If timing is everything, then score one for depositors.
The time is right for them to get what they’ve searched for: higher yields without commitment. “Whoa, hold on now,” bankers respond to such suggestions. Banks can’t throw around high yields for deposit accounts without getting something valuable in return. While that rings true, trying to tie up deposits with long-term commitments and big early withdrawal penalties is a pill few depositors will swallow.
Nor will your bank necessarily stick out in a very crowded field strictly for a favorable rate. "Now that rates matter again and competition is heating up for deposits, banks—particularly smaller ones—may not be able to rely on rate alone to be competitive,” says Byron Marshall, director, research for BAI.
Today, community banks can arm themselves with a new, unconventional offering: a hybrid account that blends the most desirable features of savings with the most desirable features of time deposits. Enter the companion deposit account, a concept that in practice sounds something like this: “Buy a CD here at our bank and you’re eligible to open or add to your companion deposit account that pays a CD-level yield in today’s market.”
That’s right: The depositor can earn a CD yield on a simple savings account. So what’s the catch?
There is nothing negative for the long-term depositor to suffer; nothing negative or complicated for the front line banker to deliver. Simple to promote and easy to explain, the companion deposit account promises great benefits to depositors who have suffered low rates for years. To win and keep these people, banks need the courage to do things differently.
“Banks need innovative approaches to attract deposits, particularly from younger customers for whom traditional term products, such as CDs, are not as relevant or attractive,” Marshall observes. “The concept of being able to earn an attractive rate without tying up money long term may be part of the solution to helping community banks effectively compete with the dominance of larger banks for long- term deposits."
Don’t be surprised, though, if the finance team responds to the companion deposit account idea by declaring, “This will never work.” The argument will often go: “Until now we’ve had to make these kind of high-yield savings accounts exclusive by requiring high balances or a ‘new money only’ qualification. We cannot just promote a simple, high-yield savings account without cannibalizing our low-yielding savings and non-interest balances.”
That would be true if not for the debit-only feature of companion deposit accounts. This product does not allow deposits except when a new time deposit of equal or greater value is opened. This feature keeps depositors from calling in and simply upgrading from regular savings to companion deposit accounts. So depositors can make that type of transfer as long as they open a CD of equal or greater value today.
You want to keep people motivated to open new CDs to get high-yield savings. These long-term savers have wisely considered their options recently; whether current clients or new ones, you can give them an account that is profitable from day one with minimal cannibalization of existing accounts.
Some readers will recognize this debit-only deposit account’s sister product: limited edition savings. We wrote about the “Savings Account that Saves Accounts” several years ago. Many bankers have experienced the retention power of this debit-only account. If you are not using it, now is the ideal time to get help closing the back door when CD clients engage your front line with a match-it-or-lose-it proposition.
This newest version of debit-only deposit account was designed years ago to arrive on the scene at such a moment as this: with depositors awake to more options and bankers looking to put their best foot forward to attract and retain depositors—without matching the highest rate offers of competitors, including online banks.
The first wave of banks to launch this approach—along with other enhanced processes, products, sales tools, and training to get the most out of it—experienced 11 percent growth of properly-priced, long-term retail deposits in the first quarter of 2018. That’s right. This innovative, easy-to-implement approach turns up at the very time bankers are challenged to retain and grow deposits, especially as online banks and aggressive credit unions pass rising savings rates on to depositors.
So yes, “Higher Yields without Commitment” can work to bank’s advantage. Promoting attractive savings yields within this structure produces something valuable according to those who have tried it: significant growth of profitable new long-term deposits.
And here’s the bottom line: Without demanding long-term commitments and big early withdrawal penalties, financial institutions can still get the raw material they need to fund loans. The debit-only deposit account offers a fresh way to tackle an old issue.
Consider this: Companion deposit accounts could represent the closest thing to a killer app in attracting profitable, long-term retail deposit growth. Who will be first in your local market to promote them?
Or, as I’ve heard one banker sum it up: “I certainly don’t want to be the last one in my market to offer this. Why wouldn’t I want to be first on this one?
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Neil Stanley is founder and CEO of The CorePoint. He also serves as president of community banking at TS Banking Group, which operates in Iowa, North Dakota, and Illinois.
For more insights, check out the webinar: Banking in 2018 - From the Customers' Perspective.