3 minutes
Helping members better their financial lives has a positive effect on loyalty.
Time deposit buyers always want the same thing Betty wanted when she bought her last time deposit--more yield.
When rates were lower than today, Betty researched yield and maturity combinations from a few sources and set up her account with the financial institution that was offering the best deal. Back then, Betty planned to wait to maturity before cashing out. After all, the financial services industry has long promoted a substantial penalty for early withdrawal when a depositor cashes in a CD before maturity. During decades of falling and low interest rates, savvy depositors like Betty didn’t see any sense in paying penalties for the opportunity to reinvest at a similarly low rate.
But the Federal Reserve recently raised its benchmark rate—and Betty got this message from a credit union:
Do you or a loved one own a bank or credit union CD? If you are waiting until maturity to make investment decisions, you could be wasting thousands of dollars. As interest rates rise, many CD holders can trade out of their old contracts into new contracts that mature on the same day for more money. Contact us for your no-obligation analysis of how you and your loved ones can benefit from rising interest rates immediately.
Although skeptical, Betty contacted the credit union. The rep wanted to know her current certificate’s origination date, maturity date, principal and interest balance, annual percentage yield, and early withdrawal penalty.
When Betty provided this information, the rep told her she could trade contracts and gain an additional $2,452 at maturity with the same maturity date. This is the analysis she received from her new credit union:
| Current date | 3/19/2017 |
| Original date of current CD | 5/15/2016 |
| Maturity date of current CD | 5/15/2021 |
| Original term to maturity | 60 months |
| Remaining term to maturity | 50 months |
| Principal and interest balance of current CD | $101,000 |
| APY of current CD | 1.25 percent |
| Estimated original principal of current CD | $99,947 |
| Estimated value of current CD at maturity | $106,355 |
| Early withdrawal penalty of current CD | $631 |
| Net amount to transfer to replacement CD | $100,369 |
| APY on replacement CD | 1.96 percent |
| Estimated value of replacement CD at maturity | $108,807 |
| Net benefit at maturity from transferring now | $2,452 |
Betty said she was surprised that after all these years of low returns at her other financial institution, her new credit union was able to help her increase the value of her accounts so quickly as interest rates have increased. She was surprised that her current financial institution never mentioned anything about this. “I’m not going back there. Whether they were aware of this or not, they obviously were not looking out for me.”
Progressive financial institutions like the one that reached out to Betty (and maybe your credit union) can create customized maturities for newly issued certificates so the offers fit nicely with the math of refinancing deposits. That is, the new contract expires on the same date as the old contract. This patented process, licensed by The CorePoint, doesn’t change the depositor’s commitment, but clearly defines the “net benefit at maturity of transferring now.”
For more about the financial impacts on a credit union of deposit refinancing, read the whitepaper, “Exposure to Deposit Refinancing.” Notably, encouraging transfers before maturity is costly to the financial institution that loses the deposit, and can be quite advantageous to the financial institution that attracts new, properly priced deposits before maturity, given that institution has the right asset/liability situation in place.
The benefits on the member loyalty side are clear, too. Refinancing can help senior citizens and others on fixed incomes who have suffered greatly during the long period of low interest rates. Reaching out to any member about options that will benefit them financially can help ensure they’ll love your credit union. See more about how CD refinancing works using this free calculator.
Neil Stanley is founder/CEO of The CorePoint, a financial technology firm providing the CoreCD® deposit sales and pricing platform. He is also president of community banking at TS Banking Group with operations in Iowa, North Dakota, and Illinois.
