October Edition

Welcome to the October edition of our newsletter, your go-to source for insights, updates, and news from the world of lending and financial services.?This month we explore some of the more frustrating implications of the Fed's rate cut, identify major growth opportunities for credit unions, and keep you up to speed on a few key insights you may have missed.?

Fed drops rates but is it too little, too late?

For the first time in 54 months, the Federal Reserve dropped rates in September, surprising some economists with a 50bps reduction.

The cut marked the first decrease since the onset of the pandemic and, excluding emergency measures taken at that time, was the first half-point reduction since the Great Recession. But was it too little too late for credit unions?

The NCUA’s Q2 report showed that insured shares and deposits grew only 4.1% over the two-year period ending in Q2, with flat or negative growth recorded across seven of the last eight quarters (fig 1.). This is less than 80% of the growth seen over the two years leading up to the pandemic.

Simultaneously, the Fed’s prolonged high-cost rate cycle saw loan-to-share ratios creep up, ending with a Q2 average of 84% (fig 2.). This is by no means the highest quarterly average, but with a presidential election on the horizon the economy is wont to fluctuate and a downturn in economic conditions could easily see recently stabilized consumer delinquency rates increase once more.

Loan-to-share factors in the alternative narrative, too. If the rate drop does as intended and stimulates the economy, encouraging increased borrowing, some credit unions may still have to review their underwriting criteria and approvals processes, with NCUA Chairman Harper himself citing concerns over liquidity .

Of course, restricting access to loans at all (let alone adding further restrictions) particularly after a period of such expensive consumer borrowing is an anathema for credit unions philosophically. Operationally, with credit union loan growth already slowing , it's not any more attractive either.

In addition, it could further exacerbate competitive concerns. A recent PYMNTS report cited bullish VCs, eager to see the profit generated by lending-focused fintech with a pay-per-loan revenue model, while traditionally disruptive lenders (now increasingly mainstream) like CashApp, PayPal and Chime are expected to extend their lead in the battle for deposits through the next year and beyond.

From a marketshare standpoint, perhaps there's some optimism for credit unions, safe in the knowledge that their banking counterparts are feeling the same pain , but what has become abundantly clear for any financial institution is that a return to normal simply isn't on the cards.

Ultimately, the Fed did what lenders and consumers alike had been hoping for, but after four-plus years of record rates, one half-point drop was never likely to solve all ills. Instead, innovative approaches to balance sheet management are likely going to come into sharp relief over the closing quarter, as credit unions look to get back to doing what they do best: Lending.

Embracing Multicultural Members without Stereotypes

One key to securing new deposits could be the 67 million underserved Hispanics in the USA.

In the latest 22 Minutes in Lending, Victor Miguel Corro, CEO of Coopera Consulting, discusses this market's untapped potential and how credit unions can most effectively serve it.?

Listen now.

How One Credit Union's Auto Lending Wins with Members

Auto lenders have had to travel a bumpy road the past five years in a virtually untested environment, but one credit union has created a winning strategy in a disruptive market. Here are their top five tips.?

Read more.

Industry Updates

Liquidity Management

New FHFA Rule Aims to Strengthen Liquidity for Home Loan Banks

The Federal Housing Finance Agency (FHFA) has proposed a new rule to expand access to liquidity for members of the Federal Home Loan Banks. The initiative would ensure lenders have adequate resources to support affordable housing and community development efforts, particularly during financial stress. If approved, this will likely be greeted positively by credit unions after seeing a 20% increase in mortgage applications in the year through June. Read more.

Fed "Neutral" on Future Cut Impact

At a press conference hosted by the National Association for Business Economics, Federal Reserve Chair, Jerome Powell, alluded to a less exhaustive Federal rate environment, stating that if the economy trends as predicted, the Fed's policy could move to "a more neutral stance," where rates would neither boost nor truncate the economy.?Read more.

Economy and Regulation

Visa in Hot Water: Monopoly Lawsuit Over Debit Card Domination

The U.S. Department of Justice has filed a lawsuit accusing Visa of stifling competition in the debit card market, alleging the company used exclusive deals and threats to maintain its dominance. Visa, which processes over 60% of U.S. debit transactions, denies the claims, calling them "meritless" and defending its market role as competitive. Read more.

Longshoreman Strike Could Scupper Inflation Efforts

A nationwide strike of 45,000 International Longshoremen's Association members began on Tuesday, Oct. 1; a move that could mitigate or outright reverse any positive inflationary gains made by the recent Fed rate cut. The strike effects docks controlling over two-thirds of the nation's imports, and—according to some experts—could cost the country up to $4.5 billion each day. Read more.

Technology

FDIC Proposes Required Recordkeeping and Reconciliation Rule

Last month saw the Federal Deposit Insurance Corporation (FDIC) put forward a proposed rule aimed at tightening how lenders manage "custodial deposit accounts with transactional features". The move is largely a reaction to the recent bankruptcy of Synapse Financial Technologies, Inc. and if it goes into effect, it would require banks and fintechs to make significant adjustments to how they structure, reconcile, and keep records of certain accounts. Crucially, this wouldn’t just apply to the big banks—all insured institutions that handle these accounts would need to comply. For credit unions and other financial institutions working closely with fintechs, this could mean a major overhaul in how these partnerships operate. Read more.

Fintech to Define Its Own Standards?

Yet more fallout from the Synapse disaster has seen the emergence of the Coalition for Financial Ecosystem Standards (CFES). The group was launched to create industry-wide standards that ensure the safety and soundness of nonbank financial services. CFES will see companies like Block, Brex, and Stripe, working together to address regulatory concerns surrounding bank-fintech partnerships. Read more.

Consumer Insights

Service Members Face Mounting Financial Challenges?

The Consumer Financial Protection Bureau (CFPB) released its 2023 annual report last month. Among the key findings is a 20% increase in financial complaints from members of the armed services, with issues related to credit reporting, debt collection, and banking services leading the concerns. The report emphasizes the need for stronger protections and clearer guidance for military personnel navigating financial products. Read more.

LendKey Updates

On-Demand Webinar

Loan Participations 101: A Practical Guide for Credit Unions and Community Banks - This webinar will help institutions and team members with limited or no experience get started with loan participations by defining key terms, setting expectations on timelines and processes, and adhering to best practices or even create best practices of their own. Watch Now

Upcoming Events

Connect with James Diezemann at APEX 2024 October 16-18 in Uncasville, Connecticut. Look for LendKey at Booth #304.

Connect with LendKey at Money 20/20 October 27-30 in Las Vegas, NV. Our team is thrilled to join industry leaders and professionals for this premier event. We look forward to seeing you there.