New kinds of savings accounts can give members with commitment to their relationship with the credit union both high yields and short terms on their deposits.
Credit unions strive to become their members’ primary financial institution. The theory is that being the PFI increases the likelihood of a continual and robustly valuable relationship. We want to be the go-to source of financial services for our members. Our teams work diligently to be top of mind and top of wallet for good reason. We strive to make our services frictionless and intuitive. We know we are in competition and we are looking for a durable competitive advantage. Many on our team are seeking ways of becoming stickier.
Sticky accounts sound good to credit union executives. Let’s close the back door so that few people leave. Meanwhile, don’t we want to eliminate friction for our members? Yes, we want our offerings to be intuitive and uncomplicated. Our members enjoy the freedom to make choices as we help people who need money they don’t yet have; have money they don’t yet need; want payments made simply as they expect; and want accounting and documentation for everything.
Can we really offer frictionless sticky deposit accounts? Generally not if you think conventionally and traditionally. On one end of the spectrum, you set up the offering to be easy in and easy out—frictionless. On the other end, you formally restrict access to deposit funds in return for higher interest rates. Today we generally observe this in the binary choice of savings versus term deposits. Traditionally, members choose liquidity with low yields in savings or high yields as they sacrifice liquidity in term deposits.
But things are changing…
Shifting Deposit Marketplace
There is a migration occurring toward hybrid savings accounts that give depositors high yields and short commitments and yet don’t give them all the optionality to open and deposit without some level of commitment to the broader relationship with the credit union. Today, 93% of banking industry deposits have no contractual maturity. The industry has widely embraced simplistic savings offerings through the recent period of ultra-low interest rates. With all the optionality in the hands of the depositors, a financial institution is left in a very vulnerable position as rates rise.
Strategic financial institution executives have discovered that having some restrictions creates more value to both depositors and credit unions. These restrictions don’t inhibit the depositor behavior that the credit union wants—an increase in properly priced deposits. Yet they do inhibit the depositor behaviors that the credit union doesn’t want—unnecessary escalation of cost of funds.
The requirements for depositors to qualify for opening and funding these hybrid savings products makes them a better deposit product for credit unions than high-yield money market accounts which typically give unlimited optionality to depositors.
The restrictions within hybrid savings are not offensive to depositors who want access to their money. Hybrid savings are conventional savings products in terms of withdrawals, which can be made at any time. Instead of restricting withdrawals, the secret formula is to require a commitment of some kind to deposit to these hybrid savings.
Limited Edition Savings Accounts
There are two basic versions of hybrid savings. The first requires a past substantive relationship, making it an ideal deposit retention strategy. Limited edition savings are offered to depositors who have had a time deposit at the credit union that is maturing. You can also refer to this account as a loyalty reward. The past term deposit account serves as a qualifying account for opening and depositing all or part of the maturing term deposit into limited edition savings that pays a higher yield than other overnight savings offerings yet doesn’t require a term to maturity.
The depositor can access their funds in the limited edition savings at any time. However, they tend not to withdraw because those funds, once withdrawn, cannot be put back into the account without going back through a time deposit relationship to qualify for deposit into the limited edition savings accounts. Credit unions can adjust the required term of the term deposit to qualify on an ongoing basis to incent or disincentivize utilization of the account.
The credit union also can change the interest rate at any time without notice. This gives the credit union significant control of this high-yield offering. However, depositors have some parity in control because they can unilaterally determine when to withdraw or close these accounts.
This offering is not advertised broadly. As an invitation-only product, it builds the arsenal of the member service representative to have something quite valuable at the point of sale where depositors have negotiated aggressively and still seem unsatisfied by the credit union’s term deposit offerings. The presentation of a savings account that yields approximately what a term deposit yields sounds like a great solution to depositors who want a solid combination of yield and liquidity.
The Companion Deposit Account
The second version of hybrid savings is closely related yet very different in its impact. The companion deposit account resembles the limited edition savings except that the qualifier for this is opening a new term deposit today. The new term deposit determines the amount that can be deposited into the companion account. This becomes a great catalyst for growth of long-term savings. Unlike high-yield money market accounts, the depositor has to deposit a portion of their funds into a term deposit to qualify, so the level of commitment is significantly higher than with a traditional savings offering. This means that although these accounts have no contractual maturity, they are stickier because of the associated commitments required to open the account in the first place.
The companion deposit account also has a variable rate that works great for promotional activity of all kinds. It can be broadly promoted alone or alongside a special certificate offering. Although some institutions have exercised some new-money-only aspects to the offering, these restrictions can be deemed quite offensive by depositors and are often determined to be unnecessary when the results are assessed. Since the introduction of companion deposit accounts in 2018, they have become a great engine for growth of less volatile long-term deposits.
The changes coming in the industry will provide fresh value to those who have owned long-term savings through the drought of interest rates. The industry will undoubtedly find that fortune favors those credit union leaders who have prepared wisely and act boldly as interest rates rise.
Neil Stanley is founder/CEO of The CorePoint.