By Ray Birch
ARLINGTON, Va.—Many credit unions are responding in the face of growing deposit competition from fintechs and online banks in the rising-rate environment, at the same time a significant number also say they haven’t budged much.
Many have opted to raise their own rates now as part of efforts to not only protect member funds already on deposit–and to lock it in ahead of future rate increases–but to also attract new funds to fuel lending growth.
Not surprisingly, more than 80% of credit union respondents to the latest NAFCU Economic & CU Monitor survey indicated increased levels of competition over the past 12 months related to member deposits.
NAFCU’s chief economist, Curt Long, said 45% of respondents have increased rates on share drafts or regular shares within the past three months, and 36% of respondents said their rates are now either "somewhat" or "significantly" more competitive than they were last year.
A ‘Combination of Things’
What is happening now with credit union CD rates is resulting from “a combination of things,” said Long. “Credit unions have seen really strong loan growth for a number of years now, outpacing share growth. And I think that for years the overall system has been flush with liquidity, particularly right after the financial crisis.”
But deposit levels in the last year, Long said, have returned to more normal levels and credit unions once again are looking for deposits to continue to fund lending growth.
Long believes that credit unions, too, are wary of competition from fintechs and online banks.
“Yes, we have heard that credit unions are seeing a lot of competition for deposits from fintechs and other online lenders—and even the big banks, which have liquidity concerns of their own,” he said. “I think credit union share growth has been stronger than bank deposit growth, which in recent years has been low. I think the big banks are looking for liquidity, possibly even more than credit unions.”
An Old-Fashioned Deposit Battle
It’s the first time in many years in which financial institutions find themselves in an old-fashioned battle over certificate rates, noted Michael Moebs, economist and CEO at Moebs $ervices, in a previous CUToday.info report. After rock-bottom rates that discouraged consumers from moving their low-paying liquid funds, CD rates have now reached the point where consumers once again see them as attractive.
But Moebs cautioned that the interest in CDs could lead credit unions to increase loan funding costs as members simply shift their money within the CU to higher-paying CDs.
A ‘Double- Edged Sword’
Long said he has the same concerns.
Curt Long, NAFCU
“This is a double-edged sword,” he said. “Raising rates can attract additional deposits but you can lose as members shift funds from lower-paying instruments.”
Overall, it’s still a “mix” as to how the credit union movement is reacting to higher rates, said long.
“Forty-five percent of respondents to our survey said they did raise rates, but that means 55% did not,” he pointed out.
What is the right strategy for each credit union is determined on a case-by-case basis, emphasized Long.
“There are a lot of different strategies we are seeing right now,” he said.
NAFCU’s survey asked its members to share other tactics they are deploying to help grow liquidity.
“A lot depends on the stresses each credit union is seeing now,” Long said. “For example, loan growth is not uniform across the industry and some credit unions are needing more liquidity than others.”
What CUs Say They Are Doing
A number of credit unions told NAFCU they are turning more to the Federal Home Loan Bank, while others are taking a different approach outside of raising rates to boost liquidity.
“We have heard that some credit unions are turning more to selling loan participations than they have in the past to free up some liquidity,” Long said. He also noted that a number of credit unions told the trade association they have already locked in long-term funding in preparation for the ongoing rate increases.
With two more rate hikes expected by the Federal Reserve before the end of the year, Long expects deposit competition is likely to heat up. But the rate increases, or the increasing competition, should not surprise any CU, Long stressed.
What is new, said Long, is credit unions must learn to adjust to the lack of stickiness of deposits due to consumers’ ability to move funds easily across the country via the Internet.
“I see at conferences that when the topic of liquidity comes up that the issue of technology is raised,” said Long. “And the fintechs are a big part of that. The role of technology in marketing rates has gotten much larger and people can shop and move money around so easily now. So what does that mean for the stickiness of credit union deposits going forward? I think a lot of credit unions are asking that question.”