In today’s economic environment, financial institutions of all shapes and sizes need to think long-term about their balance sheet and business decisions. Credit Unions, in particular, are unique in that a large percentage of funding comes from member shares, money markets and Certificates of Deposit. Since deposits are a main source of funding, Credit Unions need to keep in mind the following five factors affecting deposit performance:
(1) Interest Rates
As the Fed continues to hike rates, no blanket predictions can be made as to how rate change will affect Credit Union deposit behavior. Behavior may vary significantly among product types, depending on the Credit Union’s member base and product mix. Studying past behavior will provide better insights as to how depositors will respond as interest rates continue to rise.
(2) Online Banking
Online banking presents a growing risk to Credit Union deposits as rates are more competitive, visible, and the convenience factor is appealing to the average consumer. Moreover, younger generations expect a financial institution to provide tech-enablement. As part of your overall deposit strategy, evaluate how online and mobile banking will affect deposit performance and retention, and ensure your team is focused on identifying opportunities to remain competitive and strengthen member loyalty.
(3) Over or Under Pricing Products
If a Credit Union is reacting to the competition by offering attractive rates on CDs and other products, it may bring in more members but it could also create overhead costs and increased rate sensitivity. Ensure your pricing strategy is part of an overall balance sheet plan.
(4) Member Loyalty and Acquisition
Credit Unions rely heavily on the loyalty of their membership. While some credit unions may lose members to online banking, others will increase membership due to attractive promotions, solid reputation, and community engagement. Knowing the difference between loyal members versus rate-sensitive members will enable Credit Unions to better understand deposit performance and create a solid pricing/funding approach.
(5) Unbalanced Growth and Liquidity Constraints
How balanced a Credit Union’s short-term and long-term funding is has larger liquidity risk implications. If loans are outpacing deposits, the stability of your growth may not be sustainable. The fear of liquidity constraints creates a “WAR” for deposits to keep balances and attract a source of funding for assets.
While many Credit Unions continue to thrive and gain membership, other Credit Unions are looking for innovative solutions or alternative sources of funding to catalyze growth and compete. Using our proprietary McGuire methodology, MountainView Financial Solutions provides its Credit Union partners with independent deposit analysis, which paints a detailed picture of deposit supply and retention, and other behaviors affecting the balance sheet. To view the above article as an infographic, click here.
To learn more about the McGuire deposit analysis, please reach out to Karen Schwall, firstname.lastname@example.org.