By Ray Birch
LOMBARD, Ill.—A “cogent” pricing strategy has never been more critical for credit unions as rising rates and competitive offers lure deposits away from liquid accounts, says Bill Handel.
And the key to that pricing strategy is that it be grounded in relationship pricing, said the SVP of research at Raddon.
“Right now, what the industry has done, and this is not just credit unions but banks as well, they have pushed deposit rate increases into very narrow categories, and specifically CDs,” said Handel. “In a few cases higher tiers on money market accounts. And, they kept the core deposit rates very low, like five to 10 basis points.”
Handel said that approach has to change, and he expects it will.
“I think especially with challenges in the equity market, dollars will be flowing back into financial institutions,” noted Handel.
Hard Questions
He expects many of the older credit union members, who often claim about 75% of a CU’s deposit base, will be challenging their cooperative if core rates remain too low.
“Those high-deposit households with significant dollars may be asking hard questions about rates on their core money,” suggested Handel, pointing out members 57 and older control most of the deposit dollars. “That's a huge issue.”
Handel reminded how the previously persistent rock-bottom deposit rate environment has had consumers stockpiling money in liquid accounts.
Bill Handel
“The vast majority of the deposit dollars are sitting in core accounts,” he said. “You might not think that about the big dollars—you think they’ll be sitting in CDs. But consumers are keeping very significant dollars in checking, savings and money markets.”
Shopping Around
But as rates markedly rise, consumers are beginning to shop around, reminded Handel.
“They're going to say, ‘Well you're paying me 10 basis points and inflation is at 8%. At minimum I can go over to Discover or Ally Bank and can get a half percent.’ There's going to be that kind of pressure,” Handel said.
Handel said credit unions will have to adopt a sound strategy for holding the line on deposit accounts while balancing that against a policy that doesn't put the organization at huge risk for large outflows.
“You need a cogent pricing strategy, one that's based on the level of the relationship,” said Handel. “If someone has only non-core money just sitting in CDs, even if it's a big dollar amount, I have to
think about how I price more appropriately to make sure I can hold on to that. What other benefits can I give them as a member to make sure that they stay with me, as opposed to taking their dollars over to Ally Bank?”
No Return
Handel pointed out checking deposits represent a significant percentage of members’ current funds, before advising that credit unions cannot rely on overdraft fees to cover costs related to offering the service. He noted that while NSF fees, which began seeing a marked reduction the years leading up to the Great Recession, have been seeing greater volumes, yet that income cannot be counted on. That is due not only to pressure from other institutions lowering or eliminating their NSF pricing, but also from what a recession may do to the income.
“Since 2006, the typical credit union experienced a 50% reduction in NSF, or overdraft income, per account. That's just a trend. We have actually begun to see that slightly tick up in the last year, which has been beneficial for credit unions,” said Handel. “But, what will happen in a recession? Many people will be better about (not overdrafting). So, we will have that pressure.”