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Higher interest in higher rates: Opening eyes as Fed rates rise


Time deposit owners always want the same thing: more yield and short commitment. But until recently depositors had little motivation to spend time and energy looking for options. Every choice was pretty discouraging due to the dominance of low rates.  Bankers with plenty of non-interest bearing deposits demonstrated apathy to time deposit clients. 

Depositors traditionally search for yield and maturity combinations from the options they consider viable and open up time accounts in their financial institution of choice. Historically, they then close their eyes and wait to maturity. How have recent Federal Reserve actions impacted this situation?

Now that loan demand has steadily increased as interest rates rise, bankers are eyeing the current $1.6 trillion market for FDIC-insured time deposits and $189 billion market for NCUA-insured time deposits. 

Bankers now find that FDIC insurance alone no longer mesmerizes depositors.  As the Federal Reserve hikes interest rates, depositors expect to benefit from better returns on their deposits. The days of silent depositor capitulation have passed—and as they voice their expectations, frontline bankers find themselves unprepared to engage successfully without the highest offering rates.  They will fall into the commodity mindset trap unless bank leadership helps them.

And yet, the industry has clearly promoted the “Substantial penalty for early withdrawal.” Nobody wants to pay penalties and people presume that financial institutions deliberately design their penalties to be substantial. During decades of falling and low interest rates, it never made sense to pay penalties to improve time deposit investments. So indeed, the penalties seemed substantial.

Withdrawing a myth: Early withdrawal penalties are often not substantial

Contrary to what they may have heard or presently think, curious depositors will now find that in many cases penalties for early withdrawal are not “substantial.”  In fact with rates rising, depositors who open their eyes to refinancing time deposits often find substantial windfalls from breaking the current low-rate contracts and reinvesting in the same simple, safe and predictable insured deposit investment product. With absolutely no risk to the depositor, they can get what they want: more yield without a change in their commitment.

Withdrawing a concession: Winning deposits ahead of maturity

Astute bankers have an opportunity to open depositors’ eyes and thereby bring in the competitors’ low-cost deposits immediately without paying premium rates. A few progressive financial institutions have opened their own eyes (and minds) to broadcasting the opportunity to dislocate time deposits immediately and win them from competitors at fair pricing. 

This opportunity will not stay a secret for long. A refinance will bless senior citizens who suffered during the long period of low interest rates—and helping seniors makes for the type of good news story that our society and the media embrace. Financial institutions that downplay this opportunity may in fact appear oppressive. The best financial institutions help depositors get more value and in the process benefit themselves. After all: Isn’t that ultimately the mission of the financial services industry?

DepositsAccounts.com has a free calculator to help depositors do the math. It is only a matter of time before financial media and the media in general pick up this story. What will financial institutions do when depositors come in and share the stories they’ve heard?

Right now, progressive financial institutions can create customized maturities for newly issued certificates so that their offers fit nicely with the math of refinancing deposits. This process exposes the depositor to no change in commitment, but clearly defines the Net Benefit at Maturity from Transferring Now into a new contract. By transferring immediately many depositors can achieve greater value at maturity, as this sample analysis shows:


The owner of a certificate currently worth $101,000 principal and interest discovers they can trade contracts and gain an additional $2,452 at maturity without changing maturity terms. Financial institutions that help people discover these risk-free opportunities find that instead of having the potential to win over only the small portion of deposits currently maturing, all certificates are now “in play” at a fair price. (A detailed analysis of exposure to deposit refinancing is contained in this white paper from the Financial Managers Society.)

Putting it all together: Substantial rewards for early action

Astute executives find much more to gain than to lose when they are proactive. When bankers run the numbers and help depositors, it’s exciting and rewards everyone involved: Financial institutions do good for seniors as they do right for the industry.

The market recognition that comes from spreading this good news story creates an opportunity to break the myth that all financial institutions are the same.  As great marketers know, even good news needs an active marketing campaign to focus the message and maximize the opportunities.

Rising interest rates, paired with proactive engagement, can open eyes of consumers. But there is more:  Even as this reinvigorates new deposit business development, it also opens up possibilities.

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.