“With an end to the Fed's stimulus program, we'll see rates on both deposit and loan products increase to pre-recession levels,” said the GOBankingRates' report.

CU Times gathered deposit pricing advice from four industry experts.

Although deposit interest rates bottomed out in the second quarter, they are slowly climbing and anticipated increases next year will impact credit unions, Steve Rick, CUNA Mutual Group's chief economist said.

“With the Federal Reserve expected to raise interest rates in 2015, many credit unions are forecasting possible deposit runoff next year as some interest-rate-sensitive members look for higher returns elsewhere,” Rick said.

Despite those challenges, credit unions are expected to outperform most banks in deposit retention because credit unions have more retail and core deposits and fewer commercial deposits, he said.

“For many credit unions, rising interest rates are just what the doctor ordered,” Rick added.

Setting extremely high deposit rates or low interest rates can draw new members, but credit unions should take many factors into consideration before plunging into the deep end of the pool.

“The first tip is that you have to conduct a marginal cost analysis,” Rick said. “You also have to keep in mind how rate-sensitive your members are and to focus on rates that will have the biggest impact.”

“Having higher rates for savings and share drafts doesn't usually bring in that many new members, so it might be best to focus on raising rates for CDs and money market accounts,” he concluded. “Those are factors each credit union should explore.”

With today's current bottom-of-the-barrel rates, it's tough for credit unions to dish out rates that are distinctively different from the competition, but it can be done, according to Denny Graham, president/CEO of FI Strategies, a St. Louis-based strategic planning firm.

A perfect example is the recent GoBankingRates study, which noted that credit unions had a 75% higher savings rate on average than banks.

“Rates being 75% higher doesn't say much in this low interest rate environment. Seventy-five percent better than .10% is a whopping .175%,” Graham said. “But having said that, most credit unions don't really need deposits; they are awash in cash.”

Determining the right rates can be tricky, he said, so it's vital for credit unions to examine both the immediate and long-term impacts before adjusting them.

Sometimes it can be smart to beat banks, he said, but credit unions don't have to clobber the competition.

“Unless the credit union's strategy is maximum return to members, which is not a bad strategy, it's good to beat the competition, but we don't have to lap them,” he added.

The bottom line is that credit unions must look closely at all factors, Graham said.

“Higher deposit rates either mean a lower net interest margin, higher loan rates or more dependence on fee income to produce revenue,” he concluded. “If it's part of an overall strategy; it's a good thing.”

“Beating banks should never be the point for the credit union, but I understand the short-term buzz an organization can get from seeing the marketed rate differentials,” CU*Answers CEO Randy Karnes said.

The real point in setting savings dividends is to reward members for their patronage of the credit union, not as a competitive position, he said.

“Having the highest savings rate for a simple competitive advantage over a bank is just bubblegum for marketers, unless it leads to the overall success of the organization,” he added. “If you develop the habit of making your rates higher than the banks, just to be higher than the banks, then something has gone awry in your cooperative strategy.”

Karnes encourages cooperatives to develop a pricing strategy that is defendable, repeatable and simple enough to correlate with the organization's culture and business goals.

“We do not play the same game as banks, we do not have the same balance sheets as banks and we do not have the same owner goals as banks,” he said. “So, why would we use them in setting rates at all?”

But Karnes acknowledged that setting rates this way could work as a marketing tool. “The only way I can think of to afford the strategy of having higher savings rates than a bank is to consider it a marketing strategy, where you have identified the marginal cost paid to the saver as a marketing cost,” he said. “But then you must have the discipline to use your marketing budget to justify the rate. In other words, reduce what you spend on marketing that might attract members and pay the members that actually show up.”

“Do not fall into the trap of setting a high price just to impress,” he added. “Work hard to communicate the impression that this is the right rate right now.”

Cooperatives should maximize rates for members based on stretching to deliver the utmost in value to the entire membership, Karnes said.

“The prices you set should be based on an internal scorecard, and you should always be able to defend that, no matter what others are doing,” he concluded.

Many credit unions have taken an illogical approach to setting rates, according to Dr. Randy Thompson, Ph.D., CEO of TCT Risk Solutions (formerly TCT Inc.), a newly formed CUSO based in Eagle, Idaho.

“Most credit unions use what I call the 'looking over the fence' process to set deposit rates,” said Thompson, who is also a member of the newly-founded VirtualCorps.com, a Great Falls, Mont.-based consulting firm that provides expertise and education for credit union executives.

“They look at the other institutions in their market area, examine what they are paying and then create a rate that mirrors what they see.”

That simplistic approach doesn't seem to work well, he said.

“As a very simple example, Credit Union A looks at Credit Union B, and Credit Union B looks at Credit Union C and Credit Union C looks at Credit Union A,” he explained. “Based on what they see, rates are set.”

The question in that scenario, according to Thompson, is: Who is really setting the rates?

“Setting high deposit rates is likely to attract deposits which will cause assets to grow,” he said. “As assets grow a credit union's equity ratio declines. For example, in 2013 a credit union was offering 1% rate on shares.”

“This is 10 times the market rate,” he continued. “From June to December, their assets grew from $65 million to $95 million. This caused the equity ratio to decline from 10.2% to 8.1%.”

Some cooperatives are looking at rates with a more logical perspective, he said.

“Some credit unions are employing a more internal process to set rates,” he said. “They use what I call the dividend payout ratio.”

“Based on internal metrics such as core-to-high yield deposits, expense ratio, relative interest rates and loan-to-share, they create an internal marker for the percent of interest income that should be devoted to interest expense (dividends),” he explained. “This marker becomes a dividend budget and can distributed to each deposit type based on rates offered.”

The extra attention to detail has paid off for many.

“Credit unions using this methodology are actually paying well below the bank average while improving their net interest margin,” Thompson said. “It also provides an accurate and clear estimation of the total dividends costs in advance of month end.”