WASHINGTON–One of the best-known analysts in credit unions sees an industry that hasn’t realized having the price advantage isn’t the traditional strength it once was, says the real advantage scale gives the big banks isn’t just with technology, wants credit unions to reexamine how they position themselves, and believes AI can potentially give credit unions a big leg up even if he’s unsure if the future will be more The Matrix or Iron Man.
Bill Handel, chief economist and general manager with Raddon, a Fiserv company, touched on those topics and more with the CU Daily during an interview at America’s Credit Unions GAC in Washington. Here’s some of what was discussed:
The CU Daily: Every credit union leader is looking for a sense of direction on the economy. How do you answer them when they are looking for that direction?
Handel: These days it’s really tough. I’ve always used the Charles Dickens notation of A Tale of Two Cities, but I call it a Tale of Two Economies. I think people have referred to it as the “K economy,” which I don’t really like as an analogy. But when you look at things at the macro level, we look pretty good.
We had growth close to or exceeding 4% for two quarters last year, which is really extraordinarily strong. Historically, the growth of GDP is somewhere around 3% or even less than 3%. So those were really strong quarters. The first quarter was negative, but only artificially because of import activity, which pulls down GDP and which was driven by the first-quarter expansion of tariffs.
The fourth quarter would have been very strong, close to 3%, except for the government shutdown. So, on a macro trajectory things look pretty good, and you feel pretty confident. A lot of our research shows a lot of optimism among small businesses. Those are all very good signs.
But you also see the other side of it, which is that the vast majority of the population is living hand to mouth. They live on wages and wages only, and in the past six years you’ve seen degradation of wages in real terms because of inflation. Some people are seeing an improvement, but even today the average private-sector worker makes less in real terms than they did prior to COVID.
You have this real conflict that’s going on here between these two groups. Then you add into it what we call the wealth effect, which is what’s happening with asset prices being so strong. There is a metric that some people look at called the Buffett Index. The Buffett Index right now is around 230%, which means that if you took all the value of the stocks in the United States — the Russell 5000 — and divided that into GDP, that ratio would be about 230%. Historically it’s about 86%. It’s a great valuation of stocks, but the concern is that it has led to a wealth effect that is driving a lot of spending among people who have assets and is keeping the economy afloat.
Meanwhile, the other part of the population is really struggling. So, it’s that tale of haves and have-nots that has always been around.
The CU Daily: How do you look at the future of credit unions versus other industries?
Handel: I think the challenge you see in this industry, and it’s really interesting, is if you look back at 20 to 30 years of data, it’s been very consistent that there’s been a 2% to 3% decline in the number of credit unions per year. It’s very consistent. It doesn’t matter whether they’re in the Great Financial Crisis and all that stress or whether we’re in boom times and the economy is really strong. It’s still that same 2% to 3%, which suggests a systemic shift that’s happening in the industry.
I think that relates back to this notion of very significant economies of scale in the industry, which makes it very difficult for small organizations, which have obviously been the backbone of the industry, to survive. We’re talking about technology, which is the obvious one. I mean, how do you match what Chase spends on technology, or even what Navy Federal spends on technology?
The CU Daily: Some now argue that AI eliminates significant costs and allows smaller CUs to be much more competitive and create scale.
Handel: I think it’s there for sure. That can range from the very dystopian — The Matrix or Terminator — or the really positive, Tony Stark from Iron Man. I think the answer is probably where we choose to put it, quite honestly.
Our view is that AI actually can be a great benefit. The real challenge for this industry is not that we don’t necessarily have the tools — and I think we have more tools with things like AI that will help us — but it’s that we haven’t really figured out how to position ourselves appropriately, and I think it’s a critical issue.
This industry came of age with Baby Boomers in the 1990s, and we haven’t found a way to really shift toward the new generations. Our research suggests that about eight out of 10 Millennials and Gen Zers would consider a Big Five or Big Six bank as their primary financial institution, and Millennials would consider a fintech online-only bank as their primary financial institution compared to a credit union or community bank. Community banks and credit unions are kind of soulmates in this regard.
I think what the industry really needs to do is to reexamine how it positions itself, how it talks about itself and what its true value proposition is.
The CU Daily: When credit unions and commercial banks look to you, what is it they are looking for in terms of a sense of direction?
Handel: I think they are really looking for strategic direction. I think they’re trying to figure out how do we position ourselves appropriately for the future. I just had an interesting question yesterday from a CEO. She said, ‘I need you to come out and talk to my people about AI. I know I need to put it in place, but my people are all scared to death.’
I think we’re all trying to figure out how this world is evolving. Back in the 19th century we had the Luddite revolution, and we’re a little bit at that point. I think what we’re going to be going through with things like AI will probably be the most monumental thing we’ve ever gone through.
We have to figure out how to be bold. This is not a time to be apprehensive or scared. You have to be smart about it. You have to have some level of caution, but you also have to have a level of courage and boldness, because there is a lot changing. Humans are naturally apprehensive about change. We are naturally resistant to change. We’ve really got to do better. We’ve got to figure this thing out and move through it. It’s a great opportunity.
The CU Daily: How can a credit union most effectively serve, for lack of a better term, a K-shaped market of members?
Handel: You can talk about prevention and you can also talk about how we fix things once they’re broken when someone gets into trouble. On the issue of prevention, how do we help someone to make better financial decisions?
If you look at this industry, we grew up on price. That was our value proposition, and I mean interest rates primarily. ‘We give you a better deal.’ I don’t think that matters as much anymore. It still matters, but not as much as it did. In general, more often people are looking at other things.
That’s why BofA and Chase and Wells and others are doing so well, because they don’t ever talk about price. They talk about, ‘We make your life easier.’ They’ve played that card extraordinarily well and they’ve spent a lot of money. But I would argue that their technology solutions aren’t necessarily that much greater than anything we have. But they’ve created that perception that they are.
We talk about economies of scale with technology, but the other economy is around marketing. You can really make yourself stand out, and they do that around technology. So, we have to bridge that gap a little bit around the perception on technology. We have to talk more about what we do there.
We also have to think about ways in which we differentiate. I think a great differentiation is talking about how we are your advocate to help you live a better financial life. I think that is great within this industry. It’s where we’ve always been, and I think it’s something we can really grasp onto and utilize quite effectively. That helps people make better financial decisions so that they don’t get into that position where they buy that $80,000 SUV that they can’t afford, or they get all these BNPL loans and then they are hit with the NSF charges.
