Visualizing the Future in a Year of 'To Be Determined'

Just as we all knew and expected, things did not magically get better when the calendar flipped from Dec. 31, 2020 to Jan. 1, 2021 – even though we may have secretly, unrealistically hoped for a sudden return to normal, or even just a clearer answer on when we’ll see a return to normal. Things also did not magically get better on Jan. 20, 2021, when the Biden Administration officially took charge. While the new president’s swearing in brought a huge sense of relief to many, results of the administration’s efforts to turn the pandemic around won’t be seen for some time.

For now, we’re still living in limbo. Many businesses are still shut down, COVID case and death numbers remain high, more contagious variants of the virus are spreading, and the first few months of the vaccine rollout have been slow and disorganized. It’s still impossible to make definitive plans for travel or in-person events, which has led many credit union industry event organizers to keep their gatherings online for 2021 and move their bets for when in-person gatherings can safely return to 2022. All we can do now, it seems, is keep waiting.

While we can’t confidently predict what the rest of 2021 will look like, we can reflect on how the past year’s events have influenced how we now view different areas of our lives and businesses, what’s become more or less important than it was before, and what we’re hoping – or loosely planning – to accomplish this year.

So what’s on the minds of credit union executives now that we’re into this epilogue chapter of 2020, and how does it compare to the thoughts of bank executives? Cornerstone Advisors, the Scottsdale, Ariz.-based consulting firm that serves financial institutions worldwide, offered answers to those questions in its report, “What’s Going On in Banking 2021: Rebounding From the Pandemic,” based on a December 2020 survey of 260 senior executives from U.S.-based, mid-size financial institutions (55% from banks and 45% from credit unions).

Report author and Cornerstone Director of Research Ron Shevlin said 2021 will be a “mixed bag,” a conclusion began to take shape when survey participants were asked whether they felt optimistic or pessimistic about the banking industry this year. Those who are more optimistic about 2021 compared to 2020 (47%) named factors like the success of the Paycheck Protection Program, increased rollout of digital banking channels, and pent-up demand for travel and large purchases as reasons to feel positive.

The 53% of respondents who said they feel 2021 will be on par with 2020 or worse listed the low interest rate environment leading to margin compression, looming loan delinquencies and charge-offs, dwindling non-interest income sources, higher employee and medical costs, and more regulation as causes for concern. One bank COO, W. Lee Mikell of First National Bank of Wauchula in Florida, said, “I’m just waiting for the shoe to drop on delinquencies and foreclosures. I don’t understand how the economy can keep pushing on in light of all the folks staying at home.” You nailed it, W. Lee.

Cornerstone also dove deep into several key areas of banking business, revealing some interesting shifts in executives’ outlook on mergers and acquisitions, competitive threats, fintech partnerships and emerging technology. Here are some of the key takeaways on those topics from the report, as well as an accompanying webinar hosted by Cornerstone (we’ve also put together an infographic that visualizes the findings, available here).

Mergers

Merger volume was down in 2020, but survey respondents showed more optimism for 2021, with 27% of bank executives and 38% of credit union executives saying they’re somewhat or highly likely to make an acquisition this year. “The historical drivers for M&A – economies of scale to drive higher earnings, accelerated development of new strategic capabilities – will be more important than ever,” Vincent Hui, managing director for Cornerstone Advisors, commented in the report.

But during the webinar, Shevlin noted he hopes to see institutions consider growth strategies that entail expanding their footprints from a digital perspective. “There’s become a level that mid-size banks are striving for, but if you’re a $5 billion bank and you’re looking at five other $1 billion banks to buy, that’s a lot of work,” he said. “People don’t talk enough about how to use technology to scale up and play bigger.”

Competitive Threats

In 2019, a majority of banks and credit unions (61%) saw big tech companies like Amazon, Apple and Google as significant threats, but over the past year, that percentage fell to 49%, according to Cornerstone. That could be because more institutions are taking the “if you can’t beat ’em, join ’em” approach – 8% of credit unions are talking or planning to talk to Google about partnering on a Flex checking account, nearly one in four credit unions is evaluating a potential Google partnership, and nearly half of banks and credit unions expressed interest in partnering with Amazon if it allowed financial institutions to lend to Amazon merchants.

More banks and credit unions see challenger banks like Chime and Varo as their opponents, with 28% of survey respondents saying they see challenger banks as significant threats compared to 14% in 2019. In the webinar, Shevlin mentioned the concerning statistic that in January 2020, 25% of Gen Zers and millennials considered a challenger bank their primary financial institution, and Jill Castilla, CEO of Citizens Bank of Edmond in Edmond, Okla., called the competitors’ presence in the market “a full-on assault.” “There are all these unseen enemies,” she said. “And non-interest income is being obliterated by the nonbanks because everything is free.”

Fintech Partnerships

Credit unions are missing opportunities when it comes to fintech partnerships, with the percentage of credit unions saying such partnerships are very important to them declining from 30% for 2020 to 22% for 2021, and 15% having no personnel dedicated to fintech partnerships. Concerning the impact of these partnerships, 17% of credit unions said they helped yield a more than 5% gain in loan productivity and 15% said deposit account opening productivity improved by more than 5%, the report stated.

Both banks and credit unions are prioritizing digital account opening when they team up with fintechs, but Shevlin noted they’re overlooking several potentially beneficial areas. What’s more, what many banks and credit unions refer to as “fintech partnerships” aren’t actually partnerships at all. “Digital account opening has been at the top of the list for the past couple of years, and personally, maybe it’s a definitional thing, but I don’t see that as a partnership,” he said during the webinar. “I see that as a vendor relationship. A partnership should involve finding new ways of doing things. I asked in the survey, how interested are you in partnering with a fintech for things like cryptocurrency investing, subscription management, bill negotiation and data breach protection? And very few said they had any interest in these areas, but I hope they see the consumer research that we’re putting out in the next couple of weeks that says there are a lot of consumers, especially younger ones, who want those services and are willing to pay for them.” (According to the report, a recent Cornerstone survey found about half of U.S. consumers are interested in getting those services from their bank or credit union.)

Emerging Technology

Talking to bots on their smartphones appeared to be a popular pastime for Americans stuck at home in 2020, because of all the emerging technologies Cornerstone surveyed credit unions about (APIs, cloud computing, video collaboration, robotic process automation, chatbots, machine learning and the Internet of Things), chatbots received the highest increase in deployment, jumping from 6% going into 2020 to 18% going into 2021. Voice technologies like Alexa are also on credit unions’ radar, with 17% saying they plan to invest in or implement it in 2021.

In his “Final Words” section of the report, Shevlin admitted that his predictions the past two years – that “2019 is shaping up to be a challenging year for the banking industry” and “2020 is likely to be a good year” – turned out to be wrong. Maybe the third time’s the charm? Time will tell, and in the meantime, we’re going to have to make the state of “Limbo, USA” as comfortable as possible, because that’s where we’ll be living for a while.

Natasha Chilingerian is executive editor for CU Times. She can be reached at nchilingerian@cutimes.com.