LOMBARD, Ill.—The arrival of a rising-rate environment demands that credit unions focus on deposit retention and growth in 2016, asserts one analyst.
That new attention will involve deposit product innovation, staff training and watching out-of-market competition, said Bill Handel, VP of research at Raddon Financial Group.
“The Federal Reserve’s decision to begin moving rates, while widely anticipated, is a catalyst for fundamental changes in how credit unions operate,” said Handel. “For seven years we have been in the lowest interest rate environment in history, and the predominant focus has been on loan generation.”
While loan generation remains important for many credit unions, for many more the focus now shifts to how to retain deposits in a cost-effective manner and how to acquire new deposits in a way that doesn’t “decimate” net interest margins, said Handel.
“Even for those credit unions that don’t have a strong need for deposits today, deposit management will be crucial in 2016,” he said.
Steps To Take
Handle outlined key points to consider and steps to take. He noted that for the typical credit union 85% of deposits is found in 15% of the member households – those with over $20,000 in aggregate deposits.
“This means that retention efforts can be focused on this 15% rather than the entire membership. It is very important to monitor the behavior in higher-deposit member households,” he said. “When you begin to see changes in the deposit behavior of this group, you know you need to implement a treatment plan to retain these households’ deposits. Our analysis shows that this group of households has the strongest level of relationship, including loan usage and core deposit balances, so preservation is key.”
Handel cautioned that deposit competition isn’t a matter of watching competitors’ store windows.
“We have seen online competitors already engage in significant efforts to attract deposits virtually,” said Handel. “We anticipate this trend will accelerate as these entities count on rising interest rates to ‘awaken’ depositors and increase rate sensitivity.”
Staff training will be critical, said Handel.
“How many of your front-line or call center staff have worked in a rising-rate environment?” asked Handel. “If you are like most credit unions, the answer is very few. Your staff will have to be equipped to have conversations with members about the implications of a rising interest rate environment and what it means for effective money management. This training should be about both deposits and loans.”
Time For Adjustments
Bill Handel, Raddon
Product changes, too, will need to be made.
“We need deposit product innovation,” urged Handel. “As I said, the historic low-rate environment has resulted in reduced rate sensitivity on the part of consumers. Rising rates will begin to reverse this, slowly at first, perhaps. But if the Federal Reserve follows through with a second rate increase in the first quarter of 2016, we expect an acceleration in rate sensitivity.”
Handle insisted that credit unions need to have a way to be able to satisfy the demand for better rates that a portion of the membership base will demand, without “unduly” impacting the cost of funds.
“Product design will be crucial in this regard,” he said. “Also important is paying attention to metrics such as the new money ratio – what percentage of balances attracted in a deposit marketing campaign are new to the credit union. In addition, for most credit unions, 35% of deposits are from households over the age of 70. This is a significant vulnerability, and credit unions need to have a plan in place for the significant volume of wealth transfer over the next ten years.”