There’s no way to sugarcoat it: the COVID-19 pandemic and resulting economic crisis has dealt a devastating blow to people all over the country, a wave that will surely affect banks and credit unions for some time to come. But this isn’t the first time community financial institutions have found themselves in an economic crisis and 0% rate environment.
During the Great Recession of 2008, while many community financial institutions took significant financial hits or were forced to board up their branches, some not only survived but thrived. We looked at what community financial institutions did right in 2008 using a study from the Federal Reserve Bank of St. Louis and talked to Greg Wempe, Kasasa’s Chief Client Officer, to find out what local banks and credit unions can do now to come out of this crisis even stronger.
The St. Louis Fed’s study specifically looked at community banks that “thrived” during the last recession, meaning they had a CAMELS (capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk) rating of one. While credit unions generally fared better than banks throughout the crisis, looks into how they grew during this time showed similar strategies as the banks’ methods for success.
Prudence in lending, strong commitments to maintaining standards for risk control in all economic environments, developing business plans that worked for their individual markets, and implementing strong, localized service all played a part in helping community financial institutions grow during and after the crash.
While there wasn’t a one-size-fits-all approach and success generally came from community financial institutions knowing their local markets well, there were distinct challenges that emerged, allowing institutions to prepare for future crises and turning the 2008 recession into a stress test of sorts.
According to Wempe, “The Great Recession prepared community banks and credit unions to be ready to respond to market fluctuations quickly. In 2008, Fed funds fell like a rock. Leadership teams were forced to learn how to assess the situation, make quick decisions with little information, and then deploy them to their teams.”
With the benefit of hindsight and new technology and products that have been created in the decade since the last recession, here’s what you can do to protect and bolster your institution during and after this crisis:
In a pandemic that’s forced everybody online, it’s easy to see that offering the technology consumers need to do business with you is one of the best ways to minimize losses during this time.
But even during the Great Recession, technology contributed to several banks’ success. Many community bank leaders interviewed said that technology played a key role in their success by keeping operating costs low.
A solid digital strategy can help you convert consumers on the front end and add efficiency to your operation on the back end, saving you money and time in the long run.
Like the 2008 crisis was a stress test for financial institution preparedness, a recent report from Bancography advises that this pandemic should be viewed as a stress test for your digital channels. Ask yourself where a consumer could run into friction when trying to find a product on your website or open an account with you. (Here’s a checklist that can help.)
“When Fed funds started falling as a result of COVID-19, Kasasa’s Client Success Managers were flooded with calls from clients looking for guidance and analytical support on potentially changing the rates on their high-yield Kasasa Cash® and Kasasa Saver® accounts,” says Wempe.
“Despite these accounts being positioned as ‘high rate’ before Fed funds plummeted, over 60% of the hundreds of community financial institutions we spoke to chose to leave their previously market-leading rates in place — meaning they understood the true financial impacts and nuances of those accounts and saw the value of continuing to attract new account holders.”
A crisis is not the time to press pause on your business, although it can be tempting. People still need accounts and will be looking for the best deal. So if you can attract account holders with a high rate, while offsetting that cost with non-interest income and money-saving services, like e-statements, you can still come out ahead. That means basing rate decisions on your cost of deposits, not cost of funds.
Wempe agrees. “It’s easy to go through and cut rates to try to save expenses…but that knee-jerk reaction may not always be the best answer (though, sometimes, it is). The key point is to do the analysis first. Measure twice, cut once.”
And even though you may not need deposits now, new account holders mean relationships that you can lean into for new deposits (and other products) when the market eventually changes.
The St. Louis Fed’s study found that many community banks had robust sources of non-interest income that shored up their balance sheets before, during, and after the 2008 recession.
From loan origination fees to services like accounts receivable or trust services, several of the banks that thrived had set up solid sources of non-interest income for themselves.
Accounts can provide non-interest income through fees (though consumers may not be happy) or interchange fees through share-of-wallet-growing debit card swipes. Value-added products offered through partners are also a great option to deepen consumer relationships while earning additional income. Learn more about adding non-interest income drivers to your product lineup here.
4. Offer lending products and services that deter delinquency.
In a 0% rate environment, margin compression can squeeze out institutions that rely heavily on credit. And with loan delinquencies on the rise over the past few years, credit was already a challenge plaguing financial institutions.
The St. Louis Fed’s study showed that a commitment to conservative lending principles and a careful monitoring of credit quality played a big role for successful community banks during the Great Recession. But if you’re a community bank or credit union that’s made its name on lending to the credit-challenged (especially at a time when underserved populations are facing the greatest hardship), turning your back now could sour your relationships. You do have other options to deter delinquency.
During a recent Kasasa digital roundtable, community financial institution leaders suggested ways to help borrowers during this pandemic, including tracking the need for skip-a-payments or offering a “no payment for 90 days” special on loan refinances. They also suggested running a “payment holiday” where all loans have the due date moved a month later, which reduces workload on staff and creates goodwill with your account holder base.
Getting new borrowers can be tough during and after an economic crisis as fear can hold consumers back from seeking financing for a year or longer. With a product like the Kasasa Loan®, a borrower can use a feature called a Take-Back® to access cash that they’ve paid ahead on, giving them a cushion during hard times.
The Kasasa Loan can help reduce delinquency through auto-pay adoption (nearly two-thirds of Kasasa Loan borrowers enrolled in auto pay without a rate discount, according to a Kasasa case study). It also builds stronger relationships by offering borrowers help during financial emergencies. So far this year, as unemployment rates have risen, we’ve seen a 288% increase in consumers leveraging their Take-Back funds.
A unique advantage you have that the megabanks can’t touch is your level of community commitment. You don’t want to lose that when things get hard.
Building relationships through community outreach, programs, and events can do a lot to solidify a stable foundation for your future.
According to the St. Louis Fed, most leaders of banks they interviewed talked about the importance of staff members staying active in their communities during the 2008 crisis. They went so far as to omit offers from their product lineup that could be seen as predatory, like overdraft protection and home equity loans, at a time when consumer trust of financial institutions was shaky.
There was a common theme among the banks and credit unions that did well in the 2008 crisis: they took the actions that helped them succeed before disaster struck.
Even though we’re already in another economic crisis, there is still time to start putting these safeguards in place. Doing so now will help you in the future. And remember to stay vigilant — even after the worst storms, the sun still rises the next day. You want to be in a good position when it does.
Says Wempe, “It’s easy, in these times, to focus completely inward and forget to keep at least one eye on your competition. But for those institutions that are well positioned, times like these are the best opportunities to make significant moves, take chunks out of market share, and dominate those that are too distracted to really see what’s happening. Don’t forget to keep an eye out, and be prepared to respond, even if it’s at a time where you feel close to overwhelmed.”