The Unfolding Impact of Rates and Retirements

Sponsored by Fiserv

Changes over the last decade have placed tremendous pressure on financial institutions. The rise of fintech competitors, shifting demographics as baby boomers are replaced by millennials, long-tail implications of the pandemic and now a radically different economic environment have created challenges for every financial institution. 

Consider that since 2013:

• The number of U.S. credit unions has declined by 28%, according to statistics from the National Credit Union Administration. In this same period, credit union deposits grew more than 100% and loans grew more than 140%. This tells us the industry is not losing relevancy, but smaller institutions face significant challenges.
• Credit unions with assets under $1 billion have seen assets and membership decline precipitously. In 2013, the NCUA reports, these institutions represented 97% of credit unions, 46% of industry loans, 48% of industry deposits and 56% of credit union members. In 2023, they still represented 91% of credit unions, but their share of loans, deposits and members declined to 23%, 25% and 29%, respectively. 
• According to Raddon Research Insights, the percentage of consumers who consider Bank of America, Chase or Wells Fargo to be their primary financial institution more than doubled between 2013 and 2023. The greatest shift occurred among millennials and Gen Z, representing an existential threat to community banks and credit unions.

In addition, the COVID-19 pandemic has accelerated the retirements of baby boomers, creating a scarcity of workers that puts pressure on wages and fuels inflation. This will result in higher interest rates as the Fed seeks to tamper inflation.

Baby boomers entering retirement are transforming from a generation of savers (accounting for more than 50% of consumer deposits at most financial institutions) to more active spenders, according to Raddon Performance Analytics. The impact will be a long-term reduction in deposits and again, upward pressure on interest rates. 

These repercussions are already being felt. 2023 saw a rapid rise in interest rates and funding costs and subsequent pressure on margins. While net income for the credit unions rose approximately 13% per year between 2017 and 2022, according to NCUA, net income was down 8% in 2023. The drop could be even more severe in 2024.

The Implication: Financial Institutions Need to Manage Deposits and Loans Differently 

In the low interest rate environment of recent years, most institutions treated deposits as raw material for lending. When rates are low, it is not worthwhile to spend time managing the cost of funds. With higher rates, financial institutions need to manage deposits more effectively. This requires better deposit products, pricing strategies and technologies, such as DNA® and Portico® from Fiserv. 

Higher interest rates are also impacting lending. Mortgage refinance volume declined by 75% nationally in 2022 and dropped another 50% in 2023, according to the Mortgage Bankers Association. It is not likely to recover meaningfully in the next three to five years. Higher rates are also beginning to impact the demand for and quality of credit, with greater delinquencies and charge-offs. Again, financial institutions need to have the appropriate technology to compete effectively.

Economies of Scale Play a Vital Role in Enabling Credit Unions to Compete

Scale provides the ability to compete from a marketing, product development and compliance perspective and perhaps most importantly, from a technology perspective. Credit unions must improve the experience of the member, and technology will play a critical role. 

To improve economies of scale, growth must be sustainable and generate strong earnings. Make sure your business model can be successful in a sustained high interest rate environment and understand that price (rate and fees) is only one aspect of your value proposition. 

Credit unions are increasingly turning to acquired growth through mergers and acquisitions. This is effective when used judiciously but be sure to consider all aspects in a merger, including geography, technology and culture.

The second way to achieve scale is through partnerships that provide key competencies to help you compete with larger financial institutions. 

Bill Handel is general manager and chief economist for Raddon, a Fiserv company. He has worked in the financial services industry since the 1980s, in the areas of economic and financial analysis, consumer and small business research, accountholder analytics and thought leadership. Since joining Raddon in 1990, he has created, developed and managed many unique programs to assist financial institutions in the effective management of their organization.