A volatile 2022 has caused many people to fear we are headed for a global recession. For credit unions, the concerns are likely to lead to increased demand for services that provide members with sound savings strategies.
The past year has seen multiple threats emerge that have led to a weakened economy and reduced consumer confidence. Inflationary pressures have hit consumers hard, especially at the grocery store and the gas tank.
Continued supply chain disruptions have made for long waits for spare parts and everyday household items alike. The continued uncertainties that came to bear with the COVID-19 pandemic continue to persist, shaping how we work, socialize, and spend.
Worldwide and domestic crises, punctuated by Russia’s invasion of Ukraine, add further to the concerns about a recession striking in 2023.
What is a recession? Strictly defined, a recession is a temporary period of sustained and widespread downturn in the economy, usually marked by two consecutive quarters of a fall in the gross domestic product (GDP). However, the dictionary definition does not be true for the majority of people to feel as if times are hard.
Many economists predict a continued weakening of the U.S. economy. For example, J.P. Morgan expects a mild expansion of 0.5 percent to 1 percent with a mild recession likely. The J.P. Morgan report also notes that while many households built up a healthy financial reserve during the pandemic in 2020 and 2021, those surpluses were mostly eroded in 2022. Credit card balances increased rapidly in the last half of 2022 and consumer borrowing continued to increase.
What could a slowing U.S. economy or recession mean for credit unions and their members? How can new partnerships lead to new opportunities? Here’s a closer look.
Credit Unions and a Recession – How to Prepare
Credit unions have long been a hedge against recessions, continuing to generate revenue through lending products while continuing to support members. To be able to do so now is the time to prepare. Here are some steps credit unions can take to shore up their operations if and when a recession occurs.
Focus on Risk Management
There are several steps credit unions can take to ensure they can withstand the headwinds of a recession. They include:
- Stress-testing assets to address a potential 5 percent downturn in the economy. Even though experts do not expect that large of a contraction, there may be regional differences
- Increase loan loss reserves
- Examine interest rate risk for balance sheets. Short rates have eclipsed longer rates and if the trend continues it could become problematic for credit unions
- Ensure that collections procedures are sound
- Tighten underwriting standards if necessary
Find Other Revenue Opportunities
In challenging economic times, many consumers turn to revolving loans, such as credit cards and home equity loans to keep up with inflationary pressures. Credit unions should look to expand lending in these areas to temporarily provide more revenue opportunities, aware that the demand may ebb as inflation wanes.
Drive Improvements in Efficiency
During a recession, every business will look to improve efficiencies in business operations to generate cost savings. Credit unions will need to use process improvements, technologies, and better time management to improve productivity during an economic contraction. Managing labor costs and operational inefficiencies are key steps to saving money.
Focus on Community
Credit unions have a long history of building and supporting communities. During a recession, the need for strong communities is high. Collaborations with community partners can boost membership and help members give back, despite difficult financial situations.
Turn to Fintech Partnerships
Fintechs can help credit unions in multiple ways. They can help to automate processes and provide members with new tools, products, and services. By seeking out fintech partnerships to solve internal problems and serve members, credit unions can continue to innovate and differentiate.
How to Help Credit Union Members
There are some encouraging signs that the economy may not be heading into a recession. Strong job numbers in early 2023 could be a sign that inflation and recessionary fears are cooling.
However, there are still some troubling signs. A recent LendingClub report noted that 64 percent of Americans are living paycheck to paycheck. More than half of those making six figures reported for the first time that they were struggling. Both statistics are clear indications that inflation is still having a major adverse impact on people’s lives.
Credit unions can continue to play an important role in educating and supporting members during these tough economic conditions. Credit unions can provide both information and context, especially for younger members who have not lived through a recession as adults. By promoting effortless savings, they can support members and help them have resources to withstand difficult financial times.
At Spave, we provide an innovative app-based solution for credit unions and their members. When you offer Spave to your members, they can easily connect all their accounts with your credit union, including checking, savings, and credit cards.
With Spave, members can use the app to set a percentage of each purchase that is designated for their savings account. The percentage amount, much like a tip, is added to the total bill and is automatically sent to their credit union account. At the same time, a percentage is also provided to one of more than 1.5 million approved charities, allowing members to give back at the same time and strengthen their communities.
Other Spave features include a rounding-up feature that contributes spare change to their savings account and one-time contributions to savings accounts and charities. Included insights allow members to understand their spending habits and make smart choices about budgets.
For credit unions, Spave provides new, innovative ways to educate members and boost savings. Credit unions using Spave see increased swipes, savings balances, and lifetime member value.
To learn more about how to partner with Spave, contact us today.