How to Find Deposit Volume Without Exploding Cost of Funds  

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By Matthew Doffing

5 minutes

Segment deposit offers and train frontline staff to navigate the fine lines between members’ goals and those of your credit union.

It is tempting to believe that a low cost of funds is synonymous with financial success, but there’s a fatal flaw in that thinking. Spread is required for credit unions to achieve high performance, but CUs also must have deposit volume. How much spread must they now give up in today’s rising rate environment to obtain that volume?    

The question has had almost no bite for some 15 years. With rates at near zero, no one needed to compete for cash; it was everywhere, and it was nearly free. Now all that’s substantially changed.

Rates and competition apply pressure on staff through depositors who are engaging branches and contact centers looking for high yields and short commitments. Managers’ phones ring off the hook as front-line staff members seek exception pricing. The industry rightly fears repricing its book of funding only to gain a marginal amount, and many now turn to an overly simplistic yet appealing tactic: delaying rate increases while allowing deposit relationships to decay. 

Those using a delay-and-decay approach, though, may miss the exit ramp in their funding competition.  Credit unions can better manage deposit repricing—and obtain funding in the required volume—by creating segmented deposit offers, improving negotiation processes and training frontline staff to navigate the fine lines between depositors’ and institutions’ goals. 

Yes, Some Upward Repricing

Share certificate usage among members continued its rapid rise in first quarter, up 50.1% year-over-year, according to reporting from “Share certificates now make up 19.1% of total shares outstanding,” the publication observed. “The cost of deposits also rose 51 basis points to 0.99% in the first quarter as deposits garnering higher interest rates make up a larger percentage of the share composition.” 

Credit unions should be aware of pricing trends for banks as well. Depositors have followed higher rates. Banks’ average CD yield was 2.99% in first quarter, yet the median was only 1.94%; averages are only higher than medians when volume sits above the median price. 

For credit union leaders, the cautionary tale is that deposit volume at banks booked 1% higher than the median price offered to depositors. If people can get 2.99% at banks, will they expect a similar rate from their credit union? Credit unions certainly have a reputation for higher deposit rates and lower loan rates. The question is: How much must they raise rates to obtain volume?

Spoiler: The answer is not offering depositors the best rate available. It’s about finding an arrangement that will make the member happy.

Volumes at the Lowest Possible Cost

The insistence of some credit unions on insured deposit spreads upwards of 300 basis points is harmful, especially in a free market where aggressive competitors easily poach funds away. Those credit unions abandon depositors seeking reasonable prices who now bank at institutions willing to pay relatively higher deposit rates.  

Before you suggest that competitors paying higher rates must be using a loss-leader approach, consider where the Fed funds rate is today—having marched upward to 5.25%. Credit unions can invest newly acquired short-term funds, and any deposit booked at 5% or less needs no subsidization. They are clearly not loss leaders. Not only are the aggressive deposit rates observed today generally under wholesale funding costs, they typically offer the opportunity to invest these funds in a modest but attractive risk-free spread.

Leaders should instead aim for a Goldilocks scenario in which interest rates are put in proper perspective: to produce motivated depositors for significant volumes while managing a material spread for the institution. It’s not about casually increasing deposit interest rates. Neither ultra-low rates that fail to motivate deposit volume nor ultra-high rates that make margins trivial are acceptable. 

Better Negotiation Needed

Negotiating deposit rates and maintaining member satisfaction will feel like a contradiction in terms for some front-line staff. They’ve faced many a rate shopper by this point in 2023. But the worst thing front-line staff can do is assume every member is a rate shopper looking for high yields and short commitments. Leaders need to draw them back from focusing solely on price to focusing instead on the spectrum of members, each with their own goals and variables. 

Leaders can start by educating the front line on cost of funds and its impact on them and their employer. If staffers don’t know that their actions have consequences, they will tend toward their human nature and go for the most immediate praise. In the moment, without education, they often will turn to the depositor and offer the highest interest rate they can, an approach not aligned with successful deposit-gathering. Give them an understanding of what success looks like and why. 

Staff also need meaningful strata—low, middle, and high—for their deposit negotiation that align with a process. The word “meaningful” is important. Offering to upgrade a member to the middle strata must feel meaningful; a move up from 1.05% to 1.08% would not seem material. Likewise, it’s also problematic if the spreads are too large. For example, telling a depositor the standard rate is 0.55% only to graduate them to 4.75% in one giant leap is not optimal. The pricing committee must consistently recalibrate felt-fair pricing strata; only then will a sequential offering process earn adoption by the front line.

Staff then need training on strata-based negotiation. They should start by respectfully engaging members about their objectives, which can reveal their desired term, liquidity needs or worries about the direction of interest rates. At a high level, staff should move sequentially from the lowest strata to the middle and eventually to the highest strata in their conversation with the member. Fixing an expected starting place in their mind will slow them down in reverting to the best rate available, allowing more low- and middle-strata pricing to be accepted by depositors.

Leaders at institutions worried about spread also can support efforts on the front line by avoiding rate-focused promotions or contact with owners of maturing time deposits. What member wouldn’t take a higher rate on a special offer at the term of their CD? Credit unions must avoid awakening otherwise content members who may just renew automatically. 

Nothing in your organization’s income statements will increase more this year on a percentage basis than interest expenses. Credit unions’ success is heavily dependent on a coherent, effective and efficient pricing strategy that achieves an oversized portfolio simultaneously with an oversized margin.  

Matthew Doffing is director of marketing at The CorePoint.

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