Here are four ways to build on the foundation of successful certificate marketing.
Share certificates are the quickest way to raise deposits as loan volume increases, according to Steve Stone, CEO of $1 billion 1st United Services Credit Union in Pleasanton, Calif., because they tend to be larger deposits.
Besides looking at certificates, here are four more things to consider when working out your CU’s deposit strategy in this rising-rate environment:
1. Optimize high interest checking. While these accounts are part of today’s stepped-up competition for deposits, they’re not usually a game-changer, says Kirk Kordeleski, CCE, senior managing partner and chief strategy officer at BIG Consulting, Tampa, Fla. “In most major markets, one or two financial institutions will offer it, but it has strings, and a third of the account holders don’t even qualify for the higher rate,” he notes. It’s rate-based competition for deposits, but financial institutions also want the direct deposit and the multiple debit card transactions that usually are required.
Credit unions under $10 billion in assets still earn close to 1 percent interchange on the debits, he notes. A checking account with direct deposits and debit card activity is seen as an anchor product and the key to becoming the consumer’s primary financial institution, he points out, so checking accounts are gold and offering high yields may be more about getting the accounts than raising deposits.
One “smart” innovation is linking high-yield checking to credit card rewards, says Mary Beth Sullivan, managing partner of CUES Supplier member Capital Performance Group, LLC. Bank of America, she notes, has rolled out a program that gives cardholders greater rewards if they keep high levels of deposits.
“Credit cards have been marketed as free-standing products,” she notes, “but now deposits are coming back into the value equation.”
CUs may be starting to pick up on the idea. On its website, $1.2 billion Consumers Cooperative Credit Union, Gurnee, Ill., promotes a checking account with eye-catching rates of 3.09, 3.59 and 4.59 percent. Members get the 3.09 rate on balances up to $10,000 if they have one direct deposit, ACH debit or bill-pay transaction; one online banking visit; get paperless statements; and do 12 card debits. But the debits have to be PIN-less to count. Members get the 3.59 rate once they add $500 in charges to the CU’s credit card in a given month and the 4.59 rate if they charge $1,000 or more that month. No information about how those accounts are performing could be obtained for this article.
2. Watch loan-to-deposit ratios. Loan growth is primarily responsible for deposit campaigns, and growing deposits to fund more loans is fundamentally rational, Sullivan says.
“It varies by region and time, but first mortgage and auto loans have seen strong growth,” she explains. “With home prices and homeowner equity rising, home equity loans are looking good, and credit card outstandings have been phenomenally strong. Once loans get to 80-85 percent of deposits, CUs start to target deposit growth.”
Even without loan demand, the deposit franchise has to be protected, she adds. “Deposits are the key to member relationships. You can’t afford to lose those.”
Deposit strategists pay a lot of attention to loan-to-deposit ratios, Kordeleski says. The sweet spot is 80 to 90 percent for most credit unions. “That’s where you see an ROA that can support their capital position.” For CUs with more than $750 million in assets, the loan-to-deposit ratio was recently 76 percent. Some are still at 50 to 60 percent, he adds. With loans growing around 12-13 percent annually and deposits at 8-10 percent, the ratio is rising, he notes.
The challenge today, says Darryl Mataya, senior vice president of Farin Financial Risk Management, Fitchburg, Wis., is to have a rational plan based on loan funding and control over the cost of funds and stick to it. “Don’t be swayed by emotion or quick reaction to what other financial institutions are doing. It’s a stressful time, and credit unions need to act but not overreact,” he says.
3. Watch for competitors’ adjustable rate certificates.
Adjustable-rate certificates are rare, but expect more to show up, Sullivan says. “Anything that locks in rates in a rising-rate environment will meet with resistance, and issuers will try to soften the lock.” Low penalties for early withdrawal would be one tactic, but she hasn’t seen many CUs cut those penalties as a product enhancement.
Industry-wide, there is little interest among depositors in longer-term CDs and little appetite among issuers to push up long-maturity yields until they find the selling point, says Greg McBride, chief financial analyst at Bankrate. And few CUs want to take a chance with adjustable-rate certificates, he adds.
“Consumers still like liquidity, and many financial institutions still have adequate deposits. There’s still a lot of caution,” McBride explains. “Small credit unions in markets that are dominated by a few large financial institutions have to be heard, which means they have to offer higher rates. In less concentrated markets, there’s more competition and a smaller rate range.”
4. Know the future is unknown. With so much uncertainty in the political and economic spheres, a flight to the safest available investments could be imminent, Kordeleski warns. “We aren’t seeing it yet, but if it comes, we’ll see another spike in liquidity, with low interest rates, low inflation and low loan demand. It may not happen, but credit unions should be prepared.”
Credit unions are appropriately paying attention to the short game now, says Dave Koch, Farin president/CEO, but the long game will be challenging. “The 80/20 rule is now 90/10 or 95/5 in deposit-taking—90-95 percent of the deposits belong to 5 to 10 percent of the members. These are the CD buyers, and they’re an aging demographic. Raising deposits with ‘what always worked in the past,’ may still work pretty well today, but I wouldn’t count on it in the future.”
Richard H. Gamble is a freelance writer based in Colorado.
