From Commoditized to Customized Deposits
Bankers have grown accustomed over past decades to a plentiful supply of low-cost time deposits from senior citizens that help to properly fund fixed-rate long-term loans. This need for seniors to invest conservatively is timeless. The specifics, however, of what kind of deposits the older generation will embrace is changing.
When we speak about the “older generation” in this context we now need to focus on baby boomers, those people born between 1946 and 1964. In 2013, the oldest boomers begin turning 67. While safety-of-principal will remain a primary concern of these retiring boomers, they are not likely to invest like past generations of seniors. Having grown up with a plethora of choices – and the technology to implement those choices – baby boomers will be looking for customized financial solutions.
This is not just an issue for boomers. The Ernst and Young Global Consumer Banking Survey 2012 notes that customers overall “want personalized products and services … In response, banks need to reevaluate their assumptions and fundamentally change how they interact with their customers. They need to embrace change by giving their customers greater flexibility, choice and control, and by reconfiguring their business models around customer needs.”
While most boomers are not yet in retirement the decline in traditional time deposits already has been dramatic. FDIC data shows that time deposit volumes fell from $2.8 trillion in 2008 to under $1.8 trillion in 2012, a 36% decrease in four years. The bank certificate of deposit (CD) is clearly “out” unless banks change. We acknowledge the impact of the Federal Reserve’s interest rate policies in amplifying the recent decline. However, I suggest it would be naïve to assume that the decline in time deposits is merely a result of low interest rates. With or without higher rates how many baby boomers believe a traditional bank CD is an acceptable place for their money?
Let’s assume you can get a baby boomer to consider your bank CD. Technology clearly plays a role here. Boomer retirees can and will use their smart phones to Google search the highest CD yields across the country. How will bankers attract and retain properly-priced, long-term deposits from these well-informed customers without matching the highest rates of competitors? It appears bankers are left with two bad choices – Lose Business or Lose Money. That is the harsh reality if you are limited to offering “commoditized” CDs.
There is another possibility, which is to change the design and features of the traditional time deposit, to provide essentially a customized rather than commoditized product. Here are some options that are designed to attract and retain depositors:
- Customized maturity dates linked to when the depositor expects to need the money;
- Ability to compare investment alternatives in dollars at maturity;
- Substitute a savings account with a CD yield rather than lose the money to another financial institution;
- Have the option to withdraw early from the time deposit with all principal and interest and a “bond-like” gain when interest rates have dropped;
- Refinance conventional CDs for financial windfall when interest rates rise;
- Purchase a customized early withdrawal penalty on a CD by negotiating variations in annual percentage yield (APY) – in other words, substitute a weaker early withdrawal penalty if the customer is willing to take a lower APY;
- Invest in CDs where the financial institution will notify them when they can profitably refinance their time deposit for a predetermined financial benefit at maturity when interest rates rise;
- Calculate the estimated combined contractual liquidation cash value of the entire investment portfolio held at any institution and globally at any future date;
- Model and simulate the consequences of possible future interest rates and probable efficient use of early withdrawal options embedded in time deposits on the depositor’s entire portfolio liquidation cash value;
- Set up an annuity-like deposit account with a time deposit APY that produces cash flow over time while any additional future distribution would be fair-valued based on the financial institution’s replacement cost of the funds withdrawn ahead of schedule.
Obviously, these features will not be found in the vast majority of today’s bank CDs. But everything on this list is feasible and can be profitable to the bank. Utilizing such features in their time deposits, retail bankers will find it much easier to confidently engage a depositor and respond to their financial needs. These solutions help retail bankers serve depositors while making APY just one of the considerations rather than the only consideration.
Mr. Stanley is president of Bank Performance Strategies, an Omaha, Neb.-based consulting firm offering a web-based retail deposit pricing and sales platform. Mr. Stanley also serves as retained counsel for banking strategies at WebEquity Solutions. He can be reached at [email protected].