Raddon Trends: Equity Lending, BNPL, Staff Shortages May Impact Credit Unions In 2022
By Roy Urrico
There are opportunities for credit unions to navigate through a changing 2022 economic environment by meeting the challenges of attracting and retaining staff, adding value for digitally savvy members, and addressing the needs of younger accountholders, according to Lombard, Ill.-based research provider Raddon, a Fiserv company.
Bill Handel, general manager and chief economist at Raddon, discussed how he sees these trends impacting credit unions.
Equity Lending Returning
Handel foresees continued economic growth in 2022, but not as strong as 2021. “People don't realize that even with all the noise that 2021 was the strongest growth year in the United States since 1984, in terms of GDP (north of 5%).”
However, Handel believes the U.S. will also probably see two, potentially even three interest rate increases in 2022 on the part of the Federal Reserve. This will trigger a fundamental shift away from refinance activity towards purchase activity, driven primarily by millennials, but not exclusively by millennials. “You're going to see the purchase activity continue to be strong, but you're going to see a significant reduction in refinance activity happen. It is already happening in in many places.”
Handel also sees the reemergence of equity lending as a critical part of credit unions’ portfolios. “That’s kind of been a dormant product category since the great financial crisis of 12 years ago.” With the anticipated rate hikes, Raddon estimates that homeowners will pass on refinancing, but look to tools like equity financing. “We see that as a pretty big trend that you'll see emerge in 2022 and beyond.”
BNPL and Crypto Interest Grow
Handel also sees buy now, pay later (BNPL), or point-of-sale financing, gaining speed. “We’re seeing some very significant increases in activity; it is really concentrated in the younger demographic.”
Point-of-sale financing could impact credit union in several ways, according to Handel. “We can see the continued diminishment of credit card balances.” Handel attributed part of this trend to BNPL transactions. “It represents a threat to the card base, especially people who tend to carry balances on their card. People who do not carry balances are probably not going to find as much value (in BNPL).” Another potentially affected area is through people who use cards more as a lending vehicle and might favor paying for items over time.
Another trend Raddon is paying attention to is movement towards cryptocurrency. Handel pointed out that only about one in eight people in the U.S. hold cryptocurrency today. “It's very demographically based; found in younger individuals 30-to-45 where we are seeing the prime spot in terms of activity.”
Handel does not anticipate credit unions diving into the world of cryptocurrency anytime soon but understanding what it is and that it matters to some members is important to staying relevant with younger members.
Continued Pressure on Earnings
Raddon also forecasts continued pressure on earnings because of the interest rate environment. “Some (financial institutions) will see an improvement in earnings in 2022 and some will see actually continued pressure on earnings in 2022,” said Handel. Loan demand will slow down as rates begin to rise. “That will continue to put some pressure on margins for the industry overall.”
Handel noted over the last 10 years, Raddon has seen non-interest income from sources such as overdrafts cut in half for many organizations. Handle explained in Raddon’s Performance Analytics program, in which about 350 U.S. credit unions participate, the company has seen the average non-sufficient funds (NSF) per checking account decline from over $100 in 2006 to less than $50 today.
Handel suggested what is happening in the banking industry is not just a regulatory issue. “Now you've seen almost every single major bank begin to talk about eliminating overdrafts. So, we really do have to plan for life after overdraft as an industry.”
Dealing With Staff Shortages
A recent Bureau of Labor Statistics report showed over 20 million people quit their jobs in the second half of 2021 in what some call the "great resignation."
Not surprisingly, Handel sees staffing issues as a top problem facing credit unions and other financial institutions. “Many of our clients are talking about 20% plus in terms of staff turnover; more importantly, much of it is happening at senior levels of the organization.”
Handel envisions the labor market in flux for many years. “Part of this is the pandemic for sure. But the bigger part of this is actually just simply demographics. We've got the heart of the baby boom generation moving into retirement.”
For members and staff, it all boils down to an issue of relevancy, cautioned Handel. “Are credit unions perceived by the average consumer as being relevant in the sphere of financial services? I think for somebody who uses a credit union, the answer is probably yeah, they are, reasonably relevant.”
However, the whole issue of relevancy is not just about the membership, but also whether the existing staff is engaged and buying into the organization’s goals and strategies. Involved staff can help recruit people into the organization.
Adding Value to Digitally Savvy Customers
Digital adoption – especially mobile services – was happening at a rapid pace prior to the pandemic, but the pace of adoption accelerated, especially among the older demographics. the necessity to use tools such as mobile banking in the pandemic spurred adoption which, in turn, spurred acceptance.
Raddon perceives an integrated delivery ecosystem encompassing all channels as a key feature around branch evolution. Explained Handel, “There are people who will be digital only without a doubt; but the vast majority of consumers are what we call ‘high tech and high touch.’”
Handel noted Raddon found, “the millennial generation not only wants the digital solutions to be strong, but they also want to have that ability to go in and talk with somebody.”
There is already a branch transformation underway from just being a transaction hub, “to a place where we actually have conversations with membership, provide advice, and illustrate the value that we have,” Handle said. “We are going to have to have more of a layout that is very open and inviting and have people shown different types of opportunities, products and services.”
Catering to Younger Generations
Diving even deeper into today’s member mindset, Handel outlined three traditional competition vectors: convenience, service quality and price. “We think that the fourth piece that's emerging into this is financial wellness.”
According to Raddon, besides a greater affinity toward BNPL and cryptocurrency, the younger generations seem drawn toward tools and support to help them manage their finances in an increasingly complex world.
“From our research the younger demographic is much more aware of what they don't know, or at least aware of the vulnerabilities,” Handel said. Whereas previous generations might have learned the hard way, the younger generations — who were in their formative years during the great financial crisis of 10 years ago, and now experiencing the pandemic — have shown an interest in making sure they make the right decisions.
Handle recommended for credit unions financial wellness does not mean putting articles on a website for people to read, or providing seminars at branches about retirement planning. “That may be part of what you do there, but it's going to be much more embedded in things like digital tools, where we have the member understand implications of their decisions and track their behavior.”
Handel pointed to recent Raddon studies that reveal about three in 10 consumers in the U.S. are even willing to let artificial intelligence manage their money. “In other words, they just want to turn it over to somebody who can make all the right decisions for them.”
RPA and AI as Job Assistants
Robotic process automation and artificial intelligence will keep emerging as types of tools to reduce friction, Handel suggested. “Not only for the membership in terms of how they engage with us, but also with the staff. Because that is going to create more appeal for your organization, both with your members as well as with your associates.”
Handel described how in the past, credit unions used journey mapping, “where you took every process and broke it down to its component steps and you tracked it out” to identify ways to consider bypassing steps or streamlining processes.
“Now we need to take that one step further and start looking at robotic process automation, where we can engage with artificial intelligence. For the average credit union, you are going to say that does not make sense for me, but it will,” said Handel.