By Ray Birch
MADISON—With inflation eating away at consumers’ financial reserves and the Federal Reserve focused on reducing money supply, credit unions are facing a battle for deposits that requires several steps to address, according to Mike Higgins.
“We’ve got things going on both sides—the consumer and the Federal Reserve—and that's why we're seeing such a sudden war for deposits,” said Higgins, a managing partner at performance compensation firm Mike Higgins & Associates.
During a recent Filene webinar, Higgins outlined steps he recommended credit unions take to keep and attract their share of deposits as funds become harder to come by.
“I wish I had all the answers--the simple answer is, there are no easy answers,” he said. “But it's going to be important that we start exercising that deposit-gathering muscle.”
Higgins contends credit union skills when it comes to attracting deposits may have experienced some “atrophy” given the previous rock-bottom rate environment that had consumers parking a lot of cash in liquid accounts and with few institutions giving them reason to move.
“We really haven't had to work on this very hard, but now it's going to be become important. Those that have been going to the financial gym and exercising, they're going to make out well,” Higgins said.
The First Step
Higgins said the first step is to communicate to the CU’s board that what’s happening with deposits is occurring industry-wide.
“It's not happening to just your credit union. Sure, some credit unions and banks are going to be affected more than others,” Higgins said. “But communicate that, let the board know that.”
Higgins said it’s also important to let the board know the deposit rates the credit union is going to have to pay on shares will take them out of their current comfort zone.
“The last time that rates were this high was back in 2006 to 2007,” Higgins reminded. “We've been living in an era where cost of funds has been probably under 50 basis points. Now we’re talking about rates in the 3% range. That may seem astronomical to some, but we have been there before, and you have to sensitize the credit union a bit to that.”
Singing in Harmony
When it comes to the next step for attracting and retaining deposits, Higgins stressed marketing and finance must “sing from the same sheet of music.”
“I know of one credit union where marketing kept on plowing down a certain path with the way they were promoting rates in the marketplace, and finance said we’ve got to stop that because our net interest margin is going to compress to a point where we're not generating enough income to stay adequately capitalized,” he said. “So, make sure these two departments are talking to each other.”
Run the Simulations
Higgins said it’s critical every credit union be running simulations.
“Get out your asset-liability models. Run some net income simulations--not a rate shock test—a net income simulation,” he said. “Run some assumptions out over the next 12 months, 24 months, get a little into the future. I tend to find that stuff very reassuring. It's the fear of the unknown that usually gets you and then, when you identify what the unknown looks like, you begin to realize it’s not so bad and you’ll get through this just fine.”
Higgins said the credit union must also address secondary funding sources with the board.
“That might be getting money from the Federal Home Loan Bank,” he said. “Make sure that you've got enough there to cover what you might need. Just reassure your board that you’ve got the ability to do this. And, yes, it's the most costly way to obtain funds. You hope you don’t have to go there. But you’re going to be OK. Let the board know you have your bases covered.”
Eyeballing Activity
Next step, according to Higgins, is to keep a close eye on deposit activity.
“Start to segment your deposit relationships and try to come up with some strategies for each,” Higgins advised. “For example, highlight and monitor your large-balance members. And maybe even have a chat with them, talking about what you can offer them, what you can do for them.”
After segmenting depositors and formulating strategies to keep them, Higgins recommended CUs monitor the competition closely.
“Scan the environment for what others are doing,” said Higgins, who added he is seeing a great deal of rate movement with CDs and money market accounts now.
“I am seeing a lot of activity in the eight- to ten-month CDs now,” continued Higgins. “I'm seeing people offering these short-term CDs to try to protect their high-balance accounts. They don't want to go too long on that CD duration in case rates start to tick down a little bit, but they're using that as a way to tie up some funds.”
A Meaningless Penalty & A Reminder
Higgins noted that CDs paying in the 2% range are targets for movement, despite the term.
“Yes, there's a penalty for early withdrawal. But that doesn't mean anything anymore (for CDs near 2%) because of the higher yield people can get somewhere else,” Higgins said.
It is also time, according to Higgins, to “double down” on the core business model.
“Anything that we can do that makes us more operationally efficient gets a green light. Anything that improves the affinity with our members that will help us retain those deposits and those relationships,” he said. “Remind members of all the things that you’re doing for them.”
Finally, Higgins said the market has been increasingly turning to relationship pricing.
“Banks and credit unions are saying if you want to get that special rate with us, let's see what the rest of your relationship looks like,” Higgins said. “Use that as an offensive weapon to keep members that are worth keeping. And the other ones, the ones using you just for rate, maybe it's okay to let them go.”