5 Things Credit Unions and Banks Should Consider Before Responding to Fed Rate Cuts

The Federal Reserve's pivot to cutting interest rates presents a complex landscape for financial institutions, combining fresh opportunities with heightened risks. While lower rates typically spark increased lending activity, banks face unprecedented challenges: credit card delinquencies have hit a 12-year high, and nearly 40% of cardholders have maxed out cards since rates began rising.

Now that the U.S. Federal Reserve has finally started to cut interest rates to achieve a soft economic landing expect activity to ramp up at banks and credit unions as consumers and businesses adjust their finances to reflect the new reality. Some will seek high-rate CDs while they’re still available, others will want to consolidate credit card debt, and mortgage activity may pick up, too.

This sounds positive, but for financial institutions, the monetary policy shift reflects rising risks from both new competitive pressures and the risks of serving debt-strapped consumers. A range of Federal Reserve Bank studies tell the story: Credit card delinquencies have hit 10.9%, a 12-year high. Subprime delinquencies hit 63% in 2023 vs. 38% in 2021. Meanwhile, nearly 40% of cardholders have maxed out a credit card or come close since the Fed started raising interest rates, according to a Bankrate credit utilization survey, which draws on data from the Fed and Equifax.

To better understand how banks and credit unions might react to the changing rate environment, The Financial Brand spoke with two executives — business analyst Kim Gaines and client strategist Wendy Erhart — both from Vericast, a firm that helps banks and credit unions improve their marketing engagement through more effective use of data.

Here are five suggestions they had for financial institutions as interest rates fall:

As rates fall and your customers start to consider new borrowing options, they won’t necessarily come to you. That’s especially true in today’s market, where online rate shopping is a long-established norm—and where both old and new digital-first players invest heavily in customer acquisition.

Rather than wait for your comprehensive strategy to take shape, begin outreach to high-value customers and members as soon as possible. The truth is that customers can take a year or more to reposition themselves in response to a significant market change or shift in personal circumstances. As they get oriented and start to weigh options, your messaging — not just products and rates, but branding and voice — should be in the mix.

Proactive customer engagement based on pragmatic outbound communications can educate customers about what financial products make the most sense for them now. For example, try engaging them with informational content that helps them understand the dollar savings consumers might, in fact, gain following a series of rate cuts.

Dynamic Markets Demand Dynamic Toolsets

As credit quality declines and delinquencies rise, banks and credit unions face increasing pressure to be selective when approving loan and credit applications. This environment makes it more crucial than ever to leverage big data and analytics to target the right customers with the right products. By using such resources, financial institutions can navigate these challenges while keeping an active hand in the market.

Propensity models are an essential weapon in your arsenal. These AI-powered models analyze vast amounts of customer data—including credit applications, loan payments, and demographic and geographic information — to identify patterns and predict future behavior. By applying these insights, banks & credit unions can determine which customers are most likely to borrow via a specific loan product over the next three to six months. This allows for highly targeted marketing campaigns, focusing efforts on those with a higher likelihood of engagement.

For instance, propensity modeling could identify individuals who are actively shopping for personal or auto loans, enabling institutions to present them with tailored offers for home equity products. Such precision targeting has been shown to yield measurable results. According to Vericast’s Gaines, campaigns that integrate propensity modeling typically see a 20 percent increase in the number of incoming applications, demonstrating the significant advantage of data-driven marketing in a dynamic lending environment.

Remember to Play Defense

The catchphrases we use to talk about rate cuts, such as “unleashing the animal spirits”; “loosening the purse strings”; “spiking the punch bowl,” are colorful but also hint at risk. After all, there are less-than-optimal economic conditions that tend to trigger rate cuts in the first place. They also contain an implicit warning to financial services marketers to sync up with their CFOs and their colleagues in compliance, to level-set on balance sheet targets and review exposures.

With consumers already weighed down with unsecured credit cards and personal loan debt, now is a great time for financial institutions to shift to secured loans. It makes sense to educate customers and members — who have amassed large amounts of credit card debt at high rates — about the merits of taking out a home equity loan or home equity line of credit. Encouraging consumers to move from high-interest credit card debt to secured options like home equity loans or lines of credit enhances asset quality and stability, which likely contributes to balance sheet discipline and capital requirements.

Meanwhile, secured products’ lower rates lead to more manageable monthly payments for borrowers. As interest rates decline, educating customers about these benefits positions the institution as a trusted partner while supporting long-term portfolio health.

 

Finally, before activity spikes, make sure your compliance approach is buttoned down and that all marketing materials, collateral, and offers are updated before new campaigns are launched. It’s especially important to check language on pre-approvals at a time when delinquencies are rising.

Be As Flexible on The Way Down as You Were on the Way Up

With interest rates high, banks & credit unions have been offering cash incentives for new deposits, for example, offering $300 for opening a checking account. But “that’s exactly what banks and credit unions today want to get out of,” said Vericast’s Erhart. “Instead, they want to gain new customers with incentives that build long-term value.”

As your institution looks to compensate for narrowing net interest margins, incentives still matter — possibly even more so. The good news is that the current rate environment unlocks a range of opportunities to boost loyalty while avoiding “hot money” deposits. That’s where flexibility and creativity can play a role.

The Fed’s Calendar Isn’t the Only One That Matters

Banks and credit unions should always be mindful of seasonal factors when planning campaigns. For example, now is a prime time to promote credit card offers with attractive rates and zero-percent consolidation options, especially if the marketing campaign can be launched before Black Friday, the official start of the U.S. holiday shopping season.

Financial institutions should also consider that customers may be on edge about how a new presidential administration in 2025 might impact their finances and confidence in the economy. A recent survey for The Financial Brand found that 61% of people believe the election result will have a tangible impact on their individual finances.

This suggests that offering financial advisory services to help customers navigate potential economic scenarios to match new economic policy could be a strategy to help retain deposits during this period of heightened uncertainty. It also makes sense to stage different offerings and campaigns as policy outcomes come into focus after Election Day and into 2025.