Strategies for Growing Loans and Deposits in Spite of a Potential Recession

In a 2019 National Association for Business Economics survey of economists, 72% of respondents predicted a recession would occur by the end of 2021. More than half said they think one will strike before 2020 ends. The economists surveyed cited increased trade protectionism, financial market strains, and a global growth slowdown as factors leading them to this conclusion.

If the market does take a downward turn, consumer, auto and mortgage loans will face a higher risk of default, and deposit and card activity will significantly decline. To make matters even worse, instances of theft and fraud often spike during economic slumps due to growing unemployment and poverty.

Aside from a potentially looming recession, other market factors already weigh heavily on credit union business, including:

• High loan-to-share ratios and tighter balance sheet liquidity (source: NAFCU);
• Expanding competition;
• Regulatory concerns; and
• Evolving member banking wants, expectations and habits.

Despite these factors’ business implications, credit unions can continue to grow, protect and evolve their business. Credit unions have far more options at their disposal than they did during 2008’s Great Recession. With the right tools and strategies, credit unions can continue to grow their membership, loan and deposit business in a competitive, sustainable and risk-conscious way.

Non-Traditional Loan Offerings

Regulations, competition and liquidity all play major roles in a credit union’s loan strategy. Today, consumers are receiving loan offers from various organizations (through various channels) promising to give them a loan perfectly suited to meet their needs. For this reason, consumers are no longer looking for traditional loans as their only option.

Expanding loan portfolios beyond traditional offerings will enable credit unions to meet market demands while continuing to bring in safe, profitable loans. They can offer a variety of non-traditional loan types to differentiate themselves from other lenders, grow loan profitability and diversify their portfolios.

Student loans offer a huge opportunity for credit unions to establish long-lasting, profitable relationships with young members early in their credit journeys. A 2019 Cornerstone study found six in 10 consumers who applied for a student loan opened another account at that financial institution. While there is risk associated with student loans, private student loans carry much less risk than federal student loans, which make up 92% of the total national student loan debt, NerdWallet reported.

There are many other non-traditional loan options credit unions can adopt to diversify and strengthen their loan portfolios, including but certainly not limited to:

• Auto and consumer loans with flexible payment structures;
• Home refinancing and home improvement loans;
• Auto lending and leasing alternatives, like residual based financing;
• Commercial loans;
• Indirect loans; and
• Tech-based tools that drive loan interest and traffic (e.g., TrueCar).

Implementing these cutting-edge solutions can help you pursue more loan opportunities while offering desirable loan characteristics, like shorter terms and lower monthly payments, to a wider variety of borrowers.

Expanded Borrower Pool

The outdated FICO model does not paint a complete picture of where the risks and opportunities lie with members. Depending on this score alone will leave many valuable lending and refinancing opportunities on the table. There exists alternative types of borrowers that could be very lucrative for a credit union, such as near-prime millennials and Gen Zers still building their credit profiles.

Looking at alternative member data like bill pay history, checking or deposit account patterns, and savings account usage can offer credit unions a more well-rounded view of a prospective borrower’s predicted risk level. This information, along with traditional credit profiles, can be used to extend loan offers to more borrowers while still remaining risk-conscious.

Reinvigorated Deposit Growth Strategies

The fight for deposits has been a steadily increasing concern for credit unions recently. The latter part of 2019 continued to see deposit rates and demand for certificates of deposit falling (source: The Financial Brand). Many credit unions have traditionally relied on high-rate savings accounts and CDs to pull in long-term deposit activity. However, these methods are no longer working. Many consumers are moving their money to investment alternatives that offer higher returns. To build deposits, credit unions need to reinvigorate their approaches to drawing in new activity.

Account loyalty and rewards programs are a great way to draw in new depositors. These accounts incentivize members to make regular deposits by offering monetary and retail rewards for transactions. Loan-related benefits like APR discounts or cash toward loan payments could be used to incentivize deposit activity and simultaneously drive loan opportunities. These accounts can also deliver new revenue to credit unions by charging a fee or up-front cost for higher-level rewards account types.

Offering more than one type of deposit account will enable members to choose the right account for them and help credit unions continue pulling in various types of depositors, by offering multiple options that address different members’ wants and needs. Credit unions should consider assembling an account portfolio that contains savings accounts with competitive interest rates, while balancing these payouts with money markets, CDs, and commercial and retail deposit accounts. Fees from the rewards programs can offset savings account interest rates.

Credit unions could also reconsider the traditional pricing structures to protect current deposit accounts and continue attracting new accounts. There are two common options for changing up the pricing structure, which can go hand in hand: Pricing segmentation and dynamic pricing.

Pricing segmentation results in cutting rates for some accounts, so that only members less likely to be impacted by a rate cut will receive the change. This approach is a win-win for members and the credit union alike: The credit union pays out less money and members remain satisfied with their deposit account. Assessing which members would not be affected by the change can be a challenging process, but data on financials can be very helpful in making this decision.

In a dynamic pricing structure, members receive a custom rate up front, based on their financial situations. This too can be a bit tricky, but if credit unions establish clear guidelines for their staff, this payment structure can succeed for both credit unions and their members.

Community Education Programs

With affordable solutions and a member-driven mission, credit unions have the unique advantage of offering attractive, affordable loans and products for nearly every member of their community. Education programs are a great way to showcase these member-driven solutions to a larger portion of the community, while also helping to build trust and loyalty with current member relationships.

Consumers – millennials and Gen Zers, especially – want to understand a product’s functionality and how it helps them. Offering an opportunity for them to receive answers to these and other questions can drive trust with these members, while pulling in new members. Home buying and selling workshops, product-specific Q&A sessions, and talks on loan or fraud risk prevention can be fairly easy for credit unions to host, and with the right marketing, can have a huge impact on loan volume, account openings, member relations and sales revenue – especially in younger age groups.

Enhanced Member Experiences

Delivering a positive experience to all members has never been more important in ensuring a credit union’s long-term success. Consumers have more options for lending and banking than they ever have before, and many consumers are moving away from traditional banking entirely. Continuing to attract new members and build new business requires meeting consumers where they are.

No matter their age, consumers want a service experience that is simple, pleasant and relevant to their needs. Sales and service experiences should be as easy as possible, while still delivering the same positive, personalized service they would receive in face-to-face interactions. Leveraging online and mobile technology is the best way to offer these experiences.

Credit unions that prioritize their digital strategy to make mobile and online services a reality (e.g., bill pay, account inquiries, loan applications and mobile payment options) will be far more successful in sustaining members and driving business than those that don’t.

Data and Marketing Approach

If member service is one side of the digital strategy triangle, data and marketing make up the other two sides. Credit unions have member data on hand they can use to glean insights about each individual member’s unique preferences, stage in life and financial circumstances – from purchase history, to forms with demographic information, to social and ad interaction. These insights can be used to deliver personalized, targeted offers to address identified needs. The more relevant a credit union’s offer is to the member, the more likely it will garner a positive response. When properly executed, data-driven marketing strategies can result in enhanced member trust, satisfaction, loyalty and sales.

Even if a recession does come by 2021, credit unions that offer their members desirable solutions in desirable ways will see desirable results.

Jarrett Settles is National Sales Consultant, Technology & Lending for Allied Solutions in Carmel, Ind.