Standing at a Precipice: What the Fed’s Rate Cut Should Signal to Credit Unions

The Fed’s recent half-point rate cut, which was on the high end of the expectation range, is a strong signal that we have reached the end of the rising rates cycle. This is expected to be just the start of a welcome downward trend, with another cut likely to follow by year end. As rates fall, loan to share ratios should continue to normalize, allowing credit unions to serve more members and resume growth.

This outlook is especially notable when set against the backdrop of credit unions losing market share across many types of loans. In fact, the Fed’s recent G-19 Consumer Credit Report revealed 12-month declines at credit unions and banks for auto loans, personal loans and other non-revolving loans. While this slowdown is helping to stabilize loan-to-share ratios – it’s a bit of a double-edged sword given that as rates fall, it will grow increasingly difficult to gain attractive returns. Undoubtedly, credit unions will face even more competition in existing channels for loans, making it even more important to identify attractive assets to maintain healthy margins.

With this rate shift and its many implications in mind, now is the time for credit unions to reevaluate their lending strategies, ensuring that they are well positioned to optimize their portfolios and deliver strong borrower experiences that meet the needs of today’s consumers. Importantly, a diverse lending strategy needs to go beyond an overreliance on indirect auto loans, which tend to have razor-thin margins and disintermediate the credit union. With indirect auto, the majority of borrowers do not even know the name of the credit union issuing the loan, making it close to impossible to form a lasting relationship. To increase their impact and awareness while simultaneously strengthening their portfolios, credit unions will need to think outside the indirect auto box and find ways to bring their brand to the forefront.

First, a strong portfolio is diverse and contains high-yield assets, preferably with the potential to form meaningful member relationships beyond the life of the loan. As lending activity stands at the precipice of a major resurgence, it’s critical for credit unions to define and implement a robust lending strategy now that helps them grow and compete. One approach is to embrace personal loans, which have become increasingly relevant as consumers look to deleverage. Notably, U.S. credit card debt has skyrocketed in recent years, reaching a staggering $1.14 trillion, with average credit card interest rates sitting at nearly 23%. As rates ease down, consumers will be looking to reduce their financial stress by consolidating and paying off this high-interest credit card debt. With short-duration, high-return personal loans, credit unions can help members regain financial stability and achieve their goals more quickly and affordably.

This strategy also offers additional benefits to the credit union. While the average life of a personal loan tends to be similar to the duration of an indirect auto loan, the personal loan has a much more attractive risk adjusted return and more effectively diversifies the balance sheet. Plus, this asset can significantly increase the likelihood of retaining the member. After all, such an offering allows credit unions to be there for the member at an important point in their financial life and help them achieve their goals, which fosters loyalty. And, a recent Statisa study found that the most important factor for consumers when thinking about their financial institution is trust; nothing is quite as trustworthy as helping someone overcome debt.

Another area that will be more important than ever to consider is optimizing member engagement. While the right loan might get a member in the door, a single touchpoint likely won’t be enough to keep them there long-term. In the current environment where the competition is stronger than ever, credit unions must determine how to deepen member relationships, leveraging effective cross-selling techniques to generate additional revenue and increase stickiness. Facilitating seamless digital experiences and being able to offer the right products at the right times in the right channels can make all of the difference.

This is a pivotal moment for credit unions, marking the beginning of a journey back to conditions that promote healthy borrowing and sustainable growth. Those organizations that take the time now to closely evaluate their portfolios and lending strategies – getting ahead of the curve and optimizing their portfolios with high-yield, diversified assets – and that determine how to enhance member engagement will be best positioned to help more people and achieve long-term success.

Matt Potere is CEO of the Torrance, Calif.-based consumer finance platform provider Happy Money.