Economic Outlook: What Financial Institutions Should Expect in H2 2025 

Transcript

Virginia Heyburn (00:01.816)
Hello to everyone joining us today. Welcome back to another episode of FinTech Unleashed, where we talk about the latest trends in the world of financial services and what it all means strategically to banks and credit unions. My name is Virginia Hayburn. I'm the Director of Research, Insights, and Advocacy at EngageFI. And today I'm joined by my esteemed colleague, Fabio Biasella, Director of Strategic Services, to discuss the all-important economic outlook for the second half

of 2025. Now, Fabio spends most of his time with C-level executives in banks and credit unions. So he has a really terrific perspective on industry sentiment. We're going to talk all about it. We're going to chat about key trends shaping the landscape, including the employment market, interest rates, inflation, and the growing debt burden. We're also going to take a closer look at where loan and deposit growth may be headed.

the biggest risks currently facing banks and credit unions, and also potential threats to the traditional banking model. All of this is important. We have so much to cover today. So let's dive right in.

Fabio Biasella (01:13.386)
Hello, Virginia.

Virginia Heyburn (01:15.138)
Fabio, welcome back to the FinTech Unleashed podcast.

Fabio Biasella (01:18.868)
Hello, Virginia. Good to see you again, as always. Happy to be here.

Virginia Heyburn (01:21.966)
Great, great to see you. Great to see you. Now for some of our audience, they actually may not know you. So you've been on the podcast before, but why don't you just take a quick minute and introduce yourself. Tell us about what you do for EngageFI, especially in the last few months. What kind of work have you been doing with financial institutions?

Fabio Biasella (01:43.604)
Sure, thank you very much. as you mentioned, I am the Director of Strategic Services here at EngageFI, and I'm tasked with helping to stand up the strategy consulting group here. And I work with clients primarily in the planning area, strategy planning, tactical planning, be it.

corporate level across the entire entity with the board and the C-suite or for specific initiatives that they may happen to be undertaking. Digital strategy is a hot one lately. To be talking about AI has also been a hot topic of strategy. For example, I am a 30-year industry veteran. I've spent many times, many...

many instances where I've been in planning sessions with clients. So I've done well over several hundred of those through the years. And lately I've been spending a lot of time interacting with C-suite and getting ready to tackle these issues that are coming up and kind of getting the lay of the land, Virginia. It's been a lot of fun as it always is. And I am happy to be here to share what I'm hearing and to share what I think folks are thinking about a lot more as we go forward. So.

That's kind of the 30 second distillation of what's been going on and what my life has been like lately. So happy to talk about it further.

Virginia Heyburn (03:02.629)
I love your passion for this industry. I know there are a lot of concerns out there right now when we talk to financial services executives. What are the biggest concerns that you're hearing about right now when you go into these banks and credit unions, you're engaged in strategic conversations? What's hot?

Fabio Biasella (03:20.33)
Well, there's a couple of things. Growth in particular is a real challenge. The native tailwinds that the industry has enjoyed for the last three decades, they're changing around a lot. The consumer preferences and the consumer groups that drove that native growth, that natural growth we had enjoyed in the loan side and the deposit side.

are shifting around and clients are really becoming more keenly aware of that than I think they have been over the last five years in particular, kind of the post COVID umbrella. COVID did kind of mask a lot of long-term trends that were taking place, but now they're keenly aware of that we're through kind of the turbulent waters that were induced by COVID and they're beginning to start to think about how they got to readjust their business going forward to capture that growth.

that they were deploying previous to COVID if we kind of just use that as a line of demarcation are less

less viable, they're less robust than they were back in the day. And so we need to start changing around how we're approaching the consumer, how we're approaching the small business customer, because their needs have changed dramatically. And in association with that kind of that growth, the altering growth landscape, Virginia, there's a much greater focus now on how internal operations need to evolve to be able to more effectively capture

and create a relevancy argument for the new types of customers and consumers that are coming down the pipeline. So real interesting time. We're in a time, I think, of kind of a bit of a renaissance for banks and credit unions and how they have to mature their operations, and not just to become more efficient, but to position those operations to be able to capture a different kind of growth paradigm going forward. Yeah, that's a of points.

Virginia Heyburn (05:22.349)
And we're going to dig into that more. I think one of the reasons why so much is so different in our industry is the economy, The economic outlook. There's, I think, an argument in favor of economic strength. There's an argument in favor of economic weakness. There are lots of opinions. What key indicators are you watching most closely right now?

