As the likelihood of the Fed raising interest rates looms ever larger, it’s time for banks to consider the strategic implications of their time deposit funding portfolios, commonly referred to as certificates of deposit (CDs).
A typical bank will have between 10% and 40% of their balance sheet in time deposits. The magnitude of dollars spent annually on time deposit interest expense is significantly higher than costs in other areas that bankers often spend more time reviewing and managing, such as charity donations and janitorial services. A typical SWOT analysis agenda today may not even mention CDs, creating a significant opportunity for those who focus on this now.
Here are six common myths that we believe have hindered awareness of the strategic importance of time deposits:
The only new CD business that banks can attract will be unprofitable. The idea here is that retail depositors will always move to the highest yields and since some financial institution is always offering yields that are irrational, there is no way to draw in new business without also offering irrationally high yields. So, it seems that success in time deposit funding is impossible without paying a premium.
Truth: Our data shows that high performance banks are booking material time deposit funding volumes at up to 40 basis points less than their peers while continuing to get all the funding they need.
A rate sheet is the best way to offer time deposits. Most banks today still create a static rate sheet – often referred to internally as “board rates” – and use that as the sales tool for securing time deposits.
Truth: With current technology, bank customers can find rates with the simple click of a button. Equipping bankers with the appropriate tools and updating processes and systems is the new standard for offering CDs. The bank employees need to be in a position to provide more information than the customer can find online themselves. The way for bankers to distinguish themselves from the competition is to add additional value to the CD sales conversation by providing multiple options and speaking to the customer in dollar values, not simply rates and annual percentage yields (APYs).
Consumers make decisions by considering only yields and term. The banking industry has commoditized CDs as they have conditioned customers to focus on rate and term by providing a grid of term and rate options to the customer. Bank employees will tell you that customers push them for the highest rate on the shortest term.
Truth: Consumers make decisions on numerous other factors as well, such as clarity of information, service, knowledge level of the banker and efficiency. Banks that provide their customer-facing employees with the appropriate tools and information find that they build loyalty and sales based on all of the above criteria. Give customers more factors to consider and they will consider more factors. The depositors’ time and energy for researching alternatives also plays a significant role in their decisions.
Time deposits are becoming obsolete as consumers become more sophisticated investors. Many bankers today say that they haven’t seen an interest in CDs from their customers and assume the product is becoming extinct.
Truth: Given the lack of attention focused on CDs, it is not surprising that a product begins to fall out of favor, especially coupled with the abnormally low rate environment over the last decade. But cycles turn and soon CDs will again become a key to depositor loyalty. Everyone who is fortunate enough to live beyond their income-generating years needs investment options just like an insured time deposit – safe, simple and predictable. As the rate environment begins to shift and banks adopt the newest practices and tools for CDs, the product will resume its role as a core offering.
Wholesale and brokered funding is always available to fill any funding voids. Many bankers have become reliant on the ease of which wholesale and brokered funds can be obtained to fill short- and long-term funding gaps created by lack of local funding or an increase in loan volumes.
Truth: The ease of obtaining these wholesale funds too often diminishes the urgency behind creating a strategic long-term plan for sustainable local deposit management. The growing regulatory scrutiny in regards to wholesale funding must be taken seriously to ensure long-term success.
The level of the average rate of the CD portfolio is a good measurement of success. Many bankers across the country have told us that their cost of CD funds has gone down and therefore their CD portfolio is in good shape.
Truth: There are much more effective measures to determine success in CD funding and sales. A simple measure of a lower average rate on the CD portfolio may only reflect the rate environment we are currently in. Utilizing a wholesale funding rate as a baseline across all terms and weighting the results not only for dollars but for term as well will reflect true success. Rates will rise and fall and a bank’s ability to procure appropriately priced deposits in relationship to the market determines performance.
If any of these myths resonate with you or your organization then there is a material strategic opportunity available. Embracing new approaches in time deposit funding can generate immediate profit enhancement and improved customer satisfaction in any rate environment and better position your organization for the future. Such innovations include presenting offers in dollars at maturity; proactively showing how offers stack up to the competition in dollars; customizing maturity dates to the needs of the depositor; and measuring portfolio performance consistently. As you begin to plan for next year and beyond, this is the perfect time to add time deposits to your strategic planning process.
Mr. Stanley is CEO/founder and Ms. Hernandez is chief operating officer of The CorePoint, an Omaha, Neb. and Chicago-based firm offering a web-based retail deposit pricing and sales platform. They can be reached at [email protected].