The Federal Reserve has truly committed to raising rates. Is your financial institution running or planning to run random CD promotional specials attempting to attract and retain long-term deposits?
That’s the traditional approach. But what is really “special” about your traditional CD special—for your institution and for your customer?
And how has increasing your deposit interest rates with specials impacted—and going to impact—your profit margin and your depositors’ expectations?
Let’s take a fresh look at CD specials and then at 11 steps to take you out of this habit-forming rut.
What’s really meaningful?
Community bank managers have long believed that they attract and retain the deposits they need by offering a warm and inviting atmosphere; deposit insurance; and competitive rates. Well, now …
• The warm and inviting atmosphere is hard to hang your hat on today—so few depositors visit the bank and really feel they know your staff. And when they are in your offices looking at deposit accounts, chances are they are Googling your competition!
• Deposit insurance doesn’t give anyone an edge—it’s table-stakes to be in the game.
• Interest rates represent the cost of holding money. Rates are moving up, closer to typical levels of the past. The temptation to run old-fashioned CD specials that rely on attention-getting interest rates will be strong.
High interest rates might get your institution some attention. But they can also poison your net interest margin.
Deposits in the Google age
Technology is giving people greater options for how they learn about and address the issues of managing money. Has your financial institution adapted to the technology era when it comes to helping senior citizens and other likely CD holders manage their time deposits?
Or are you promoting CDs the same way your financial institution did decades ago? Are you offering…
• Static rate sheets
• Commoditized fixed terms to maturity—i.e., the same terms everyone else offers
• Penalties for early withdrawal calculated as a randomly selected number of months of interest
• Promotional specials that could have run 10 years ago.
What is your bank doing today that embraces today’s depositor and technology? What can you do to bring energy and vitality to this important part of your balance sheet as your front-line staff deals with a more technologically capable and agile CD-owning generation? Especially in an environment that we haven’t seen for over a decade?
Keep in mind that most community financial institutions have 10%-40% of their balance sheet funded by time deposits. Institutions cannot pretend that this part of their business won’t eventually evaporate if they don’t improve in the presence of online banks that clearly are using new technology to win over this deposit base.
How to improve on old-fashioned specials
What does the CD client want? High yield, short commitment, flexible choices, and trustworthy advice from financially savvy experts. Do you believe your depositors are impressed by your current offers and the process you use to present them?
Using RateWatch data I find that of the 317 financial institutions reporting CD rates in Iowa, for example, 119 (37%) are currently running some type of CD special.
I have to wonder if these CD specials are working well unless they were properly designed and executed considering the perspectives of all involved—the depositor, financial institution, and front-line banker.
Here are some of the capabilities financial institutions are adopting beyond running random specials:
1. Show me my money.
Successful institutions are replacing their old static rate sheets with dynamic rate sheets. The latter show the depositor how much their account will be worth in the future in dollars. Check out the online banks. You will find they do this.
Beyond this, winners are displaying how their offers stack up—again, in dollars—compared to the offers of their local, regional, and national competitors.
2. Tailor the offer to the customer.
Successful institutions are building in the capacity to guide depositors through stages of a sales process. This resembles what we would see in large-ticket retail sales, like automobile sales, and even, potentially, in other parts of the bank.
Through the process depositors receive a series of offers that can help them make an appropriate choice based on their individual needs. Without this your front-line staff is trapped in order-taking mode. They will have neither insight nor energy.
3. Everyone gets “special” treatment.
Strong deposit gatherers are offering to customize maturity dates. First, this meets the expectations and needs of individual depositors. Second, it simultaneously delivers enhanced relationship-based pricing so they have in place the potential for everyone to feel they are getting “special” treatment.
4. Preparing for those “ready to walk.”
How does your bank handle those customers with maturing deposits who give you a “match-it or lose-it” ultimatum?
Consider offering a “Limited Edition Savings Account.” This pays a CD yield without any contractual commitment. The “secret sauce” is that new deposits are not allowed in this account.
Any financial institution that doesn’t have this in place is either unnecessarily losing profitable deposits or paying too much to keep depositors from leaving.
This strategy is ideal for financial institutions that become addicted to specials. Break the dependence on specials by having limited edition accounts in place to offer at the maturity of the next group of your maturing special CDs.
5. Ditch “all or nothing” penalty structures.
Promote that you allow partial withdrawals of CDs with penalties only for the portion withdrawn. Partial withdrawals are depositor friendly. At the same time, they don’t impair the financial institution’s needs.
6. Offer one-time “jump-up” or “bump-rate” offers for longer-term deposits.
Such offers should be structured as an option granted to the depositor. Given that, the nature of the option needs to be clearly defined and stated explicitly in the account disclosures in regard to:
• Number of times the rate-change option can be exercised.
• Index that determines the optional future interest rate.
• Impact of term maturities and renewals on the option.
7. Time and define promotional specials by using your maturing CD schedule.
Offer your most attractive offers when you have the least exposure to repricing those funds you already expect to retain.
8. Don’t just fight for the CDs that are maturing. Go after them all now with a “refinance campaign.”
You need the deposits. They are sitting in another financial institution and the depositor doesn’t realize that today’s higher rates make it compelling to consider refinancing them prior to maturity. Your institution can open depositor eyes and enhance their wallet, while you grow your properly-priced funding.
9. Resist the urge to make your penalties harsher across the board.
Depositors hate penalties. Financial institutions that try to protect themselves with more aggressive penalties can push depositors away.
Therefore, replace fixed penalties with fair, flexible ones that protect your interests while providing what the depositor wants.
One approach is “CDtwo®,” a new term deposit product that doesn’t punish customers for all withdrawals. Instead, under this approach, it only charges a penalty if the withdrawal damages the financial institution.
• If replacement is more expensive, the financial institution charges a fair early withdrawal penalty. Any penalties are based on what it would cost to replace the funding.
Depositors could get their entire principal and interest returned and may even get a bonus, but will never pay a penalty larger than would be charged on an old fashioned CD.
• If replacement is not more expensive, depositors can get more than their principal and accrued interest when they withdraw prior to maturity.
10. Promote a high-yield “Companion Deposit Account” when a saver opens a CD of 5-months or longer.
This high-yield savings approach appeals to all stakeholders because of its well-priced long-term nature. This product combines the most attractive promotional features of CDs and savings:
• Open and fund like a CD.
• High yield like a CD.
• Variable rate like a savings account.
• Withdraw any time, like a savings account.
Like Limited Edition Savings, this special deposit account does not allow additional deposits. This stabilizes the balances and lengthens the duration of these deposit accounts.
11. Track your deposit pricing and sales results.
Profit comes from a combination of volume and spread. Success does not come from merely growing deposits nor by simply driving down interest expense. Maximizing profit results from a funding portfolio that produces the funding volume at an overall advantageous cost.
The only way to know is to track and report the volume and the Funds Transfer Pricing (FTP) spread against wholesale funding alternatives. In this way your financial institution can validate real financial performance. (You can learn more about this in my 2012 white paper.)
Try these 11 steps. I think you’ll find they help produce:
• Enhanced depositor experience
• Increased employee engagement
• Improved financial performance
• More funding that is both more profitable and more sustainable
About the author
Neil Stanley is founder and CEO of The CorePoint. He also serves as president of community banking at TS Banking Group, which operates in Iowa, North Dakota, and Illinois.