October 23, 2022
September’s inflationary data has reasserted a common theme - there remains much to be done by way of tightening monetary policy as inflation continues to press upwards.
The Federal Reserve has made repeated attempts to stem the tide of inflation by increasing the target for the federal funds rate - most recently by another 75 basis points. The range now sits between 3% and 3.25%, with median projections suggesting that it will touch upwards of 4.4% by the end of the year. The goal of placing upward pressure on the cost of funds is to slow the economy, thus reducing spending and decreasing demand, and ideally bringing down inflation to the Federal Reserve’s target of 2%.
Consumers are now forced to navigate an environment in which purchasing power is depleted at the same time as credit is becoming more expensive to obtain. Outsized purchases of homes and vehicles have continued to pare back, which is reasonable given the costs associated with making these kinds of purchases - high interest rates place them largely out of reach of many. While the proportion of individual income that is classified as “non-discretionary” increases due to the high costs of daily necessities such as food and energy, consumers continue to seek stable places to park some discretionary funds.
High-yield savings accounts have become a fixture of this conversation, as they can be lucrative places to hold money in a high interest rate environment for savvy consumers. While the Federal Reserve hikes interest rates in an effort to stabilize spending and borrowing, savings accounts become far more attractive as the yields amplify as interest rates increase.
Another factor driving interest in such accounts is market competition. Banks, credit unions, and other entities offering high-yield savings accounts place pressure on the APY, and also define consumer expectations with regard to the ease to which access to higher yields should be offered. For instance, low minimum account balance or small initial deposit requirements make switching costs highly affordable. The simplicity of being able to electronically transfer funds between institutions erases some fears consumers have about having accounts with multiple banks and the speed at which the funds can be accessed.
The Credit Union Benefit
Credit unions have long been known to offer higher yields on products than banks for various reasons, but primarily due to the not-for-profit structure that allows them to share their profits with members in the form of better yields and lower fees. The current economic environment puts credit unions in a strong position to capitalize on a time of financial uncertainty, building unique relationships with both new and current members who may realize that a product such as a high-yield savings account is right for them. This will remain true as interest rates likely shift higher and yields on these accounts increase to the point where they may become too great to ignore. In this case, it should be expected that demand for these products will continue to increase.
This growing demand has been noticed by Apple, which, through Goldman Sachs, also seeks to take a bite out of the demand for high-yield savings. Apple offers built-in access to an account that users can manage within the wallet app of their iPhone. Account holders have ability to deposit and withdraw the funds to another bank account at any time and without fees. The flexibility of control offers users the added reassurance of being able to access the money should they need it for immediate use. While these benefits are by no means revolutionary, the integration of such a product into the device is unique. Given how it may bring more eyes to the high-yield style of savings account and ease of account access and use, this makes Apple a notable competitor.
In 2019 Apple launched the Apple Card, a credit card "built with customers' financial health in mind." Per apple, "Apple Card has no fees and is designed to offer customers an easy and secure way to track purchases, and manage spending from Wallet, while getting up to 3 percent Daily Cash when they use Apple Card online, in-store, and in-apps." While reviews have been mixed, Apple itself suggests they rate #1 in customer satisfaction.
The extent of the disruption of the Apple product remains to be seen as it is not yet publicly available (the anticipated launch is early 2023). However, the underlying significance of the introduction is the simplicity and tech-friendly experience that such a product would bring to the market. Credit unions have long been wise to invest in the user experience and continuing to do so is paramount - more so as the market becomes ever more crowded with various entities and institutions offering competitive products.
Glatt Consulting offers consulting solutions and leadership role-related support designed to help credit unions establish the foundational strength necessary to succeed in today's highly competitive financial marketplace. Learn more.