Credit union deposit rate strategy in a volatile rate environment
Credit unions across the nation face a myriad of challenges as they strive to meet the evolving needs of their members. This necessitates an adaptable and considerate approach to stay ahead of market trends and proactively identify growth opportunities. Among the complex issues that require resolution is how to refine your strategic growth strategy for deposits in a rapidly changing rate environment. While offering a competitive rate based on similar-sized financial institutions in the local area might appear straightforward, this assumption couldn’t be further from reality. The truth is that the interest rates offered by your institution impact you differently than the same rate offered elsewhere. In this article, we will delve into various topics, including essential elements to contemplate when devising a rate strategy and effective ways to manage your offerings proactively amidst external fluctuations.
The unique aspects of rate strategy for credit unions
A paramount principle to remember when assessing your local market is that every credit union employs a distinct approach when establishing rate offerings. The following is a brief list of considerations that may come into play:
- Institutional Deposits Needs: Evaluate your asset size relative to your demand for deposits. If substantial deposit growth is necessary to fulfill strategic investment initiatives, your offerings must be compelling enough to attract new members. This approach should encompass the nature of deposits acquired through long-term investments or liquid funds and how these funds must be collateralized.
- Promotional Rates: Similar to the aforementioned strategy, the determination of what rates to offer and how long should be solely based on the value these new deposits bring to your institution and the period required for these deposits to align with your investment strategy.
- Reinvestment Strategy: The linchpin in designing your rate strategy lies in comprehending the value of deposits to your credit union. Various methods, ranging from Cost of Funds approach to Funds Transfer Pricing to liquidity growth strategies, can be employed to assess this value. Each method will yield a unique value specific to your credit union, differing from that of other credit unions in your locality.
- Competitive Positioning: Consider the image your credit union aims to project to its members. Striving to excel in every aspect might not be prudent, financially or otherwise. Determine whether you want to be perceived as offering the best product quality, customer service, community involvement, exclusive offerings, or something else. Your choices should align with your overall mission while acknowledging that competing institutions might have similar objectives that could clash with your goals.
An in-depth approach
To delve deeper, let’s start with the primary objective of serving members’ best interests while maintaining fiscal prudence. Grasping the value of deposits to your credit union will directly influence your perspective on required amounts, deposit durations, the impact of market trends on value fluctuations, and the potential drawbacks of consistently offering the highest rate in the market. In terms of this strategy, we will primarily discuss standard rate offerings, as competitive pricing strategy heavily hinges on specific relationships with your institution.
Determining your rate strategy
Understanding deposit value is best approached linearly. Begin by establishing your credit union’s lending rate strategy for deposits. While each credit union approaches this ratio differently, lending anywhere from 70-100% of deposits is common, with most institutions ideally averaging an 80-90% ratio. Your target liquidity is contingent on overall asset size, average lending terms, and withdrawal policies for your membership base. This ratio is pivotal in determining the portion of each dollar that can’t be considered part of your overall value proposition.
Next, grasp your credit union’s reinvestment strategy to discern the long- and short-term securities purchased with reinvested deposits. Bonds, T-bills, and high-yield term loans are typical investments that generate consistent interest income on deposits. The average value of these securities aids in gauging the growth potential for new deposits.
Consider each account structure independently. Rates for fixed-term loans can be determined relatively easily, as they involve minimal to no fees. Conversely, savings and checking accounts require a different approach due to liquidity impact and associated fees. For instance, accounts with minimum balance perks still incur costs for your institution, necessitating a conservative percentage to cover those expenses.
Lastly, determine the spread your credit union intends to gain on each deposited dollar. It is important to recognize that reinvestment rates might heavily influence available spread. It’s crucial to align your spread expectations with factors specific to your credit union, like employee/membership ratio, average salary, and branch operation costs.
Formulating a rates strategy
A simplified example formula for determining your rate strategy is as follows:
0.70 (Lending Rate) * 0.045 (blended rate from reinvested/lent deposits) – 0.0010 (cost of services provided) – 0.0035 (spread) = 0.027 (Offered Rate to members)
In this example, offering a 2.70% interest rate on deposits allows your credit union to cover operational costs while achieving the desired return on funds. The formula grows more intricate as additional cost considerations are integrated. Furthermore, remember that the blended rate is heavily influenced by the remaining time on held securities.
Once your institution establishes a formula, maintaining a regular review cadence is essential to account for changing factors influencing your rate of return. Specifically, as the Fed Funds target rate fluctuates and term securities mature, your average blended rate for reinvested securities will shift. This review cadence should align with, or be even more frequent than, the rate changes for your members.
Navigating the terrain of Treasury Management involves a constant learning curve, encompassing both successes and setbacks. The business deposits market, in particular, demands a balance between member satisfaction and revenue generation for your credit union. Introducing a new rate structure, especially without prior experience, can be challenging.
When implementing a new rate strategy, having a team of seasoned consultants with expertise in cash management and working capital strategy is indispensable. Our team of Treasury Consultants is all Certified Treasury Professionals (CTP) accredited with the Association of Financial Professionals (AFP). Tru Treasury was established to assist credit unions in crafting a comprehensive program to generate extra fee and deposit revenue, attract new business members, retain current members, offer valuable services, and robustly compete with banks. For more information, visit us at trutreasury.com.
