A look at 2021: A strong case for optimism but the ride isn’t over

Many of us find ourselves at the end of 2020 reflecting on a year that has brought change into every corner of our lives. While we are looking to 2021 with a lot of hope, there is still an understanding that even with promising vaccines on the horizon, there will be a slow return to normalcy. 2020 will be a year to be remembered but it’s time to look ahead, for individuals and businesses.

Even the most optimistic credit union leaders must be prepared to adapt to new realities to be better positioned for the future. From our vantage point, we see four key factors shaping the environment for credit unions in 2021.

2021 will be the Year of New’s – The Pandemic, New Administration will Drive More Change

Many are toasting the end of 2020, but don’t expect the roller coaster ride to end with the calendar year. The pandemic is far from over, a new presidential administration will enter Washington, and policy changes and new programs may be on the horizon. All of these factors will continue to fuel the dynamic climate that’s diverging spending patterns and financial behaviors from the norms. 

When it comes to change, 2021 is bound to bring more of the same – something new every day. It’s imperative to be ready to adapt on short notice. 

And how exactly can credit unions be equipped to handle unforeseen change? For starters, by detecting and responding to the unseen patterns that foreshadow both threats and opportunities. Modern tools like predictive analytics are far more powerful and precise than any traditional forecasting method, and through machine learning, can continuously synthesize new information and evolve in-step with the environment. This is more important than ever. 

Tricky Waters Ahead with Rising Risk

S&P Global Ratings is warning that 2021 could be the toughest year for the banking industry since the global financial crisis of 2008. Though they predict a sharp increase in global growth, there are four near-term risks potentially looming for financial institutions. Those include:

• Economic disruption from COVID-19 that gets worse or lasts even longer than expected.
• A withdrawal of federal support too soon, potentially damaging the fragile financial state of both consumers and businesses. 
• An anticipated surge in leverage that can extend corporations causing insolvencies to spike.
• A weakening of the property market that increases defaults and weakens financial institutions credit quality.

The use of business intelligence tools gives credit unions the ability to mine their vast pools of data with incredible granularity and turn it into information that is understandable and actionable. With a framework in place to continually analyze and visualize critical information, credit unions will possess a more accurate and detailed picture of their specific risks and be in a much stronger position to mitigate them.

New Loan Generation may be Tougher

Even after much of the country is vaccinated, the return of consumer demand will likely happen slowly. Even the best vaccine can’t make the millions of people who have been economically affected financially whole. It will take time to rebuild the financial stability needed to drive demand for home and auto loans.

While digitizing loan application and approval processes will improve speed and efficiency, incorporating data analytics will provide the needed insights on who to target, when and how. Digitization plus analytics provides the double-edged sword that will be required to gain a competitive edge in a low-demand environment.

CU Rise’s predictive models are indicating a return of loan demand by Q3 of 2021, with a strong surge in Q4. Credit unions must be prepared to strategically capitalize on the shifting trends at just the right moment.

Cost-Cutting will Remain a Priority

Many credit unions experienced revenue drops in 2020 that will continue into 2021. In spite of a short mortgage and HELOC boost, ultralow interest rates are dragging down net interest margins, and are expected to stay low for a while. Combining that with low new loan generation, many credit unions will be looking to manage expenses carefully to maintain positive ROA. While credit unions are putting a red pen to their budgets, it’s important to evaluate cost-cutting measures strategically by increasing efficiency and digitizing effectively.

Data analytics can do the legwork of pinpointing where to put time and resources. Build marketing campaigns targeting only the most likely to respond. Focus collection efforts on the segments positioned for the most serious delinquency issues. Re-engage the members most likely to quietly take their business elsewhere. 

All the while, these initiatives have payoffs beyond the increased ROI of a single campaign. They are creating more interactions with members that further build the digital footprint, which in turn leads to more fruitful and accurate insights. The results compound and continually strengthen a credit union’s ability to deliver exceptional, well-targeted member service.

Though increased intelligence & digitization was rapidly pressed upon many credit unions in 2020, it creates an array of new opportunities in 2021. As data becomes more abundant and accessible, so do the opportunities for more dynamic business strategies and member service. Perhaps that’s one parting gift from 2020 we can be grateful for.