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The next refi boom won’t be mortgages

Financial institutions holding off on paying higher rates on long-term savings accounts could end up in the crosshairs of aggressive deposit raiders.

Jun 22, 2022 / Consumer Banking
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This month’s 75-basis-point Fed rate hike opens the door for deposit raiders to do more than trickle out better rates over time.

Current data indicates that there are still high volumes of retail deposits on the books of financial institutions at ultra-low interest rates that have months or even years to mature. Where can consumers benefit most from rising rates? Their current long-term savings accounts.

With many conventional-thinking bankers feeling burdened by excess deposits, the situation is ideal for strategic bankers to attract new deposits prior to their current maturity without overpaying.

Many bankers are reporting that public-fund treasurers are running the numbers to close out old contracts, take their penalties and reinvest at today’s higher interest rates. We can confidently predict that retail depositors will soon be open to such opportunities as well. This is possible because switching costs are only the early-withdrawal penalties and the depositor’s effort to recognize the opportunity and make the trade.

Even as simple as the math is, seems most bankers have not taken the time to stress-test their portfolios for the consequences of refinancing CDs in a rising-rate environment. Strategic bankers have fortified their early-withdrawal penalties because the arbitrary penalties of the past were not calibrated for the ultra-low interest rates of recent times. Those that did this are in position now to help their competitor’s depositors switch to higher-yielding savings.

A rising-rate environment is also favorable for fintechs, neobanks and startups eyeing ways to attract profitable deposits away from traditional institutions.

Those who have explored this deposit-refinancing strategy have learned that the best way of launching this activity is to make the offer clear and simple, with zero risk to the depositor. The advertisements are simple and clear and sound something like this:

“Do you or a loved one own a bank or credit union CD?  If you are waiting until maturity to make investment decisions, you could be wasting thousands of dollars.  As interest rates rise, many CD holders can trade out of their old contracts into new contracts that mature on the same day for more money.  Contact us at XYZ Bank for your no-obligation analysis of how you and your loved ones can benefit from rising interest rates immediately.”

When the numbers are run today, we commonly see results where the depositor can achieve a significant financial benefit that’s easy to understand and easy to achieve, and take no risk in the process.

The growing disparity between currently offered interest rates makes this call to action even more dramatic.  Where some financial institutions are willing and able to pay rates in the range of U.S. Treasuries, others are lagging – as if the interest rate markets have not changed in the last year. This leaves the door open for a totally legitimate transfer of money from financial institutions that depositors believe have abandoned their interest to those who are actively seeking to pay what depositors see as a fair rate.

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Bankers need to understand that those who make this attractive offer to depositors secure valuable data to process the refinance analysis.  While not all situations will have a positive net payoff from the refinance, the process enables the financial institution to collect information such as current interest and maturity date, deposit amount and the bank or credit union currently holding the deposit.

The lack of awareness of this threat by some financial institution executives could create a major shift in the banking industry, with the aggressors using prices that are predatory without compromising their own margins, as is typically the case in price wars. The aggressor can refinance deposits away at very profitable levels and meet little to no resistance from those that almost willingly give up deposits because of the sense of surplus. When bankers work so hard to build franchise value, it is shocking to see some who appear so willing to give these deposits up so readily.

This next refinance boom may not involve as many consumers as mortgages, but the financial impact on those consumers who have owned long-term savings through the drought of interest rates will still be quite material, and the industry will undoubtedly find that fortune favors those who prepared wisely and acted boldly as interest rates rose.

Neil Stanley is founder and CEO at The CorePoint.