MAD MONEY

Banks, credit unions battling fraudsters, digital competitors...and Fed actions

By Rick Haglund

A rapid shift to digital banking, growing cybersecurity worries, escalating competition from online payment applications and securing talent are threatening banks and credit unions’ profitability.

Credit unions and banks have been driven to tech as their customers use their phones, laptop computers and other digital devices to bank.

Those services are being driven in part by competition from “fintechs,” financial technology software used to modify, enhance or automate financial services. They include payment apps such as Venmo (popular among young consumers) and Stripe, which helps businesses process online payments.

“The proliferation of fintechs has been a good thing,” said Norm Plumstead, president and CEO of Honor Bank.

“It’s forced us to innovate faster than we would have otherwise.”

Honor Bank already offers a range of online banking services to its customers and is preparing to roll out digital services for business customers this year.

“We felt we had fallen behind the curve in offering online services to business customers,” Plumstead said.

“Pressure from fintechs and well-funded megabanks prompted us to do this.”

Some banks are partnering with or acquiring fintechs. Columbus, Ohio- based Huntington Bank, the largest bank operating in the Grand Traverse region, last year bought San Francisco-based digital payments provider app Torana. The service will power the bank’s ChoicePay app, used to facilitate payments to Huntington customers.

Last fall, Independent Bank launched “Business Loan Express,” which allows business customers to apply for commercial loans online and get a decision in as little as three days. The bank partnered with a Boston fintech to develop the service.

The quick turnaround time is “unheard of in the world of commercial lending,” said Marc Judge, first vice president of community banking at Indepen- dent Bank in Traverse City.

Cybersecurity is a long-standing headache for financial institutions, and the bad guys are only getting more active and sophisticated.

“It’s staggering the number of attempts people from the outside world are making, trying to get into our database,” said Dan Druskovich, State Savings Bank’s regional president in Traverse City. Druskovich and other local financial institution leaders say their information technology departments are largely able to head off those hacking attempts, but must constantly update their cybersecurity tools.

Some say they’re offering cybersecurity services to their customers, which is mutually beneficial in protecting valuable data and preventing financial losses.

“The risks around cybersecurity have done nothing but go up on an exponential basis over the past several years,” Plumstead said. “We do a lot of training in that area, and we can extend some of that expertise to our customers to help them solve some of the same challenges.”

Bankers and credit union executives also are balancing the rapid shift to online banking with the need to maintain brick-and-mortar branches for primarily older customers and others that desire personal services.

A survey last year by Bankrate.com found that almost 80% of millennials reported using digital banking services, but just 48.5% of baby boomers reported doing so. Yet nearly 80% of those who preferred online or mobile banking still visited a branch in 2019.

“There is still a group out there that wants one-on-one customer service” in a branch, Druskovich said.

Some financial institutions are using digital technologies to accommodate those personal interactions.

Independent Bank gives customers access to its bankers’ online calendars to set up in-person or video meetings and phone calls.

“Our goal is the Amazon experience” of fast, seamless, digital interactions, Judge said.

“When you go to the website of a bank, it’s not an Amazon experience,” he said.

Banks and credit unions continue to seek talent in a tight labor market, although many say the situation has improved as the COVID pandemic has eased and people return to the labor force. But some say they are having trouble filling entry-level positions in branches.

“That’s always a hard environment,” Judge said. “We have postings galore across the state.”

All these challenges are occurring against the backdrop of a slackening economy as the Federal Reserve steadily boosts interest rates to tame rising inflation.

Although job growth remains surprisingly strong in the region – Grand Traverse County’s unemployment rate was just 3.7% in December, the latest date available – high inflation, continued supply chain shortages and geopolitical conflicts are worrying financial institution executives.

“The economy as a whole is really volatile,” said Karen Browne, president and CEO of TBA Credit Union in Traverse City.

Consumers are draining savings and checking accounts to support higher costs of daily living expenses. Nationwide, bank deposits fell in the second and third quarters of 2022, the first such back-to-back decline since 2010, the Wall Street Journal reported.

“We expect to see some pain in the runoff in deposits caused by inflation,” said Andy Kempf, president and CEO of 4Front Credit union. “We’re watching that really closely. People are struggling to make ends meet.”

At the same time, higher interest rates are hurting demand for mortgage, home equity and commercial loans. Banks and credit unions also are tightening lending standards to head off potential loan defaults. That’s being driven in part, Browne said, by a new financial industry accounting standard that requires banks and credit unions to identify potential loan losses earlier in the lending cycle and boost loan-loss reserves. The rule took effect in January for most banks and credit unions.

“It’s always a new roller-coaster ride,” Browne said.

Some bank and credit union executives are expressing frustration with the Federal Reserve’s repeated interest rate hikes, saying the Fed could push a fragile economy into recession.

Major employers in the region, including Munson Healthcare and classic car insurer Hagerty, have experienced layoffs, they noted. And there has been a rash of local restaurant closings.

“If the Fed keep raising rates, we’ll continue to see a softening of the economy,” Judge said. “Customers can’t absorb these rates. It doesn’t help the macroeconomy.”