Fabio Biasella (05:46.378)
You are exactly right. And I think the best way to describe this is splotchiness, right? When you look at the overall macro numbers that we're all used to looking to, GDP kind of being the poster child for that.

looks very normal, right? Historically positive. had, yes, we had a down quarter last quarter, but that was the front running of imports. Trying to get ahead of the tariffs. Imports are a natural deduction to a country's GDP. So we had a lot of people trying to purchase a bunch of imports pre-tariff price, which drove the GDP negative.

The indicators that I'm looking at are really ones that are more closely associated with what I'm calling the splotchiness of demand now. So you're going to see kind of this protracted turbulent period in all the macro data. Your unemployment number ticks off a period, ticks down a period.

clings to the historical averages. Your inflation numbers cling up a period or two, then click down a period or two, but all trending towards a long-term historical averages, Virginia. So you can look at those things traditionally that we look at.

But just remember that it's in a more volatile or splotchy, for lack of a more sophisticated way of thinking about that. The thing that I'm seeing inside the C-suites and the boards is we're all accustomed to kind of growth patterns that go like this over time. We've been kind of blessed with that through the last three, four decades in particularly, certainly most of my banking career. We're now in a period of time where it's going to be bloop, bloop, bloop,

Fabio Biasella (07:34.972)
So we have to be far more nimble in how we capture it. And I think the most important thing that I'm looking at is this notion of, and it gets back to your argument, you can make a case for the good, you can make a case for the bad. That's really being driven by the fact that the consumer population is being split into two groups.

We'll call them the haves and the have-nots if you will and it generally breaks their long-agent income lines, but there's really two veins of consumer sentiment that are appearing. If you are tending to be Wealthier or had assets particularly financial assets when you were asked sentiment and sentiment survey after sentiment survey Do you think the economy is in good shape? Those folks tend to say yes the economy was in a recession and has improved and is improved

or is about to come out of a recession, therefore is improving. Those who are not blessed with the same types of financial assets in particular, whether it's a home, stocks, bonds, savings, be generally younger, tend to indicate that we're still in a recession war. And we're in a recession war because their real incomes are not growing as rapidly as they did pre-COVID. They're growing and it's positive, but it's not at the same clip. And they need to start doing some catch-up work.

So that's a key indicator. I'd be looking at real income growth amongst the younger working segments, and certainly like, let's just say 18 to 25, 25 to 35, 35 to 45. Start to see how well their real incomes are growing because there's a lot of angst there around affordability of things, right? Inflation has whacked them on the rent side, it's whacked them on the insurance side.

So they're, you know, they're, they're not as upwardly mobile as prior groups who were their age, if I'm making sense there. So I'd be looking around, focusing around younger individuals, consumer sentiment about what they think the economy is doing. And then home affordability, all the indices that you can look at across the industry, whether it's Case Schiller and there are several others, Case Schiller being the most prominent are indicating that home affordability is at some of the lowest.

Virginia Heyburn (09:31.181)
Cheers.

Fabio Biasella (09:52.652)
levels it's been at quite some time. So to the extent that younger households can't start achieving those milestones around home ownership and or debt reduction, you really do have that bifurcated economy. So what we're doing with clients now is really passing our strategies through that prism, whatever they are. Whereas before you might have had just a general strategy, we are this type of lender or this type of deposit institution.

Now you're really subject to how much of those two types of consumers and small businesses you have in your marketplaces or where you're planning on going and you really need to start tailoring your messaging and your approaches based upon those realities. So those are the two biggies that I'm looking at. Home affordability and consumer sentiment, particularly amongst the younger consumers and small businesses, small business owners.

Virginia Heyburn (10:50.765)
And Fabio, you talked about this bifurcated customer base, member base, and that would maybe indicate that there's a need for a bifurcated strategy. But I'm wondering how you feel about this statement. There's no need for the bifurcated strategy. What we need is better data so that we can tailor our offerings and our services to whatever the need is in whichever demographic it is that we're targeting. Does that make sense to you?

Fabio Biasella (11:16.404)
Yeah, absolutely. And the data discussion continues to roil on in institution after institution. You are seeing institutions trying to mature.

their data functions, mature their analytical functions as fast as humanly possible. You're right. And then it isn't a bifurcated strategy. It's actually a macro strategy tailored to each individual segment that you're willing to create at the organization. That is a very advanced state of affairs that I see a lot of clients aspiring to, but in all candor, not very many have made it to that point yet.

