By Neil Stanley
The March 12, 2018 article by The Financial Brand, “How Banks and Credit Unions Can Survive Rising Interest Rates,” brings attention to the struggles banks and credit unions face today in attracting and retaining long-term savings depositors.
In a recent study by Raddon, consumers were asked if they planned to open a CD or money market account in the next 12 months. Based on the findings of this study, there is expected to be a 40% decrease in demand for CDs and a 50% decrease in demand for both money market and savings accounts. It also reported that only 8% of consumers look to their primary financial institution for investments.
There is expected to be a 40% decrease in demand for CDs and a 50% decrease in demand for both money market and savings accounts.
With financial institutions striving to hold the line on costs while growing deposits, there is great tension in attempting price differentiation as interest rate volatility returns. Financial institutions are looking for ways in which depositors can qualify for market rates of interest while restricting the broader impact on funding costs from interest rate changes to existing portfolios.
We observe bankers today relying heavily on promotional specials and exploring high interest rates for high-balance accounts and “new money only” situations. These exclusions are intended to categorically restrict some deposits from receiving high rates in the hope that those depositors who don’t qualify might be less price-sensitive and will still leave their deposits in place.
The struggle with this approach is that depositors and front-line bankers will often view these approaches as heavy-handed and unfair. For organizations that are seeking to build franchise value and grow client and funding bases, these approaches can alienate many depositors who could materially contribute to the financial institution’s success.
So how do we make savings cool again while expressing inclusion?
“Cool” results from producing an impact that is cool. Too often, savers have observed banks as indifferent and cold-hearted – the opposite of cool. So we must begin with the depositor journey and experience. We must stop thinking that the banking industry paradigms about savings and savers have been optimized.
While these are only generalities, here are several attributes about typical long-term savers:
- Have significant financial resources (the raw material of banking)
- Are past their income producing years
- Need simple, safe and predictable investments
- Have other investments that they manage
- Engage with bankers when time deposits mature
- Are looking for high yield and short commitment
- Have several other selection considerations that would be important if depositors were aware of them
And here are some important questions for financial institutions to wrestle with:
- Why wouldn’t we use a debit-only savings product to help all long-term savers qualify for our best savings interest rates rather than relying on size of deposit or fabricated rules about “new money only” promotions?
- While no-penalty CDs are appealing for depositors, how can they be a good long-term solution when this approach doesn’t produce a truly reliable long-term cost of funds for the financial institution?
- Why would we assess a penalty on the entire time deposit account balance if a depositor wants to pull out a small portion of their time deposit?
- Do we really need to assess a large penalty for early withdrawal in the first place? Shouldn’t we eliminate the expectation of “Substantial Penalty for Early Withdrawal” when a smaller right-sized penalty would effectively protect the financial interests of the bank while giving the depositor more flexibility?
- Why would we not be among the first to get the news out that depositors can refinance time deposits? That sounds pretty cool to baby boomers who experienced success in refinancing their debt over the past 30 years.
- Why shouldn’t we invest time and energy into equipping and empowering front-line bankers to provide financial guidance that goes beyond offering rate sheets and taking orders?
By considering the needs and wants of the depositor, front-line banker, and the financial institution, more banks and credit unions are making CDs “cool” again by:
- Replacing static rate sheets with dynamic ones
- Creating professional sequential CD sales processes
- Guiding the depositor through a comparison of options
- Providing customized offers with relationship pricing
- Offering a Limited Edition Savings account to retain deposits
- Eliminating the “all-or-nothing” early withdrawal penalty
- Using debit-only offerings to attract new funds profitably
- Incorporating one-time jump-up features in specials
- Refinancing CDs away from other banks before maturity
- Offering a Smart CD that uses “right-sized” penalties
These systems are available today for financial institutions that are interested in creating and capturing real deposit value. Contact Haberfeld for more information.