How Credit Unions Can Win the Battle for Business Deposits

In a thought-provoking session on Day 2 of the 2023 Servion Lending Conference, Von Hawthorne, the Chief Operating Officer at Tru Treasury, delved into the intricate world of liquidity within the lending industry. His mission was to empower attendees with insights into market dynamics, interest rates, and most importantly, how credit unions can emerge victorious in the relentless competition for business deposits.

The Economic Impact on Credit Unions' Cost of Funds

In the tumultuous year of 2022, as inflation surged, the Federal Reserve implemented several strategies, including bond purchases, to exert downward pressure on the prices of goods and services. Simultaneously, it raised the interest rate on reserve balances from 0.5% to 1.65% in an attempt to mitigate excessive spending, dampen demand, and curb inflation. Notably, inflation reached its zenith in June 2022, and since then, the Federal Reserve has taken a staggering eleven steps to raise interest rates as a robust response to inflation. As a consequence, borrowing costs are now at their highest point in 22 years.

The Vital Role of Business Deposits for Credit Unions

Elevating interest rates invariably influences deposits. At this juncture, the cost of deposits is also surging. On a macro scale, credit unions are currently witnessing lower checking account balances than in the past. The reason behind this shift is that customers are redirecting their funds to more lucrative options like Certificates of Deposit (CDs), which promise a superior rate of return. In fact, the share of CDs in the total credit union deposits has surged to nearly 22%, a remarkable 13% increase since June 2022 when inflation was at its peak. For credit unions, this poses a challenge due to the escalated cost of funds. So, the question arises: How can credit unions enhance the cost of funds to offer more competitive rates to their clients? Von's answer is to enhance the value of business deposits.

Three Strategic Avenues to Conquer the Battle for Business Deposits

1. Embrace Business Deposits: Credit unions should no longer settle for loan-only transactions with business clients, a practice they have traditionally adhered to. Requiring deposits or other supplementary business activities can substantially elevate the worth of business deposits. However, this may necessitate a shift in credit union culture and additional training and resources for loan officers, who are often not trained in this approach. Coaching and development programs may be indispensable.
2. Deposits as a Condition for Credit: Recognizing the challenge credit unions face in accumulating commercial deposits, one solution is to make deposits a prerequisite for securing credit. Von cited an illustrative example in which an initial loan of $1 million, tied to a deposit balance of $2 million along with treasury management services, escalated the value from $30,000 to $83,000.
3. Comprehensive Support for Business Owners: According to data from the Federal Reserve Bank Small Business Credit Survey, only 8% of small businesses seek loans from credit unions. Credit unions should be ready to offer comprehensive support to these customers by providing a full suite of lending products such as lines of credit, Small Business Administration (SBA) loans, term loans, and Commercial Real Estate (CRE) loans. The idea is to cater to a diverse range of loan requirements that businesses might have in the future.

The Role of Treasury Management in Securing Business Deposits

Once the hard work of acquiring customers and their deposits is done, treasury management steps into the spotlight. It's a pivotal player in supporting customer needs through services like cash flow automation, fraud prevention, operational efficiencies, and optimized cash returns. Credit unions face a crucial decision: whether to build an in-house treasury management department or outsource it. Developing an in-house treasury management department involves offering a suite of products to manage payables, receivables, cash services, and fraud prevention. It also necessitates a robust sales team capable of selling these products to existing and new members, along with efficient operational support to ensure a seamless department operation and managing customer expectations.

In conclusion, Von Hawthorne's insights shed light on the intricate dynamics of business deposits and the strategic steps credit unions can take to thrive in this fiercely competitive landscape. This comprehensive approach can provide credit unions with a solid foundation to navigate the evolving financial terrain.