Reflecting on 2020 to prepare for a successful year ahead
The year 2020 will be memorable in many different ways. There were challenges and struggles, but for most of us, many teachable moments and lessons learned. On both a personal and professional level, 2020 was likely not what you expected it to be. However, through reflection and evaluation, here are our takeaways and thoughts for future strategies that can help your credit union prepare for a successful year ahead.
Strategic Initiatives Put to the Test
The past year upended all of our best laid plans. Most initiatives were either put on hold, delayed or even cancelled due to the pandemic. At Coastal, we had to quickly adjust at the beginning of the year to focus on member relief programs. This unexpected shift actually proved to be invaluable to us as it brought us closer to what members really need, and we learned how they really want to do business with us. It also brought us closer to our employees, reinforcing their trust that we would take care of them even in extreme circumstances. We pivoted to enable work from home situations and created options for all employees to continue to work.
Recessions are an inevitable part of business for a financial institution, whether you’re a local credit union or large national bank, and it’s our responsibility to prepare for them. In fact, after the 2008 recession we made a conscious effort to grow net worth well beyond the regulatory requirement. That decision enabled us to survive the anticipated loan losses as well as the sharp decline in interest rates.
With COVID-19 ongoing, we all must prepare to manage the recession hangover. Coastal is fortunate to have the financial strength to proceed ahead with our overall strategic plan. We will, of course, have to pull back in some areas, but with our bold initiatives on the digital front, for example, we can continue to move forward in other ways. Looking optimistically toward the future is what motivates our team as we gear up for 2021. It gives us a feeling of “return to normal” rather than just constantly being in “pandemic reaction mode.”
One strategic initiative of ours that will carry into 2021 will be a continued focus on digital transformation efforts. We were already moving in that direction. However, COVID-19 showed us that we were moving too slowly. The pandemic has affected all of us long enough to create permanent change in our behavior. The ability to do nearly everything remotely and digitally is now paramount. Initiatives such as video meetings, instant chat, contactless cards and more began to ramp up dramatically, and we will keep refining these efforts in 2021 knowing their critical necessity for preparedness.
The Pendulum Swing on Performance
Credit unions and banks everywhere felt the pandemic effect on overall performance. The rapid spread of COVID-19 forced many businesses to close causing sudden layoffs and unemployment. Typically, during recessions, these events cause a chain reaction. However, during the pandemic-induced recession in 2020 everything happened simultaneously.
Every financial institution is experiencing compression in the interest margin. The sharp drop in interest rates paired with a pullback in consumer lending have simultaneously caused a reduction in interest income. Deposit rates can be lowered in response to falling interest income, but with rates already so low, the options to mitigate will begin to run thin. The industry is also realizing historical growth in deposits as members move funds out of the markets and into deposit accounts that will not erode principle. Deposit growth absent lending demand has also opened up liquidity, but liquidity sitting in cash earns little to no interest. Thus, it appears to be a worst-case scenario for interest margins across the board, but we are optimistic that consumer loan demand will begin to rebound in the new year.
This rate environment has offered tremendous benefits to borrowers. Mortgage loan rates, in particular, are hitting all-time lows. It’s a great time for our members to invest in a home if they are financially able to do so. In fact, mortgage rates are so low that a member can get a 30-year mortgage at about the same rate as an auto loan. This is unprecedented. For members facing financial difficulties, lines of credit such as credit cards and home equity loans may offer a financial bridge in times of uncertainty. Lines of credit are also at historically low rates.
Member spending trends have also shifted more toward savings and paying down debt during the pandemic. Much of the government stimulus money that was received in April has either stayed in deposit accounts or was used to pay down debt such as credit cards. Many members are choosing to lower their monthly payments and build up savings in a year with so much uncertainty. As a result, we are actually seeing an improvement in the financial well-being of members that have been able to make this shift.
Consistent with decreased spending in checking accounts, we also saw a decline in credit and debit card interchange. Debit card interchange has slowly returned to normal levels, but we’ve seen a significant shift in traditional spending from travel and entertainment to home improvements and food purchases. Remote deposits through digital banking also increased, and at one point, exceeded deposits at our personal teller machines for the first time in our credit union’s history. To support this member behavior, we raised remote deposit limits for members.
Positioning for the Future
The uncertainty of 2020 reminds us that 2021 could be more of the same. We anticipate the key driver of success will be to provide multiple points of service options for our members while emphasizing our digital and remote capabilities. Credit unions can position for the future by restarting efforts to build toward previously outlined strategies taking note of lessons learned from the pandemic to make those strategies stronger. It’s time to focus spending on true priorities and pull back on less impactful initiatives. This might mean putting more effort into your digital strategy than you previously anticipated.
Due to the industry shifts we saw in 2020, we will be focusing more on giveback programs that reward the savers who are experiencing lower returns and focus our efforts on value added deposit services that offer convenience and ease of use through digital channels. We will continue our commitment to low fees and rewards programs tied to spending for checking accounts and debit card use. On the lending side, historically low interest rates provide our borrowers with opportunities to restructure debt or finally make that move to home ownership. For our members that continue to experience financial difficulties caused by the pandemic, our Member Assistance Program is well-prepared to assist them any way we can.
Financial curve balls are part of our business. Our team is looking at the past, the challenges of the last year, and gathering lessons learned for an even stronger future.
Ultimately, COVID-19 and the resulting recession proved that we are ready for the unknown – even if we thought we weren’t. By keeping focus on our members’ well-being, we can weather the good, bad and ugly together.