Spotlight on Certificate Specials

As credit union executives look to fund expanding loan portfolios, most turn to a tried-and-true method: promoting a share certificate “special.” Recognizing that price impacts volume, executives have historically ratcheted up the price on “CDs” to attract more depositor attention. It is simple and often works, but at what cost? Should senior managers be using this approach from last decade’s playbook? Here are some questions executives should be asking:

• Why are we running a share certificate special?
• Why are we paying more than Federal Home Loan Bank advance rates?
• How much are CD specials impacting our profitability?
• If every dollar attracted to our specials at rates over FHLB unnecessarily hurts our net income, what does success with this account look like?
• How do we measure the results of our promotional CD activity?
• Is there a less costly way to attract and retain funds?
• Do we have a well-designed, low-cost retention strategy for when these specials mature?

The number and yield of specials varies across states. Below is a graphic of the recently offered CD specials in Massachusetts where the annual percentage yield is greater than comparable term FHLB advance rates.

Seventy-eight of the 236 financial institutions surveyed by RateWatch in Massachusetts offer a promotional special with APY over comparable-term FHLB advance rates. With 33 percent of this state’s financial institutions doing so before any increase by the Federal Reserve, we can only speculate about the level and volatility of aggressiveness that might be experienced once the Federal Reserve begins to raise rates.

There are ways leaders at credit unions can significantly improve how they price and sell time deposits. The current environment is precisely when these enhanced, yet simple methods pay off by producing more funding volumes with less negative impact to profitability. These methods include:

• Offering multiple stages in the share certificate sales process. With a rate sheet that presents all the available offers the sale is executed as a one-pass process. When the time deposit sales toolkit is enhanced with additional tools that are more effective given specific situations, results improve. Considering the fact that not all depositors will respond in the same way to various offers, it makes sense to harvest some accounts that are less price-sensitive with your standard pricing at lower interest rates. However, if all you have to offer is this lower standard pricing, you will lose the business that you would have previously retained. Therefore, you need a series of offers.
  
  We recommend a four-stage CD sales process: standard rates, promotional specials, customized maturity offers, and limited edition savings for maturing CDs. These offers are made sequentially. If standard rates satisfy the member, we stop selling. If they don't, we offer each stage until we get a sale or exhaust our stages. The goal is to price the often silent majority who do not display as much rate-sensitive behavior at standard fair rates; attract new deposits and depositors; and price the vocal minority who display rate-sensitive behaviors at managed, consistent exception rates. 

• Displaying offers in dollars at maturity. Every CD customer wants two things always: 1) high yield and 2) short commitment. The key difference between members is how their depositor behaviors https://www.cues.org/article/view/id/CFO-focus-assets-are-only-half-the-picture will vary depending upon the impact pricing makes to them. To bring relevance to the decision-making process and produce win-win results, member service representatives should be equipped to talk to their depositors in terms of dollars.

With a quote in dollars, members can clearly understand the outcome and thoughtfully weigh their options.

• Showing how offers stack up against the competition in dollars. In addition to building an environment of transparency and trust, showing how offers stack up against competing offers quickly and easily identifies the benefit of depositing in your credit union compared to others. Members are often surprised at how small the dollar differences are. Many will show loyalty and forego a small increase elsewhere when they see the negligible difference in the final outcome.

• Using customized deposit maturities along with rate enhancement. Producing a de-commoditized offering with customized maturity dates and advantageous pricing for the assertive rate-sensitive depositor, compared to similar term standard offers, creates a mutually satisfying negotiation and customer experience.

• Offering a CD yield on a simple savings account via an invitation-only “limited edition savings” account when necessary. This is a special-purpose savings account offered only as a last resort. When owners appear committed to leaving if the credit union won’t match another offer, it is used for retention of these accounts. The unique account structure prohibits deposits, eliminating the movement of checking and savings funds. Members are happy and the credit union is protected from the fast money pain typically associated with high-yield money market accounts.

A Comprehensive Approach

Now is the time to arm your credit union with the best tools and approaches for attracting and retaining profitable deposits. Share certificate specials may ultimately be a legitimate part of an effective pricing and sales strategy. However, over-emphasizing these specials may risk opportunity. These approaches will help you confidently manage your balance sheet and income statement and positively address questions regarding the appropriateness of your funding strategies.

Neil Stanley is CEO/founder of The CorePoint, which offers a Web-based retail deposit pricing and sales platform.
Kimberly Myszkewicz is marketing manager at RateWatch, a premier provider of competitive interest rate and product comparison information to financial institutions across the United States.