NAFCU Services Blog

By: Allied Solutions

As this whirlwind of a year draws to a close, it’s natural to pause and reflect on where we started and where we are today. We’ve had highs in more ways than one (hello inflation and interest rates), shocking lows (goodbye Silicon Valley Bank), and a plethora of hot topics to fill in between. As you continue to strategize for next year, review some of the top topics from the credit union industry in 2023 so you can start the new year with might and main.

1.    Buy Now Pay Later (BNPL)

The BNPL industry will exceed $1.2 trillion by next year, so chances are, your cardholders are already doing BNPL. This indicates an enormous shift away from traditional lending. But financial institutions have a positive opportunity to gain interchange revenue and deposit growth opportunities that could make up for reduced debit and credit card usage.

FI’s that partner with a BNPL vendor also have a chance to play on the BNPL turf to bring safer transactions, fraud monitoring, and accountholder education to this space in a substantial way.

2.    FedNow® Service

The FedNow® Service went live in July and enables individuals and businesses to make instant payments through their depository institution accounts. Here’s what you should know about its current features:

• Real-time interbank clearing and settlement, allowing funds to be transferred from a sender’s account to a receiver’s account.
• 24x7x365 operation
• Security and data integrity through security features.
• Intraday credit access under the same terms as other Federal Reserve services.
• Liquidity management transfer, allowing participants to transfer funds to support liquidity needs related to payment activity.

The first release included optional features such as fraud prevention tools, the ability to join as a receive-only participant initially, request for payment capability, and tools for handling payment inquiries.

3.    Artificial Intelligence (AI)

Artificial Intelligence is a little bit scary, a little bit intriguing, and a whole lot of exciting possibilities but is here to help credit unions be more efficient and productive. Credit unions, along with community banks, need machine-learned tools to stay relevant in a predominantly digital banking landscape. Additionally, automation can alleviate the employee workload and help delay hiring additional employees until the economy regains strength. AI can learn and automate basic to advanced tasks, reducing the errors, inefficiencies, and delays that come with manual, human-run processes.

4.    The 4%ers (aka What to Do About Gen Z)

The underrepresented generation of Z (and millennials) came to light this year as they only make up 4% (and 5%) of credit union memberships. These are some top tips on how credit unions should be approaching these generations of tomorrow:

• Be Where They Are – Their Phone
  • Mobile phones and devices are quite literally the one line in and out to younger generations. It’s critical to review your mobile website functionality and mobile app experience, for ease of use to open accounts or move money, as an example.
• Don’t Talk the Talk — Talk Their Talk
  • According to a recent Forbes Advisor survey, 80% of millennials and Gen Zers have received financial advice, whether accurate or not, from “finfluencers” on sites like TikTok and YouTube. Creating and posting short-form videos can help increase institution exposure, educate your existing/potential customers, and make you a trusted advisor.
• Be Social
  • Whether it’s an IM, DM, or tweet – they want to connect quickly and easily, and they want a response even faster. But be aware of the pros and cons. Social media is great for marketing and educating but is also often used as a complaint platform.
• Validate Them
  • A University of Texas study found that two reasons why people love a personalized experience are control (or the feeling of it) and not feeling overloaded with information. Use your data to target useful products to your customers or to predict their needs and behaviors.

5.    Loan-to-Share Ratios

Share balances were up 6.3%, pushing the loan-to-share ratio up to 78.3%. Although not an all-time high, there are underlying factors. Cash has fallen 6%, from 13.0% to 7.1% of total assets. With rising interest rates, we see lower mortgage loan originations and a tanking secondary market which means more are being retained on the balance sheet. Credit unions have been keeping up with loan demand, but sudden-onset liquidity concerns may arise if lending activity continues to rise. Credit unions may need to implement new strategies to generate liquidity.

6.    Collections & Delinquencies

Higher loan losses can lead to reduced profitability for credit unions and may also signal economic weakness or instability. These losses can also make it more difficult for credit unions to extend credit to borrowers, which could negatively impact member spending and economic growth. Credit unions can help mitigate risks by:

• Implementing sound underwriting practices to ensure only lending to borrowers who can repay their loans.
• Diversifying the loan portfolio to reduce exposure to any one type of loan and mitigate the impact of any losses that may arise in a particular loan segment.
• Monitoring loans regularly using processes to review borrower statements and track loan payments to identify any potential problems early on.
• Managing loan loss reserves by strategically and compliantly setting aside funds in a loan loss reserve account to cover potential losses.
• Offering loan modifications to help borrowers experiencing financial difficulties stay current on payments – including extending the loan term or deferring payments.

The road to 2024 is paved with challenges and opportunities alike. By embracing innovation, adapting to changing demographics, and proactively addressing financial dynamics, credit unions can position themselves not just to survive but to thrive in the dynamic landscape of the coming year. Here's to navigating the future with resilience, adaptability, and a commitment to the evolving needs of your members.