There’s an old bumper sticker that was seen often in Texas in the mid-80’s after the oil boom and bust: “God, please give us another boom, we promise not to waste it this time”.
This reminds me of when you could get 6.01% APY on your checking account just for swiping your debit card. Those were the Good Old Days (circa 2006) when Fed Funds were 5.25%, average (not exceptional) return on equity was 13%, spreads of 3% or more on loans were common, and even small mortgage departments were printing money. The financial industry’s demand for raw material in the form of deposits was massive. At the time, one innovative solution for credit unions to compete with global scale financial supermarkets was to market a checking product that offset high interest rates with requirements that drove interchange income and alternative delivery channel adoption.
Unfortunately, the gears of finance ground to a halt shortly after these “Rewards Checking” accounts became commonplace and rates plummeted. Credit unions faced a dilemma — deposits were less valuable but members liked the above market rates. Killing a reward product would be a tough sell to a credit union’s stakeholders, and with higher rates “just around the corner” most credit unions continued their programs to keep relationships from walking down the street. Members were conditioned to expect high rates.
Now, we face a future filled with the three “knows”: 1) things that we think we know (next move in rates is up), 2) things we know that we don’t know (when the next move in rates comes), and 3) things that we don’t know that we don’t know (external factors that will change what we think we know). So how does reward checking fit into this construct? Well, we think we know rates are going up so, by extension, the expectation is that rewards checking rates will just rise in tandem (hopefully more slowly than rates on loans rise). But what if there is another factor at play?
According to the Federal Reserve, time deposits have been cut in half over the past five years. A material amount of these deposits have flowed into rate sensitive, liquid products like MMDA, savings and interest reward checking accounts. However, demand for term products hasn’t changed; it is just being masked by the current rate environment, and that puts credit unions with rate sensitive products, like interest reward checking, in a dill of a pickle. Do you risk a bet that market rates for deposits will rise slower than rates on your loan portfolio (the “hope” strategy)? Do you risk a bet that an irrational competitor won’t come into market with a higher rate rewards account (the “prayer” strategy)? Or do you take a less theological approach and build products that give you the flexibility to meet any challenges that come (the “tune up” strategy)?
The tune up strategy starts with the understanding that giving members the ability to bank how they want is the best acquisition and retention play available. If a member wants to keep the bulk of their day-to-day account funds in a checking account with separate savings accounts for each savings goal, let them and reward them for it. Building flexibility into your accounts, like rewarding based on relationship rather than just transactions, will help retain valuable members who drive a material amount of franchise value. This “relationship pricing” component of the product allows members to receive rewards without changing the way they bank. Better yet, building a reward structure that is non-interest bearing (using tiered cash rewards) will further reduce interest rate sensitivity and deposit beta. Summed up, relationship pricing on deposit accounts reduces friction and pain points for the member, and adds a competitive differentiator for your institution.
Restructuring a rewards product set is different than just converting free checking to a fee for service model. This is not a decision to be taken lightly or something that lends itself to cookie-cutter products. Each credit union has its specific needs and goals, requiring flexible solutions that can meet their particular requirements. If your credit union doesn’t have expertise in this area, you need to build it or buy it. Deposit products will be a focus of management, regulators and members in the near future. Prepare for it now, or risk losing members down the road. Are your checking products ready for a tune-up?