricing existing portfolios.
Financial institutions also need to adopt an “always-on” marketing approach to deposits and lending, in addition to competitive interest rates, to outperform competitors. New technologies enable credit unions to present offers to consumers—anytime, anywhere—while giving the financial institution a powerful tool to grow its loan portfolio.
With an always-on marketing approach for both deposits and lending, an institution’s marketing team can build upon the knowledge gained from prior events to continually improve results and compete more effectively for market share.
Carrie Stapp is SVP/product management for CUES Supplier member Harland Clarke, San Antonio, Texas. She leverages her 19 years of the financial services marketing and product skills to manage the product lifecycle, from understanding client and consumer needs, assessing industry trends and identifying emerging market opportunities, to driving strong business cases that deliver results.