We have initiatives in both online only and branch operations. Our branches are growing retail deposits robustly. However, we are not doing it with conventional tactics. We use three powerful new approaches to attract, negotiate, and expand the focus to grow significant volumes of properly-priced long-term retail deposits in this market.
Retail deposits must be simple, safe, and predictable. However, our bankers are proving that meeting these qualifications does not mean offering the same conventional products as everyone else today. Some intuitive adjustments to the old paradigms give our bankers a great leg-up and the depositors respond when they see the value these new approaches provide.
Attract - Companion Deposit Accounts to Promote
First, Companion Deposit Accounts introduced in 2018 are promotional "Debit-Only" deposit accounts that give the long-term depositor exactly what they are looking for and will respond to – High Yield and Short Commitment.
This new unconventional offering is a hybrid account that blends the most desirable features of savings with the most desirable features of time deposits:
· 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 very simple concept…Buy a CD here and you are 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 now. It is one of those rare "killer apps" that is categorically better than previous approaches to promote widely.
Typically retail pricing is shaped by a history of requiring high balances or a "New Money Only" qualification. Some bankers will assume that we cannot just promote a simple high-yield savings account without cannibalizing our currently content low-yielding savings and non-interest balances! That would be 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 regular savings to Companion Deposit Accounts.
Installations of Companion Deposit Account to-date have proven that those who are motivated to open new CDs to get high-yield savings are the people banks want to keep. These long-term savers have been wisely considering their options as rates rise. Whether they are current clients or new ones, you can give them an account that is profitable 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 accounts are associated with over five times that many total deposits in the bank on average. This means that a typical $20,000 companion deposit account owner has over $100,000 in deposit relationship with the bank. Some of those are new funds associated with new clients; some are new funds from legacy relationships; some are existing funds from legacy relationships. In every case the bankers involved recognize the value of attracting and retaining these properly-priced, long-term retail deposits as they consider what the challenges would be in these relationships without this product.
See one of our bank's implementation of this offering at http://blog.thebankoftioga.com/get-the-best-in-savings-high-yield-and-no-commitments-2
Another benefit that was discovered by a few of our thoughtful lenders was that this promotional special is great to show borrowers what we have to pay savers today justifying higher interest rates on loans. What a great bonus!
Without demanding long-term commitments and big early withdrawal penalties we get the raw material we need to fund loans. The debit-only deposit account appears to be a very simple, yet fresh approach to an old issue. "What could go wrong? It is a variable rate savings program that helps grow deposits below short-term treasury yields from motivated depositors without moving all our otherwise content funds to high yields."
Negotiate - Compete on Penalties to De-emphasize Interest Rates
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 than we are? Aren't interest rates destiny for CDs?
Everything in banking has structural elements as well as a pricing element. So, what are the structural elements of CDs? They are contracts that have a specific term and a penalty for early withdrawal. Let's dig into the penalty issue. In theory, the penalty should protect the bank from the damage of early withdrawal. Conventionally, the practices of banking where a number of months of interest determine the penalty don't really do that. Test it yourself, run the numbers and calculate what the damage to the bank is for protecting it from rising rates over time and see if your penalty accurately yields the correct amount to consistently cover the exact amount of financial damage.
Your early withdrawal penalty based on an arbitrary value is often overly harsh and the depositors will react negatively 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 "right-sized" early withdrawal penalties is fair and gives our bank a negotiating posture that broadens the discussion when competing for deposits with a financial institution that is offering higher rates, but may be offering less value because their early withdrawal penalty is punitive. Asking the depositor if they just want the highest interest rate or the best value is an effective approach when you can demonstrate that the competitor's early withdrawal penalties are many months or years and ours today is measured in days and although the penalty will rise as interest rates rise, our penalty will never be more than our standard penalty. This means that the advantage is always with this enhanced term deposit product referred to as CDtwo®.
See one of our bank's implementation of this offering at http://blog.tsbank.com/weve-taken-the-punishment-out-of-cd-withdrawals
You can find a whitepaper on this at http://www.fmsinc.org/Documents/MemberCenter/WhitePapers/TheCaseforMarketValueTimeDeposits.pdf
"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 our bank and the depositor once the issue is put under the spotlight. You can go on selling CDs that have arbitrary penalties that are destined to be either too harsh or too soft. However, if we want a better product to offer to depositors that doesn't diminish the value to the bank, so we put CDtwo® in our product portfolio. It is a categorically superior way to offer fixed-rate term deposit contracts.
Expand the Focus – Refinance Time Deposits Before Maturity to Grow Aggressively
Once the depositor has engaged your front line and observed the approaches above that demonstrate that our financial institution clearly respects the best interests of the depositor, we can apply the "full court press" to maximize retail deposit growth now.
The front line is typically reluctant to inquire about the extent of deposits outside our financial institution while the opportunity for a windfall today is a great topic for the front line to introduce and deliver.
See one of our bank's implementation of this offering at http://blog.tsbank.com/how-can-cd-holders-benefit-from-rising-interest-rates
This approach creates a "jump-ball" immediately for all the deposits in the market place. Without it we are in position to only gain the deposits that are maturing as the depositors decide where to re-invest maturing deposits. We don't wait to maturity, we give depositors the vision of windfall and gain the opportunity to move money into our bank now or at minimum find out all the details of the depositor's current deposit portfolio. We have so much to gain by running the numbers and displaying the opportunity for depositors to withdraw early; pay the penalty; and reinvest at today's higher rates to end up with a greater value at maturity than if they simply wait to maturity of their current contract. This is a riskless transaction for the depositor because we can have the maturity of the new contract exactly match the maturity of the 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 for years for mortgage holders. Our bankers 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 to our bank at the very time we need them most with interest rates rising.
Bringing it All Together
This 1-2-3 process begins with Companion Deposit Accounts to give us distinctly improved opportunities to get people in the door. Once they are engaged we are able to negotiate from a position of strength as our term deposits are categorically better designed with "right-sized" early withdrawal penalties that are never harsher than our conventional early withdrawal penalties. Every long-term depositor gets the opportunity to run the numbers on their existing deposits to see if a refinance today would create more value at maturity and give us more deposits now.
We are experiencing a durable competitive advantage in long-term retail deposits via better processes, products, sales tools, and frontline training.
------------------------------
Neil Stanley
President of Community Banking
TS Banking Group
Treynor, Iowa
------------------------------
-------------------------------------------
Original Message:
Sent: 06-19-2018 08:53
From: Barb Rehm
Subject: Tuesday Topic: Attracting Retail Deposits
American Banker explores trends in retail banking and finds the hunt for deposits is heating up. Some banks are emphasizing CDs for the first time in years, others are starting online banks, while many continue to rely on branches for deposit growth.
What's working for your bank as you try to attract new retail deposits? Is your focus more online or in your branches?
------------------------------
Barb Rehm
Senior Managing Director
Promontory Interfinancial Network
Arlington VA
------------------------------