How – and why – credit unions should slow the rush to the best rate

Credit unions’ deposit negotiation skills have atrophied during the past 15 years. Now, rates and competition apply pressure on staff through depositors who are engaging branches and contact centers looking for high yields and short commitments. As deposit volumes clearly begin to favor higher rates, credit unions must develop their ability to negotiate with depositors to a mutually beneficial outcome.

Look at institutions’ yield on their deposits in first quarter, and you’ll see why. Funding costs are up, and if they continue the trend from of first quarter, they will explode during 2023.

Credit unions share certificates continued their rapid rise in first quarter, up 50.1% year-over-year, according to a report by Creditunions.com. “Share certificates now make up 19.1% of total shares outstanding,” the publication observed. “The cost of deposits also rose 51 basis points to 0.99% in the first quarter as deposits garnering higher interest rates make up a larger percentage of the share composition.”

Credit unions’ competitors, banks, have seen volume follow higher rates. Their average CD yield was 2.99% in first quarter, yet the median was only 1.94%; averages are only different from medians when volume sits above or below the median price. For credit union leaders, the cautionary tale in bank’s data is volume booked 1% higher than the median price offered depositors.

If people are getting 2.99% at banks, what does that mean they’ll expect from credit unions? It’s creating significant risk for leaders who believe they can hold on at lower than median prices. They risk losing relationships, and instigating greater struggles to obtain funding in the necessary volume. The question is: How much must they raise rates to obtain volume?

Spoiler, the answer is not offering depositors the best rate available. But, to manage the mounting pressure on staff, leaders must develop negotiation processes that result in mutually beneficial rates for both credit unions and their members.

Loans manufactured from deposits

All successful deposit strategies begin with credit unions’ financial model. Loan interest keeps the lights on. They pay people for their deposits because banking institutions are loan factories; deposits are the raw material for those loans. For any manufacturer, the price paid for a raw material determines margin, and even the company’s ability to price products competitively. Members are similar to vendors who sell materials to a manufacturer in that way.

Manufacturers negotiate with material vendors because prices paid are the starting place for the rest of their financial performance. Pricing and selling deposit accounts are the same. It’s about gathering the needed funding volumes at the lowest possible cost.

What would happen if a manufacturer stopped negotiating prices because staff believed, or had no process and training to address, that vendors will not accept less than the best possible price? The result would be a dangerous progression where the company systematically bleeds away its financial strength.

When staff acts on the belief that people will only accept the best rate, it’s similar to a bank I observed when I started in banking decades ago. Believing price uniformity and transparency are fair and efficient, they posted all loan and deposit rates in the lobby. While it may have been very efficient, it certainly was not fair or wise. Borrowers represent different risks to the institution; offering all the same price eliminated the bank’s ability for reward from taking risk. But what’s worse, posting a rate meant the bank entered every loan interaction at a rate potentially lower than the borrower would have accepted.

It works the same way for deposits. Vendor negotiation is more advantageous when you know their price; it’s better to tease out their number than assume they will push for the best price available. An effective acquirer of raw material obtains an oversized volume at undersized prices. The mindset that members will always demand the best rate is financial self-destruction. Instead, focus on determining what rate would makes members happy.

Deposits aren’t only money

To negotiate with members, while credit union leaders must understand depositors as suppliers, they are also different from suppliers in a meaningful way: The purpose of selling raw materials for vendors is to make money, whereas depositors’ objectives vary.

Staff members on the front line are busy people with a lot to think about; they need leaders to draw them back from focusing solely on the institution’s prices. All must focus on the spectrum of members, each with their own goals and variables. The key is to let sleepers sleep, show respect to the curious, and negotiate skillfully with rate shoppers – current or prospective members alike. What are their reasons for visiting the branch? What are their deposit goals? Are the savings for a son or daughter graduating next May? Are they aware of the relatively small difference in earnings – in dollar terms – between institutions? Could the funds be needed early for a surprise expense?

Yes, efficiency is important in the frontline role. Team members want and need to know where the financial institution draws the line on pricing. Depositors, though, think of money as a tool for their goals and their life. Starting there is the groundwork for any negotiation.

Margin comes from art and science in pricing

Any spread between deposit and loan interest rates would be profitable if leaders only had to manage interest expense. Banking, however, has sizeable fixed costs and capital requirements, and they mandate a more material spread between aggregate deposit and loan pricing. Historically, before 15 years of low rates, credit unions achieved the needed margin from pricing excellence on both sides of the balance sheet.

Credit union leaders must take a multifaceted approach to develop organizational excellence at deposit pricing. It is no longer enough to communicate pricing expectations to staff.

We see organizations begin by educating the frontline on cost of funds, and its impact on them and their employer. If they don’t know that their actions have consequences, its human nature to go for the most immediate praise. In the moment, without education, they often will turn to the depositor and offer the highest interest rate they can, an approach not aligned with successful deposit gathering. Give them an understanding of what is and why.

Then, leaders need to recalibrate pricing spreads into meaningful strata. They can create a process for frontline staff that correlates to the strata – low, middle, and high – developed. The word “meaningful” is important. Offering to upgrade a member to the middle strata must feel meaningful, a move up from 1.05% to 1.08% would not feel material. Likewise, if the spreads are too large, it’s also problematic. For example, telling a depositor the standard rate is 0.55% only to graduate them to 4.75% in one giant leap is not optimal. The pricing committee must consistently recalibrate felt-fair pricing strata; only then will a sequential offering process earn adoption by the front line.

Staff also need training on strata-based negotiation. They should start by respectfully engaging members about their objectives, which can reveal the desired term, liquidity needs, or worries about the direction of interest rates. At a high level, staff should move sequentially from the lowest strata, to the middle, and eventually to high strata in their conversation with the member.

Deposit negotiators need an expected starting place in their minds so they do not revert to offering members the best rate available. An expected procedure tends to slow the rush to top pricing, allowing more low- and middle-strata pricing to be accepted by depositors.

Incenting volume at the best price for the institution

Leaders should track and report to team members and share pricing success stories with the front line promptly after they occur. Staff need to see happy members walking out with good rates, especially when they are not the best rate. Use those successes as opportunities to role-play and coach staff; the focus on where the process has worked will energize teams because they will believe they know how to handle negotiations.

Providing staff with reports on their volume, price, and profitability also will align their self-expectations with metrics that produce profits, and capital. A credit union may choose to provide financial incentives based on the contribution to financial success; it’s not based on volume or cost of funds alone. The best approach is to pay a portion of a staff member’s incremental impact on profitability – defined as a combination of volume and price booked relative to wholesale funding options.

Leaders can support efforts on the front line by avoiding rate-focused promotions or contact with maturing time deposit owners. What member wouldn’t take a higher rate on a special offer at the term of their CD? Credit unions must avoid awakening otherwise content members who may just renew automatically.

Right now, institutions across the country face a year where their interest expense may rise by seven to eight times. They must slow the rush to the best rate. There is much more than an improved cost of funds at stake. Upgrades to products, processes, people, pricing, promotions, and presentation are necessary for the organization’s future franchise value. Soon deposit excellence will set credit unions apart.