By Ray Birch
LOMBARD, Ill.—Credit unions are increasingly facing a big cost-of-funds “bugaboo,” needing to devise strategies to attract deposits to meet loan demand without driving down net interest margins, according to one expert.
And what’s not helping the situation, says Bill Handel, is many credit unions’ deposit-building skills have gotten rusty.
The VP of research at Raddon told CUToday.info it’s critical credit unions improve their approaches to attracting deposits. But Handel believes many credit unions are being too cautious about raising money market, checking and CD rates, fearing their loan rates might not keep pace, given recent signals from the Fed.
“There's a big concern within the industry regarding the cost of funds issue,” said Handel. “We need to get more aggressive in terms of deposit rates, but the Fed is saying no increases in 2019. That will have an impact in terms of loan yields because loan yields are not going to go up. So when credit unions begin to bid aggressively on the deposit side, then they see an impact in terms of margin. They are caught between a rock and a hard place.”
As CUToday.info has reported for more than a year, attracting deposits has been a popular subject of discussion at numerous credit union conferences.
It takes a great deal of skill to maneuver through such a rate environment and protect margins, emphasized Handel, observing it’s been some time since an environment demanded credit unions chase and lock-in deposits in order to remain sufficiently liquid.
An Echo From Great Recession
He reminded the Great Recession turned consumers back into savers—willing to accept rock-bottom rates–and slammed the brakes on loan demand for a good half-decade, driving down loan-to-share ratios. But as the trend has reversed as the economy strengthened and loan demand picked back up.
“Quite honestly, the industry is out of practice on the deposit side,” said Handel. “There hasn't really been a need for deposits for so long that credit unions have lost a little bit of their expertise when it comes to deposit acquisition. I think that many institutions have not really figured out ways in which they can be most effective in attracting deposits without unduly impacting their cost of funds.”
Bill Handel
Handel insists there has to be a much greater level of expertise in managing deposits at credit unions, not only in managing to metrics and having clear standards in terms of what the CU is trying to achieve, but also creating a high-level position to manage deposits.
“Again, we really have not paid much attention to deposits for the last 10 years,” he said.
The Top Concern
The top concern facing credit unions as they chase dollars is one veteran managers will remember, but newer CU leaders might not have faced before.
“The biggest issue for the industry is what are they going to do on the deposit side to make sure they limit how much internal cannibalization happens as they begin promoting their deposit rates out in the marketplace,” he said. “In other words, they want to go to their own members and bring in additional dollars, and they want to attract new members with new dollars. What they don't want to have happen is have a lot of their existing deposit dollars, which they may have at a relatively low rate, price up. The whole issue of cannibalization is the real bugaboo facing the industry now. If they can't manage cannibalization, then their cost of funds is really going to skyrocket.”
According to Handel, credit unions are currently bringing in between 40%-50% new money with deposit campaigns, whereas 10-15 years ago those percentages were 60%-70%, reflecting an era when shops were more accustomed to battling for deposits.
Getting Beyond Rate
Beyond rate, credit unions need to focus on new deposit product design, insisted Handel.
“Today they need to design products to encourage the inflow of new money. And you have to do a lot more training of the staff so they understand how important this is,” said Handel. “Credit unions, too, must be more targeted in terms of their marketing approaches—identify good new money opportunities within their existing member base. I would limit my use of mass media, because mass media is the greatest way to create internal cannibalization. I would use much more targeted media looking for those members whose demographics and other factors would suggest they are good new money opportunities.”
Handel also advised credit unions to look to money market accounts now and be innovative in attracting new money, either by creating new money market designs or adding new deposit tiers.
Facing the Issue
“I think it is absolutely time we face this issue with deposits, and it’s not just short-term in nature,” said Handel. “I think the issue with deposits we are seeing right now has a short-term impetus behind it—because loan demand is so strong—however, the longer-term concerns center on the generational shift in wealth.
As an example, he cited Baby Boomers and Traditionalists transferring some of their wealth to their children.
“It's happening now, but it will get more pronounced over the next 10 or 15 years, and the likelihood that those dollars will just automatically stay with a credit union are not that great, because Millennials and Gen Z are thinking differently about money than their parents,” Handel said.