Traversing a Bifurcated Economy: Challenges and Growth Opportunities for FIs

Guest Editorial by Bill Handel, General Manager and Chief Economist, Raddon, a Fiserv Company

Despite the uncertainty swirling around the economy, corporate profits and stock valuations in the US remain robust – buoying overall GDP growth, which is estimated to be around 4% for the third quarter of 2025. In September and then again in October, momentum was maintained by two Federal Reserve rate cuts – the first since December 2024 – which was driven, in part, by pressure from the Trump administration to ease monetary policy. Inflation fears continue to take a backseat to concerns around a softening labor market.

The second cut, which brings the target for the Federal Reserve’s key lending rate down to its lowest level in three years, has eased borrowing costs across the US and, in turn, preserved spending and investment at the top of the economy. At the same time, however, monetary activity has done little to alleviate the high cost of living for working Americans (particularly those with limited assets or savings, living paycheck to paycheck) who are already experiencing financial pressure from stagnant real wages.

This bifurcation of the US economy, which will likely persist well into 2026, presents opportunities and challenges to banks and credit unions. If disciplined risk management prevails, lenders of all stripes have the chance to support customers and even grow in the coming months.

A Risk-Opportunity Tightrope

One of the key areas in which financial institutions will likely be experiencing stress is their loan portfolios. For credit unions, automobile loans are particularly exposed, while for banks it’s the mortgage and credit card streams. Though most entities catering to wealthy customers are comfortable, those serving the lower end of the market, especially retailers, are struggling. Overall, delinquency rates are rising – with levels now comparable to those last seen during the 2008–09 financial crisis.

As long as household budgets are tight, delinquencies will remain an issue. To address this, financial institutions should get ahead of the problem by monitoring – and responding to – financial stress indicators. Data is a powerful tool in this respect.. If, for example, a customer’s transactional data reflects a shift from credit card payments of specific, decimal values to integer amounts, it might suggest balances are being paid off only partially, as opposed to in full. Another stress indicator is an increase in Buy Now Pay Later (BNPL) usage – particularly for small-ticket amounts like a food delivery, as opposed to larger purchases. If these behaviors can be flagged, financial institutions can step in, have conversations with their customers or members, and better manage risk.

Fortunately, cutting-edge digital tools are available to supplement these efforts. Often powered by artificial intelligence (AI), these solutions go beyond classic FICO indicators and collect information at the granular level – either enhancing the risk scoring of FIs or identifying pockets of opportunity. Going forward, AI will be a differentiator at the organizational level – boosting the productivity of staff, marketing, and overall operations, as well as personalizing wealth management solutions for customers.  

Another challenge presented by the bifurcated economy is the housing sector, which, once a source of strength, is experiencing year-over-year declines in national home prices. Even previously resilient markets in the Midwest and Northeast are showing signs of cooling. But where there are challenges there are opportunities for growth. Older Gen Zers and younger Millennials, in particular, are keen to capitalize on low prices by re-entering the purchase market. Credit unions should be ready to meet this demand.

Home-equity lending is an attractive niche in this space. Though property values are flatlining, they remain high relative to existing mortgage levels. Once again, FIs should be poised to plug these service gaps, and extend traditional deposit and lending instruments so that consumers are not forced to reach beyond traditional spheres, for payday loans.  

2026: An Impetus for Modernization

The next year-and-a-half will test the ability of banks and credit unions to walk a tightrope of risk and opportunity. Whether or not the Federal Reserve issues a final rate cut before the end of 2025, the US economy will stay on a split path through 2026. The economy may slow modestly but, with stock valuations staying robust and housing opening up, it is unlikely to tip into recession next year.

Either way, credit unions and banks will have to bolster their risk management frameworks and think more deeply about how to mine new opportunities – as well as use digital tools that augment their decisioning processes. With a premium placed on data intelligence, the incentive for credit unions and banks to modernize or upgrade their core systems and customer interfaces will intensify. Remaining sharp and strategic – while implementing strong risk frameworks – can ensure lenders survive and even thrive in spite of today’s ongoing economic uncertainty.  

My advice for financial institutions? First, in times of high risk, there is also an abundance of opportunity. Banks and credit unions should continue to look for the right growth opportunities; now is not the time to retreat into your shell. And second, keep your focus on growth, but make sure it is sustainable . Pay attention to what builds capital and infrastructure for your organization and focus your efforts there. Looking for growth opportunities that enable you to be successful in the future and drive sustainable earnings is key. With protracted financial pressure on households but steady growth at the top, the US economy is becoming a tale of two tracks and financial institutions must be able to manage lending risks while at the same time doing what they do best — supporting consumers’ financial goals and requirements.