Along with the initial rise of the COVID-19 pandemic came a surge in deposits flooding banks and credit unions. That hasn’t slowed down.
Between late March and May 26, 2020 deposits rose by $411 billion to $17.09 trillion, according to the latest available data from the Federal Reserve.
The problem for financial institutions—at least one of the problems brought about from the volume of deposits—is that when there is too much of something, the market will correct it.
“I can assure you after decades in this industry, whatever glut is out there, it will eventually erode, and it will become short. Then, it will become competitive,” said Neil Stanley, Founder of The CorePoint, during our latest Info-Pro Educational Series Webinar.
However, as Stanley pointed out, a new way of thinking about deposits—and withdrawals—can help offset the challenges brought about by turbulent times and manipulations of interest rates by the Federal Reserve and usher in the next generation of long-term savings.
“There’s a surplus of deposits in our industry,” said Stanley. “A glut is usually followed by a response when we have too much of something. So we tend to handle it in ways that eventually create scarcity.”
Reinvent the CD to Stay Competitive
Stanley shared that one way of alleviating interest costs and competing with other financial institutions is to reinvent the CD.
While CDs have traditionally been long-term and low-risk savings tools for customers that often were saddled with penalties for early withdrawals, Stanley believes it may be time to turn that model on its head.
“The average of our clients' new and renewed certificates of deposit are 17 below FHLB,” said Stanley. “There are some longer-term CDs, and they were 34 basis points under FHLB. That’s the best that we recorded in July for our clients.”
Enhanced CD Withdrawal Options
He explained how the company offered enhanced withdrawal options to help cut costs and deliver mutual funds’ look and feel to time deposits.
"Today people are putting money into things other than banks. Instead, it's going to fintech, Bitcoin, etc., and who knows how it will continue to change over the years," said Stanley. “[Our thinking was] somebody has a two or three percent account, maybe they would love to have that money back, and wouldn’t you love to give it back to them in an interest rate environment where rates are below 0.5 percent? So getting rid of those accounts was profitable.”
Enhanced Withdrawal Options - Implementation
- There is no need to transition every account
- Leave content depositors alone as they purchase and renew classic CDs
- When you encounter a disappointed depositor, you can offer to upgrade them to this enhanced option. The enhanced withdrawal option is advantageous without differentiation in APY compared to the classic CD. The early withdrawal fee is limited, never greater than the early withdrawal on the traditional CD.
- There are two ways to deliver the redemption value:
- High tech – Work with Core and/or Mobile app provider
- Low tech – Use the CoreCD® system where the depositor can enter simple parameters to get their current redemption value – Current Principal and Interest; Maturity Date; and Account APY
“After nearly 10 years in this business, there are still opportunities yet to be discovered. No one thing will drive this. However, some of the offerings today are unique to how the market is driving changes to our industry,” said Stanley.
To learn more about reinventing the traditional CD and utilizing enhanced withdrawal options to stay competitive now and in the future, watch the webinar here.
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