By Ray Birch
LAKE FOREST, Ill. – Credit unions are at risk of losing those government stimulus funds that have flowed in, according to one economist, who is not just predicting deposit rates will begin rising soon but is also offering some suggested strategies.
Michael Moebs, economist and CEO at Moebs $ervices, said that with vaccines and therapeutic drugs close to Americans’ doorsteps, consumers and businesses will begin rethinking the $3.4 trillion they have deposited in banks, credit unions and savings banks.
“Consumers will follow the three ‘S’ rule: spend, save and shift funds,” stated Moebs, whose company just completed an analysis of more than 3,000 depositories, Wall Street firms, the Federal Reserve and the U.S. Treasury. “Some will spend excess funds because they have secure employment, and the lockdowns and social distancing have caused pent-up demand for goods and services. Others will not spend, but save the funds and wait until next summer when the coronavirus has passed before spending again. This group includes consumers who are not back to work, or working from home, or are out of work and searching for a job. Finally, a healthy number of savers will shift their funds and invest in higher-paying deposits, stocks and bonds.”
That shift will occur as rates begin rising—and that will be soon, said Moebs.
“Deposit rates, they are changing,” said Moebs. “The experience of the past eight months of falling rates is about to come to an end. Rates were falling before the coronavirus appeared in Wuhan, China in October of 2019. The basic share rate hit a recent high in March 2019 of 10 basis points and fell to a low of four BPs in April 2020. Sixty month certificates of deposits hit a high of 128 BPs in April 2019 and have fallen to a low 35 BPs now.”
Moebs said money has flowed out of CDs, and along with new stimulus funds, moved to short-term instruments—checking, savings and money market deposits.
“The table (above) shows rates for these short-term services mirror the Fed funds rate,” said Moebs.
The Key Element
Rates and transaction accounts are the key element to retaining deposits, according to Moebs’ research.
“For the short term, the funds are with savings, interest checking and money market deposits. Offering rates triple the Fed funds rate will send a signal to savers your financial institution wants their money,” said Moebs, citing options he recommends financial institutions start thinking about now to preserve deposits. “The Moebs study indicates the 12-month CD will play a critical role in retaining funds. A high rate in this service, greater than 1%, will be an eye opener for the saver.”
Artificially high rates with conditions and reward programs have lost favor with many savers, said Moebs.
“Relationship pricing, especially with three or more services linked to fee and balance reductions, increases consumer value and becomes essential for the financial institution’s bottom line,” said Moebs. “Checking accounts and all related transactions must be in perfect order. Streamlining transactions in a single account and providing dollar credit as the reward is coveted by the consumer and vital for the depository to keep funds from fleeing. Increasing mobile wallet and virtual banking adoption and usage is essential in 2021.”
Michael Moebs
A Red Flag
There was little movement of rates on any deposit services for November, according to the Moebs Rate Analysis.
“But it is prudent to monitor rate movement in the weeks and months ahead,” Moebs said. “When the rates start to increase, this is the red flag for depositories the spending and shifting of funds is underway. Be ready to protect your COVID dollars with numerous, quick but small rate increases.”