Operational Considerations to Give Credit Unions an Edge in 2024
By Paul Davis, Director of Market Intelligence, SRM
A big challenge for credit unions will involve meeting the financial goals that management teams and boards set during last year's budgeting processes.
This year brings myriad unknowns, such as legislative and regulatory intervention and an unclear economic trajectory. A surprise fourth-quarter loss from New York Community Bancorp tied to commercial real estate and multifamily issues is causing broader concern about credit quality.
Bankers are formulating opinions on what areas they are most concerned about. A survey conducted by the Conference of State Bank Supervisors found that most community bankers view net interest margins as a high risk of high importance. The cost of funds, followed by core deposit growth and regulation, and accounts are also crucial for bankers.
It’s not surprising that credit union leaders have similar worries.
Growth is expected to be slow in 2024, requiring significant effort to hit revenue and bottom-line targets. The key to success during this time of uncertainty is a willingness to adapt and capitalize on industry changes. However, several areas of consideration could provide credit unions with the edge they need to meet their numbers this year.
Understanding fintech and delivery models
Fintech is an ever-evolving industry, with new solutions constantly debuting. Due to the increasing volume of these solutions, major core processing providers can struggle to keep pace.
Strategically, credit unions should prioritize customer-facing solutions in addition to best-in-breed solutions. They should be aware of whether they can effectively access data from their core, whether it's extracting info to populate adjacent systems or depositing enhanced info back into their core. Too many vendor contracts implement a "pay by the drink model" that forces credit unions to pay for access to their data.
Delivery models in the financial services industry have evolved rapidly. In the past, it was common practice for core providers to include standard contract language requiring clients to adopt their offerings even if they were inferior to similar-in-market solutions.
Many vendor contracts often include clauses that require clients to use their product, even if those clients fail to realize or understand its impact. Exclusivity clauses or stringent minimums are potentially more damaging because they can prevent financial institutions from using multiple solutions that allow them to become less reliant on a single vendor.
Adjusting to shifts in debit routing
Credit card interchange will remain a challenge – and could intensify – particularly for credit unions. Last summer, a Federal Reserve clarification to debit routing rules took effect, requiring two unaffiliated networks be made available for card-not-present (CNP) transactions. Although subtle, it carries heavy revenue implications.
The growing popularity of e-commerce should serve as a stark reminder for financial institutions to ensure their card routing strategies are adequately optimized for today's conditions. For instance, programs should be created that allow cards to be used in ways that benefit the credit union.
E-commerce has primarily contributed to a rise in CNP transactions, masking mix and rate issues that institutions can overlook without detailed volume analysis. Variables such as geography and merchant mix can factor into this analysis. Regardless, the Fed's rule change should sound alarms for credit unions to ensure their network aligns with current conditions.
Coming to terms with AI
Artificial intelligence has quickly evolved from a novelty to a necessity for credit unions. The movement to leverage these solutions in daily operations is stronger than ever. Leadership teams that refuse to adopt AI are putting their credit unions at a grave disadvantage.
Nearly all financial institutions are already deploying, or are in the process of implementing, AI capabilities, according to EY. This shouldn't come as a surprise, given how quickly generative AI swept across the financial services industry. Although capabilities such as machine learning and chatbots already existed, the 2022 introduction of ChatGPT set a new standard and opened the door to new possibilities.
Despite the benefits of AI, several questions remain, like where to implement the technology and how it should be regulated. The Biden administration recently issued an executive order regarding AI's safe development and use. Regulations will play a major role in how credit unions plan to apply AI.
SRM's experts expect initial regulations to be a broad patchwork that agencies will refine over time. When budgeting, consider this investment despite a standard set of regulations remaining a work in progress.
The financial services industry is facing constant change, prompting credit unions to adjust their 2024 goals and objectives as the year progresses. Operational agility will be critical to navigating this year's twists and turns.