As they pursue high performance, credit union leaders must juggle rising expenses, tighter margins, and challenges for non-interest income in the year ahead.
Most say “effective deposit pricing” is their top challenge when it comes to earnings growth in 2023, according to polling by Raddon. As the old banking leader’s saying goes: You can only be as smart as your most unintelligent competitor when it comes to pricing – either on loans or deposits.
Fortunately, there is a way to be smarter than competitors, a way not tethered to what other financial institutions are offering: Relationship banking. While not a new idea to credit union leaders, it has a different emphasis, and impact on the organization’s balance sheet, than it did a year ago.
Rates are causing credit unions to worry about effective pricing on deposits, but let’s look at the industry landscape. It will show why education and options provide a much-needed alternative to just raising deposit prices.
Competition is increasing
To start with, “rates-up” environments are good news. Leaders have wanted an upward movement in rates for a long time – about 15 years. It’s easier to make money when rates are at historical averages, rather than at historic lows, because margin offers more opportunities when you can work on both cost of funds and earning assets.
The grave risk facing credit unions is that deposit-side competition is an atrophied muscle. They haven’t had to work their relationship game for more than a decade and a half because of an artificial, near-zero-rate reality. Now, if they want to grow new deposit relationships – and retain current ones – they must focus now on what members want from their deposit products.
Competitors of all types, banks and other credit unions, report significant movement in deposits or increased funding-related tech investment. Polling of bank leaders, for example, shows 54% of banks bought digital retail account opening technology in 2022. Polling of credit union leaders shows the top requested digital and mobile banking feature by members is account opening, according to Alkami Technology.
Member movement is already clear from second-quarter data reported by NCUA. Larger credit unions with $1 billion more than in assets grew membership by 8%. Those between $500 million and $1 billion saw a slight decline of 0.5%. Then, depending on the asset segment, all others under $500 million reported an average of 7.8% in membership declines.
Relieving emphasis on price
Deposit relationships hold significant, pent-up emotion right now, especially for first-time homebuyers, savers, and those preparing for retirement. Engaging now with education and options will allow credit unions to keep depositors, even though tech has made it easier for them to leave.
Consider how hard it has been for savers since monetary stimulus came in 2008 and provided an extended period of historically low rates. Only the S&P 500 has offered returns much higher than 1%. Imagine you can’t safely use your current savings to increase your savings. How do you reach important financial goals like cobbling together a down payment for a home, creating a rainy-day fund, or getting ready for retirement? Many depositors – especially those reticent to risk savings on equities – have had cash parked at financial institutions. They’ve had no good options for investing to reach their goals.
These members need options and education. Many have never seen an environment – or know about products like certificates of deposits – where deposits are safe and provide a reasonable return. Their lack of experience could cost them their financial goals. They would use savings to create more savings if they knew how.
For example, saving to purchase a home is a priority for less than 20% of adults under the age of 30. That same cohort, though, says buying a home is a top priority, according to data gathered by Plinqit, a saving technology platform founded in 2018. They just don’t think saving a 3% down payment is attainable, Plinqit observed.
Retirement readiness holds similar emotion, according to a McKinsey & Company’s survey of 9,000 U.S. households, with as many as 80% of baby boomers unprepared for retirement. “Many prospective retirees feel that they lack assets and the financial know-how they need for a confident retirement,” McKinsey Insights reported.
Many credit unions are investing in new technology developed specifically for serving member’s financial needs through engagement. Those institutions that help make financial goals a reality through education and options have the best chance of remaining – or becoming – depositors’ financial home. What’s more, those credit unions will avoid retention and growth tactics that purely rely on paying members for their loyalty.