Virginia, they are working on it. I will give them credit and they're amenable to what needs to be done. I think that's part of that sea change I'm talking about, about managing growth differently as well. Yeah, absolutely. If there's a key cog.

to all strategy going forward. I don't care what it is, it's a data strategy. So to our clients out there, if you're looking to do better digital, if you're looking to do better AI strategy, if you're looking to do better growth strategy, it's all incumbent on having a robust data strategy that includes strong governance, strong architecture, and...

a good data dictionary, right? One of the things, Virginia, that's come plainly clear to me over the last several years is just kind of straightening out the internal nomenclature for a bank or credit union on what constitutes a customer in all areas of the bank or credit union can be a pretty daunting task. I've seen myself involved in a lot of those types of relationships.

Fabio Biasella (12:59.838)
But yes, absolutely, your data, your institution's data strategy will be central to whatever you want to do going forward.

Virginia Heyburn (13:08.557)
Planning is difficult under the best of circumstances, but now with all the turbulence that you described, the trade turbulence, let's talk about that for a second. That's far from settled at this point. We thought it had kind of settled a bit and now it's now the turbulence is back. What are you hearing from financial services executives on the topic of trade? What's the impact of this uncertainty on banks and credit unions?

Fabio Biasella (13:34.25)
What?

I I think what that does is that that's the one of the contributing factors that remove the smoothiness. So what you're seeing in terms of trade and the use of tariffs in the narrative, if you will, to try to begin to readjust, it's really in all candor, Virginia, the steps in the reshoring process that's taking place. COVID proved that the globalized supply chains were a bit fragile and a bit hard to stand back

once they got collapsed. In addition, you're seeing deglobalization. The population trends and the demographic trends across much of the developed world, you're not seeing that kind of expansive explosive population growth which lends itself to globalizing your supply chains. So as globalization goes on the way,

you'll begin to see things reshore, but they won't reshore in a uniform way. Jobs will return or industries may return, but they may return substantively different.

So this is another example where I think you have to be really tuned in as a community FI to what's going on in your marketplace. cannot no longer passively wait for the businesses to open up a return. You have to start anticipating where they're going to be going across your marketplaces and beginning to put into place tactics that let you nurture that and capture that.

Fabio Biasella (15:07.912)
more quickly, more efficiently, more effectively. So a better ear to the ground, I think, is what I'm hearing from clients and executives who are trying to deal with the fact that it's just not as smooth as it was anymore. And tariffs are one of the contributing factors to that. But you will see this process of supply chain shortening, if you will. And that has a lot of positive impacts for a lot of communities on jobs, job growth, and wait

But what's the downside of that? More inflation. So you've got this balancing act. Now it's going to take place. This higher inflation will impact overall level of interest rates, for example. So that's what I'm hearing and that's what I'm seeing rising to the challenge. I think the natural response to that is we have to get better attuned to what's really happening sooner in our local markets.

Virginia Heyburn (15:50.433)
Yes.

Virginia Heyburn (16:03.381)
And that goes back to your comment, right? Become more agile, be more flexible, be in a position to pivot, be able to hyper personalize, and that all goes back to data.

Fabio Biasella (16:13.802)
Yeah, challenging all of the thoughts and processes that we've grown up with, Virginia, right? It's been a fascinating ride for me personally, just as a banking professional, but helping clients nurture them down that journey. You really do see a real challenge with them, kind of breaking the old molds of thought open a little bit, allowing them to rearrange. It's really good. It's really exciting time. Hard, but exciting.

Virginia Heyburn (16:38.335)
It is exciting. Let me ask you. So now we're in a situation where there's this idea, this belief that interest rates are going to come down. When they'll come down, that's probably still up in the air. But how are banks and credit unions preparing for an easing cycle now? They've done it many times before, but the market is different today. How are you advising banks and credit unions to get ready?

Fabio Biasella (17:01.062)
Yeah, I'll be candid with you. When I look at all the macro data and then I overlay the demographic change that's taking place, whatever easing cycle we may experience, Virginia, that easing cycle may be just confined to what the Fed does.

I don't see a circumstances where you're going to see a return to kind of a low low interest rate environment even pre-COVID. COVID induced a lot of bizarre concepts into the process because we were dealing with something unprecedented.

