Published on October 11, 2023
Written by The Servion Group
The Economic Impact on Credit Unions' Cost of Funds
In the tumultuous year of 2022, as inflation surged, the Federal Reserve implemented several strategies, including bond purchases, to exert downward pressure on the prices of goods and services. Simultaneously, it raised the interest rate on reserve balances from 0.5% to 1.65% in an attempt to mitigate excessive spending, dampen demand, and curb inflation. Notably, inflation reached its zenith in June 2022, and since then, the Federal Reserve has taken a staggering eleven steps to raise interest rates as a robust response to inflation. As a consequence, borrowing costs are now at their highest point in 22 years.
The Vital Role of Business Deposits for Credit Unions
Elevating interest rates invariably influences deposits. At this juncture, the cost of deposits is also surging. On a macro scale, credit unions are currently witnessing lower checking account balances than in the past. The reason behind this shift is that customers are redirecting their funds to more lucrative options like Certificates of Deposit (CDs), which promise a superior rate of return. In fact, the share of CDs in the total credit union deposits has surged to nearly 22%, a remarkable 13% increase since June 2022 when inflation was at its peak. For credit unions, this poses a challenge due to the escalated cost of funds. So, the question arises: How can credit unions enhance the cost of funds to offer more competitive rates to their clients? Von's answer is to enhance the value of business deposits.
Three Strategic Avenues to Conquer the Battle for Business Deposits
The Role of Treasury Management in Securing Business Deposits
Once the hard work of acquiring customers and their deposits is done, treasury management steps into the spotlight. It's a pivotal player in supporting customer needs through services like cash flow automation, fraud prevention, operational efficiencies, and optimized cash returns. Credit unions face a crucial decision: whether to build an in-house treasury management department or outsource it. Developing an in-house treasury management department involves offering a suite of products to manage payables, receivables, cash services, and fraud prevention. It also necessitates a robust sales team capable of selling these products to existing and new members, along with efficient operational support to ensure a seamless department operation and managing customer expectations.
In conclusion, Von Hawthorne's insights shed light on the intricate dynamics of business deposits and the strategic steps credit unions can take to thrive in this fiercely competitive landscape. This comprehensive approach can provide credit unions with a solid foundation to navigate the evolving financial terrain.