Credit Unions Worried About the Cost of Funds in 2024: Cornerstone

Credit union executives listed “cost of funds” as their top concern heading into 2024, followed by “new member growth” and “efficiency and non-interest expenses and costs,” according to Cornerstone Advisors’ ninth annual “What’s Going On in Banking 2024” report released this week by the Scottsdale, Ariz.-based consulting firm.

The report was based on a recent survey of 359 respondents from financial institutions, 92% of whom work for financial institutions in the $250 million to $50 billion asset range. Fifty-four percent of the respondents were from banks and 46% were from credit unions.

In Cornerstone’s “What’s Going On in Banking 2023” report, the top concern among credit unions was the interest rate environment, with 59% of credit unions listing it as one of their top concerns; this year, that percentage fell to 45%. The three top concerns listed above were named by 71%, 56% and 52% of credit unions this year in the survey, respectively.

“Financial institutions continue to be squeezed on both sides after record rate increases blew up existing ALM models,” Jack Ingram, chief information officer for Whatcom Educational Credit Union ($2.7 billion, Bellingham, Wash.), stated in the report. “Between a high cost of funds, increased rates of charge-off and a material slowdown of lending engines outside of unsecured consumer debt, it makes for a difficult 2024. Coupled with a dramatic increase in operating expense due to inflationary pressures, it is a recipe for further industry consolidation.”

Notably, credit unions’ concern over the ability to attract top talent dropped significantly, from 63% in 2022 to 23% in 2024. “Our interpretation here is not that it’s getting easier for banks and credit unions to find and attract talent, but that their hiring plans have diminished and they’re not as much in the market for new employees as they were a year or two ago,” according to Cornerstone.

The annual report also gauges the optimism and pessimism levels of bankers and credit union executives. Of all respondents, six in 10 said they were either very or somewhat optimistic about the coming year, a five-percentage point increase compared to 2023. However, 52% said they anticipate a recession this year, including 42% of the optimists.

Credit unions’ progress with instant payments was another highlight of the report, as the 2023 launch of the Federal Reserve’s FedNow made the service top-of-mind for many executives last year. Fourteen percent of credit unions said they had already implemented instant payments, 36% plan to in 2024 and 34% plan to in 2025 or later. Fifty-two percent of credit unions said they were partnering with FedNow on instant payments and just 12% said they were teaming up with The Clearing House, while 34% said they hadn’t yet determined their instant payments strategy and 14% were waiting for another vendor’s solution.

What’s more, 73% of credit unions are (or plan to be) in instant payments receive-only mode, with the remaining 27% have or are planning to enable send and receive functionality. For credit unions, account-to-account transfers are the top instant payments use case (45%), whereas for banks, it’s B2B payments (35%).

According to Cornerstone, instant payments “won’t make a dent” when it comes to growing as a percentage of all payments for financial institutions, due to two things: Receive-only functionality still dominates and financial institutions have yet to package instant payments as a valuable solution for consumers. The firm said it expects instant payments will grow more significantly in 2025 as more institutions discover its income opportunities.

Other key findings from the report included the following:

• Most credit unions (77%) said auto loans were a high priority in 2024 when it comes to loan type.
• The percentage of credit unions that had implemented artificial intelligence continued to steadily grow. Thirty-two percent had implemented robotic process automation, 35% had implemented chatbots and 21% had implemented machine learning, up from 2%, 0% and 2%, respectively, in 2018.
• Credit unions’ top objective for forming fintech partnerships was “improving deposit account deposit activity” (44%) while for banks, it was “creating new products/services” (47%).
• Twenty-seven percent of credit unions and 23% of banks said they will “never be done” with their digital transformation strategies.