In a rates-up environment, keeping deposits a challenge

Neil Stanley

The day will inevitably come when your customer will visit the bank asking for a higher rate on their certificates of deposit.

As one of the largest single sources of sustainable deposits, managing a CD portfolio has long created a dilemma for bankers. Most community banks fund between 10 percent and 40 percent of their balance sheet with time deposits. In a rates up environment, having a strategy to retain customers in this key deposit segment can drastically improve the performance of the bank.

In a rates up environment, bankers come quickly to the “cliff” with CDs. They reach a clear, almost perfectly predictable decision point as each CD matures: should they negotiate with the customer to retain them or should they allow the deposit to go elsewhere. The exercise often revolves around how CD monies are traditionally retained – through awkward rate negotiations – that can create stomach acid for even the most seasoned of front-line bankers who earnestly want to maintain the customer relationship.

Because of a CD’s structure, consumers often view them as a game of rate and term. When dealing with rate shoppers, front line bankers are often put in a match-it-or-lose-it position, causing tension and frustration for bankers and customers alike. Better options are available.

One solution is to offer a simple savings account with characteristics similar to a maturing CD. It would offer customers yields comparable to currently offered CDs, but without term commitments or early withdrawal penalties. This unconventional strategy may sound counterintuitive. After all, why would any banker want to offer savings accounts that pay CD yields?

First, consider the matter from the depositors’ perspective. They like both competitive rates and liquidity. Bankers, in turn, recognize that there is always someone willing to pay higher CD rates. With this savings account, however, they now have a chance to keep depositors satisfied.

It’s important to note that this kind of account should never be promoted via direct marketing. The idea here is to have an exclusive, invitation-only product for historically loyal depositors. It is designed to defend deposits, not to attract new ones. It is the retail bankers’ solution of last resort saved for CD depositors who indicate that none of the bank’s products are suitable for re-investing their currently maturing CD funds. Bankers can utilize this account when the funds will be lost without another viable alternative that has been authorized by upper management for that situation.

From the customer’s perspective, this type of account offers a competitive return, but also something equally important: liquidity. Once the funds are moved into this account, the customer can withdraw them at any time, giving customers the control they don’t have with CDs, although they still get a CD-level yield. Customers also recognize that the bank values their relationship because they have been personally invited to take advantage of this exclusive, high-yield savings account.

Additional deposits are prohibited for this special savings account. This is a familiar restriction to CD customers, who cannot deposit additional funds to their CDs and so they don’t care. They are happy and the bank is protected from the fast money pain that is typically associated with high-yield money market accounts. Customers also will be reluctant to withdraw funds because they cannot replenish them without investing first in a CD and then later transferring to the account.

The bank also retains control of pricing this variable rate account, and although it should not be formally indexed, the pricing can be based on a predictable formula. With such an account, the bank has a better opportunity to price CDs profitably and use the accounts to retain a substantial portion of deposits that would otherwise leave at maturity.

Neil Stanley is CEO/founder of Omaha, Neb.-based The CorePoint, a firm offering a web-based retail deposit pricing and sales platform. He can be reached at [email protected].