A typical community banker would have you believe that they have built great relationships with their customers. Then, these same bankers frequently express their frustration that it is impossible to sell properly-priced longer-term deposit accounts to those customers.
When it comes to attracting long-term funding, many bankers now seem to believe the only effective way to secure these funds is through wholesale and brokered sources. They would tell you that their customers just aren’t interested in certificates of deposit (CDs) today. This is apparent in the data. CD volumes are dropping even while the volume of fixed income securities outstanding continues to grow, including brokered deposits. The Securities Industry and Financial Markets Association reports that total outstanding U.S. bond market debt grew from $31.7 trillion at the end of 2007 to $38.4 trillion at the end of the third quarter of 2014, a 21% increase.
Meanwhile, the FDIC reports that total brokered deposits in banks grew from $574 billion to $785 billion (37% increase) while total insured time deposits fell from $2.6 trillion to $1.6 trillion in the same time period (38% decrease). What would cause investors to not want long-term deposit offerings from banks while simultaneously buying them from other sources? Is there an explanation to this apparent paradox?
While some would suggest that today’s investors reject time deposits because they are more sophisticated than past generations, this ignores the simple fact that every person who is blessed to live beyond their income-producing years needs the simple, safe, and predictable investment options that banks are well-positioned to provide. The number of people living past their income-producing years is certainly not in decline in the U.S., so the theory of dwindling demand runs counter to demographics as well as the obvious demand for securities and brokered deposits that we have already recognized. We conclude, therefore, that this should remain a material and stable market opportunity for banks.
So, let’s look in other areas. Are there differences between the structure of the offerings from bankers and non-bankers? Are the customer engagement proficiencies different between bankers and other financial professionals?
Structure for Liquidity
The conventional CD is a simple financial instrument. The vast majority of bank CDs are fixed-rate, fixed-term contracts just like the instruments offered by non-banks. A key structural difference, however, can be found in the liquidity of these instruments prior to maturity. A conventional bank CD cannot be withdrawn prior to maturity unless a penalty is paid. Meanwhile, most non-bank fixed income investments, including brokered deposits, can be negotiated or liquidated through the secondary market efficiently, which gives the non-bank options a distinct advantage in many market conditions compared to bank CDs.
We believe this is part of the explanation. As depositors become more sophisticated, they consider contingencies more thoroughly. If premature withdrawal will always be penalized in a direct bank deposit, but might be rewarded in a non-bank or brokered investment, the non-bank investment has become relatively more attractive to the investor.
Consider next the perceptions and approaches experienced by potential depositors. To put this in context, how would retail bankers in your organization handle the following situations?
- A customer wants their CD to mature on their birthday two years from now and they have $19,000 to deposit today, so what can you offer?
- A customer with a $43,000, 3-year CD currently yielding 1% here at your bank and maturing next Wednesday asks, what should I do with this money?
- A customer states that they want to keep their money in short-term investments because they think interest rates will be going up. What would help them compare their choices?
Contrast the way bankers respond to such real-life situations compared to non-bank financial professionals. Do you anticipate differences in the processes, products, analytics and preparation you would experience between the bank and non-bank offerings? While non-bank professionals are typically prepared with a consultative sales process, bankers often grumble that they are not interested in dealing with “rate-shoppers.” Their goal, after all, is to focus on “core” customers.
Yet, in what ways would a “core” customer not consider the questions above to be as relevant to them as a “rate-shopper?” We believe that the deficiencies of bankers in engaging with such customers is the primary factor in explaining their inability to secure properly-priced, longer-term deposits at this time.
With a little preparation, high-performance bankers could tell their customers who are concerned about rising rates “We don’t know what rates will do in the future. However, we can show you how much rates would need to increase to make your short-term investment worth as much as the longer-term at maturity. Would you like to see?” They always do and you can then provide some simple math with easy-to-understand graphics.
In general terms, the front-line banker should be able to do the following: customize maturities of deposit accounts; display results in dollars at maturity; and show how their offers stack up against the competition in dollars. Then, when forced into a match-it-or-lose-it situation, they should be able to offer CD yields on simple savings accounts – and quite profitably!
The bottom line is that today’s CD decision is only one piece of a bigger financial picture for customers. Bankers need to be competitive with their offerings if they want to deal directly with depositors. If they abandon this market there will be a price to pay. That price may become quite steep in a rising interest rate environment when bankers are dependent upon wholesale and brokered funding.
Bank management’s investment in enhanced engagement processes for attracting and retaining retail long-term funding will be vital to a bank’s ability to create and capture value. We see this as a rare opportunity for bankers to take back control to the approval of customer-facing staff, shareholders and even regulators.
Mr. Stanley is CEO/founder and Mr. Marks is president of Bank Performance Strategies, an Omaha, Neb. and Chicago-based firm offering a web-based retail deposit pricing and sales platform. They can be reached at Info@Bank-PS.com.