The vast majority of banks now position their front line to engage the retail depositors with a static rate sheet and a few CD specials. They hope that their friendly front line bankers can charm the retail depositors with some great rapport building into opening a new relationship or remaining ‘loyal’ with standard CD rates. For the rate sensitive depositor, they have some special term promotions they can offer. After all, aren’t all retail deposit products pretty much the same?
The typical bank or credit union consumer wants retail deposits to be simple, safe, and predictable. However, some innovative financial institutions are proving that meeting these qualifications does relegate their organization to offering the same conventional products as everyone else. Some intuitive adjustments to the old deposit rate paradigm gives some organizations a great leg-up – and the depositors respond positively to the benefits of these new approaches.
The Power of Companion Deposit Accounts
Companion Deposit Accounts were introduced in 2018 as a promotional ‘Debit-Only’ product that gives the savings depositor exactly what they are looking for in a savings account – high yield with a short commitment.
This new unconventional offering is a hybrid account, that blends the most desirable features of a traditional savings account with the most desirable features of a CD:
- Open and fund like a CD
- High yield like a CD
- Variable rate like a savings account
- Withdraw any time like a savings account
It is a relatively simple concept. Buy a CD and the consumer is eligible to open or add to your Companion Deposit Account that pays a CD level yield in today’s market. That’s right, the depositor can get a CD yield on a simple savings account.
What’s the catch? There is none. There is nothing negative for the long-term depositor to suffer and nothing negative or complicated for the front line banker to deliver. It is simple to promote, easy to explain, and very beneficial to depositors who have suffered low rates for years. It is one of those rare ‘killer apps’ that is categorically better than previous deposit approaches.
The bank’s finance team may dismiss this product out of the box. Traditionally, their approach has been shaped by a history of requiring either high balances or a ‘New Money Only’ qualification. They may also assume that this new service will cannibalize current low-yielding savings accounts or non-interest bearing balances.
That may have been true if it were not for the debit-only feature of Companion Deposit Accounts. This product does not allow deposits except when a new time deposit of equal or greater value is opened. This debit-only feature keeps depositors from simply upgrading from a regular savings account to Companion Deposit Accounts.
Organizations that have offered the Companion Deposit Account to date have seen that those who are motivated to open new CDs to get high-yield savings are the consumers that financial services organizations want to retain. These long-term savers have been wisely considering their options as rates rise. Without a viable option for these consumers, they would most likely leave in time.
Whether they are current clients or new ones, you can give them an alternative account that is profitable on day one, with minimal cannibalization of existing accounts. It doesn’t mobilize those accounts that are content to stay in low-yield and non-interest bearing deposit accounts with your financial institution like a conventional high-yield savings account.
When analyzing these Companion Deposit Accounts, we found that the owners of these new accounts had 5 times their initial deposit in other accounts. This means that a typical $20,000 Companion Deposit Account owner has over $100,000 in other deposit relationship with the bank. In every case, the relationship manager involved recognized the value of attracting and retaining these properly-priced, long-term retail deposits versus the challenges that might occur without this product.
Capital to Fund Loans
Without demanding long-term commitments and big early withdrawal penalties, financial institutions can get the capital they need to fund loans. The debit-only deposit account appears to be a very simple, yet fresh approach to an old issue.
This product is a variable rate savings program that helps grow deposits below short-term treasury yields from motivated depositors without moving otherwise content funds to higher yields. And as was found in the 2018 Retail Banking Trends and Predictions and the 2018 Guide to Financial Services Marketing, published by the Digital Banking Report, generating new loan relationships is still a primary objective for most organizations.
Changing the Interest Rate Narrative
Once we get the depositors’ attention, how do we break their fixation on attaining the highest interest rates? Every depositor wants high yield and short commitment, so what about the competitors who are offering to pay higher yields in the marketplace?
Everything in banking has structural elements as well as a pricing element. The ‘structural elements’ for a CD are contracts that have a specific term and a penalty for early withdrawal. In theory, the penalty should protect the bank from the damage of early withdrawal. Unfortunately, using a set number of months to determine the penalty doesn’t really do that.
The early withdrawal penalty based on an arbitrary value is often overly harsh … and depositors will react accordingly if it comes to their attention. Alternatively a “soft” penalty puts the bank in jeopardy as rising rates will give the depositor an option to refinance, and lose value for the bank in the process.
Implementing a ‘right-sized’ early withdrawal penalty is much more fair, giving the bank a negotiating posture that broadens the discussion when competing for deposits with a competitor. Usually, this competitor is offering higher rates combined with the punitive penalty associated with the account.
Giving the consumer a choice between the highest interest rate or the best value is an effective approach when you can demonstrate that the competitor’s early withdrawal penalties are out of alignment with reality. This means that the advantage is always with this enhanced term deposit product. (note: Download the white paper ‘The Case for Market Value Time Deposits’ here.)
Right-sizing early withdrawal penalties is simple, safe, and predictable, even if it is new and different. It meets the qualification of creating benefits to both the financial institution and the depositor once the issue is put under the spotlight. You can continue to sell CDs, with an option of a better alternative.
Revisiting Existing Time Deposit Accounts Before Maturity
Once your depositor has engaged with your front line ,and observed the approaches that demonstrate that your financial institution clearly respects the best interests of the depositor, you can apply the f’ull court press’ to maximize the value of the relationship for both the consumer and your organization.
The front line is typically reluctant to inquire about the extent of deposits at other financial institutions. This has always bordered on ‘selling’ which most bank and credit union employees feel creates a win-lose scenario … with the consumer on the short end of the negotiations.
The opportunity for a win-win scenario is a great topic for the front line to introduce and deliver. This can even be used for consumers having CD maturities at a future date. There is no reason to wait till maturity. You can give depositors the vision of a ‘savings windfall,’ providing the opportunity to move money into your bank immediately (or at least to find out the details of the depositor’s current deposit portfolio).
It doesn’t take a lot of time to ‘run the numbers’, displaying the opportunity for depositors to withdraw early, pay the early withdrawal penalty, and reinvest at today’s higher rates. The consumer could end up with a greater value at maturity than if they simply waited to maturity of their current contract.Even if the numbers don’t work in the consumer’s favor, the reputation of the relationship manager is enhanced because they were ‘advising’ as opposed to ‘selling.’
This is a no-risk transaction for the depositor, since you can have the maturity of the new contract exactly match the maturity of their existing contract. The depositor takes no risk, and yet can see the opportunity to gain a financial windfall.
Rising interest rates are doing for depositors what falling interest rates did borrowers in the past … helping the consumer ‘win’. Your relationship managers can be heroes for depositors, as they present the valuable opportunity to help them gain real value while attracting properly-priced long-term retail deposits.
Bringing it All Together
The Companion Deposit Account gives you improved opportunities to get people in the door. Once they are engaged, you will be able to negotiate from a position of strength, as your term deposits are categorically better designed with ‘right-sized’ early withdrawal penalties that are never harsher than today’s conventional early withdrawal penalties.
Every long-term depositor gets the opportunity to run the numbers on their existing deposit accounts to see if a new Companion Deposit Account would create more value at maturity.
It is no wonder that the organizations using this set of processes are gaining market share rapidly without over pricing offers. The opportunity to create a durable competitive advantage in long-term retail deposits via better processes, products, sales tools, and frontline training has arrived.