But when you look at the capital cycles and you look at particularly the baby boom generation, which has most of the capital now, they're beginning to move that capital out of the system to live on it. They're either living on it or they're transferring it down to the next generation. So while interest rates may ease, all candor, they're going to stay pretty much narrowly bound in my opinion.

in the areas that we're at now. So whatever easing cycle takes place, it will not lead to kind of a rampant loan growth. In fact, we're beginning to see that splotchiness on the loan side that I was talking about. We're not quite sure, but I'm traveling the country and all of a sudden I see decent loan growth in Southern Colorado, Colorado Springs area for whatever reason, or I'll see very good auto growth in Ohio.

for whatever reason. So what you're seeing is that demand that's kind of been pent up because they're waiting for interest rates to fall being released amongst the younger cohort groups. They can't wait any longer. They need the new car. They need to finally get into a home that they can find if they can afford it. So they're willing to just take the plunge. So you're seeing that kind of release of demand at the higher interest rates, right? So you got that going on.

Fabio Biasella (19:00.222)
with amongst a small cohort group who can no longer wait. Then you have that kind of overlaid against the reality that large sections of the mortgage market, the housing market will remain frozen because we have an entire strata of consumers now who have a mortgage rate somewhere between three and 4 % who could not move or would be a bad financial decision for move. So they're staying.

they're retrenching and staying. So it freezes the housing market a little bit and that tends to keep supply low and when supply is low, supply is low, rates tend to stay higher. So we're not in that kind of wildly volatile

downward part of the cycle for interest rates in my estimation from what I can gather both in looking at the macro level data look overlaying the consumer data and then dealing with clients on a one-on-one basis. They are generally hopeful that rates will fall.

but they are no longer planning on rates are falling. So they're becoming much more pointed in their outreach. So a little bit different take than probably what you're hearing in the rest of the world. But when I'm at banking conferences and both presenting and then talking amongst leaders pre and post, we're coming to the conclusion that rates are where they are and they may go up or down, but they're gonna be narrowly bound.

Unless something unusual happens. Okay all things being equal

Virginia Heyburn (20:38.807)
So it's the Fabio contrarian view on interest rates.

Fabio Biasella (20:42.41)
A little bit, yeah. I mean, I just don't see that kind of downward pressure, right? What puts downward pressure on interest rates, Virginia? Supply of capital, right? Supply of capital is a bit more constrained now as the boomer generation shifts out of their complete wealth accumulation stage into the wealth dissipation stage, spending it.

The generations coming up next, our generation, Gen X, is far smaller than the boomer generation. It's about five million less households. That's a lot of missing income.

to feed into the capital markets. And then the younger generations, which are just entering into their real earning power, are still in their consumption stages and heavily indebted already in many cases. they're struggling. There's not a lot of free capital lying around. So that's really what goes on in my mind, all things being equal. The traditional sources of capital that the system has enjoyed are changing.

Virginia Heyburn (21:52.206)
And so I think what I'm hearing you say, Fabio, is that when we look into the future, say second half of 2025, banks and credit unions pursuing loan and deposit growth, it's not broad based. It's pockets of growth. And again, really understanding where the opportunities are within the customer base, both consumers and businesses, that's what's going to be key.

Fabio Biasella (21:52.332)
breaks things.

Fabio Biasella (22:15.999)
And really, really.

focusing in on what you're known for, because the other associated piece would kind of like a seen the splotchy growth. It's going to the organizations who are known for that type of lending in their marketplace. Does that make sense? So if I'm seeing splotchy mortgage growth in Colorado, and I look at those institutions that are seeing that growth, it's because they've been historical leaders in mortgage lending in their marketplace. knowing where you are a leader,

Virginia Heyburn (22:30.959)
it's totally.

Fabio Biasella (22:47.518)
in your marketplaces on different types of business lines is also a key. think you can leverage that reality more now, more so than ever, even if it's very nichey. But again, it gives you that idea. Let's look at the data. Let's look at what we're actually seeing happen historically. Are we good at those things? OK, how do we leverage those things in this less broad-based market?

Virginia Heyburn (23:12.605)
And those are hard questions to ask within the bank and the credit union. We have thousands of financial institutions in this country. Given what you've just described, given your thoughts on analyzing what you were really, really good at, what's your niche, is the traditional banking model under threat in this new economic era?

Fabio Biasella (23:34.41)
How's this for a pundit answer? Yes and no. Yes in so far as that you are seeing the consumers clearly indicate that they are more comfortable now using neo banks, digital banks as some of their primary.

primary financial institutions, much more so comfortable in that the consumer's growing comfortable with atomizing their financial behaviors, right? Including payments is a good example here. The number of clients who tell me that we've got clients who download payment apps, Venmo, Cash App, PayPal, you name it, to do one or two things and one or two things only gives you an idea of how...

behaviors are atomizing, that's a threat. Okay? Now, to the extent that community institute, community banks and community credit unions are...

vital to their community and oftentimes have constituencies that are local and have strong preferences to local banking. That's a strength, but that needs to be leveraged and cast into this digital age somehow, and it will be different for client to client to client. So we need to be able to take the strengths, our localness, the fact that we're a trusted institution, that you tend to know and live close by to the person who works there.

Those are real keys that digital banks don't have. And certainly big banks have less of. So we need to figure out how to leverage those realities to mitigate the fact that behaviors are becoming atomized. And I think we can do it, but again, here's a good example of where you can't just be the bank on the corner or the credit union down the street. You have to become very intimate and very, very well known.

Fabio Biasella (25:30.718)
much more well known to your customers and members for what you're for and what you stand, and then begin to deliver the tools that they need to them, the digital tools that they need to them that create a compelling difference to what they're getting bombarded with. So yeah, times are changing. That's a big threat. Consumer behaviors are driving that. But the good news is there's lots of strengths, and we're seeing institutions try to step up more and more.

to that. was with a bunch of banks in Texas recently and this was the key topic. How do we leverage our localness more efficiently and more effectively? What do we need to take to project our localness into the digital tools, right? Which is very different than what we see digital players or the large banks doing. So yeah, the model is under threat and so far that it needs to change in response to

the changing demographic environment, but it also rests on some pretty strong and sound pillars that can be leveraged differently.

Virginia Heyburn (26:42.091)
Yeah, I agree with you, Fabio. mean, digital is table stakes. If you don't have that, you essentially don't have a financial institution in this day and age. And even young people, especially young people, they really do value that local availability. They want that.

Fabio Biasella (26:57.866)
Thank you.

They do. And all of the data I've looked at, either primary level data for our client or all the industry research that we come across, both today and historically even indicates that, yeah, your younger person doesn't mind having a branch nearby. They will use it differently than the older customer or member does, but they use it for sales and advice. So if you think about that, the role of the branch continuing to transform away from transactions,

activity to centers of excellence around sales and service and advice giving. It's a real opportunity for the local bank and local credit union to change around their approach to dealing with. But yeah, it's different. It's a lot different.

Virginia Heyburn (27:46.626)
That's a great perspective. We're up against time, Fabio. I respect your time. Your insights have been terrific. if you, just closing, if you could give one piece of advice to financial services executives right now, what would it be?

Fabio Biasella (28:03.242)
The piece of advice I'm giving most often is...

We need to courageously look at all of the assumptions that we've made around our business that we've grown up with for the last 20 years, 30 years about how we grow and the processes we need to grow. All of that is under duress and under change. Be willing to courageously look at your mindsets that you have around your approach and explore different ways of thinking about things and then be prepared

to realign your operations and your processes to allow you to capture and move towards, more agilely move towards where we're gonna be in the future so that you can be more relevant to the consumer and the small business customers going forward. That is where I've been starting most of my planning session themes thematically, and that gives them license, if you will.

to pursue that if they haven't or to pursue it further if they're comfortable with it. I think that's the number one thing I'd leave you with, Virginia, when we look at all of the financial data and economic data, we're going to have this more variability, more volatile situation. It will not be overly negative. It won't be overly positive. But it will be volatile. And to the extent that you need to begin to mature your approaches, you will have

to change your mindsets. So how's that for a bold statement, if you will?

Virginia Heyburn (29:44.353)
That's awesome. Changing the mindset and realigning operations. I love it. Thank you, Fabio.

Fabio Biasella (29:50.068)
So yeah. Well, you're more than welcome. Always a pleasure, Virginia, to chat with you. Thank you for letting me ramble on. I appreciate it.

Virginia Heyburn (30:00.983)
learned something. I appreciate that. And I also want to thank the audience. Thank you to all of you listeners for choosing EngageFI as your source of information for banking technology services. Please be sure to look out for the next episode of FinTech Unleashed by following EngageFI on LinkedIn. Until next time, have a great rest of your day.

Fabio Biasella (30:21.61)
Thanks, everybody.