Competitive Deposit Management Strategies & Rate Adjustments Could Mean Growth for CUs

The economic circumstances of the last few years have given consumers ample reasons to deposit more frequently. In the wake of the pandemic-induced slowdown in spending as well as recovery initiatives vis-à-vis stimulus checks and Paycheck Protection Program loans for businesses, most popular banking institutions have seen a sizable upturn in deposit numbers.

However, these excess deposits – in tandem with ripple effects from the market’s overall volatility – have altered banking’s traditional model for balancing deposit intake alongside loans. As of Q2 2022, the loan-to-share ratio for the industry remains at 74.8%, a marked difference from the 84% documented at the end of 2019. Many of the largest commercial banks have loan-to-deposit ratios well under 70%; with deposit volume generally outstripping the number of loans being given out, banking entities have less of a pressing need to pursue a greater share of consumer deposits. This dynamic has also resulted in banks capping their rates at low numbers, with many saving accounts boasting interest rates between 5 to 10 basis points. In light of the current market outlook, it doesn’t appear as though this trend will be changing anytime soon.

While these conditions pose challenges, they also bring opportunities for credit unions to gain ground among consumers. Like commercial banks, credit unions have seen a significant inflow of deposits amid the pandemic. But unlike most banks, credit unions are in a unique position to seize this surge and highlight the benefits of storing money with them. This is due in part to how banks have responded on the user end to 2022’s economic tumult: While the Fed has continually jacked up interest rates, banks’ deposit rates have by and large stayed the same. Considering present loan-to-deposit ratios and commercial banks’ principal need to generate returns, there’s little incentive on their part to offer competitive pay rates on deposits.

Fortunately, credit unions are not tethered to generating profit margins and providing for shareholders in the same manner banks are. With that in mind, credit unions can take advantage of banks’ relative inflexibility and focus on profit maximization by offering better rates. While credit unions may not necessarily need more deposits at this precise moment, a thoughtful deposit management strategy could mean a larger member base down the line. Because credit union users are members rather than purely transactional customers, presenting superior deposit rates could afford a meaningful opportunity to stand apart from banks and reemphasize provided value during a period of economic malaise.

Any potential change in deposit management strategy only stands to sharpen credit unions’ competitive edge over banks in this arena. Per standard rate data compiled by Curinos, the average savings rate for U.S. credit unions is currently 33 basis points; in contrast, traditional banks are averaging 14 basis points. That said, this average is hardly universal, and some credit unions have kept their rates hovering around the lower end of the spectrum. Many financial institutions have determined that because deposits have been consistently high while loans have been relatively low, the need to drive loans and membership supersedes any serious alterations to deposit management strategy.

Although this approach is valid and the reasoning behind it is sound, it overlooks the transient window of opportunity generated by 2022’s economic landscape. Credit unions have a chance to significantly drive membership through competitive rates and proper marketing that redirects the spotlight toward community-oriented financial services; when inflation and recession worries are as widespread as they are right now, everyone is a prospective credit union member.

Credit unions ought to be shaping the discourse by drawing connections between the low rates national banks are paying and ever-increasing interest rates. Beyond advertising, this means having conversations with prospective members that leave no ambiguity about the money they’re leaving on the table: “The Fed is at 3.00%, and most of the big banks are only paying out 0.01% on savings annually – have you looked at your bank statement recently and do you know what you’re getting? We can offer you 1% and you can earn more money without lifting a finger.” Superior rates tell a straightforward and compelling story; it’s just a matter of spreading the word about it.

Even with these clearcut advantages, credit unions still have several complicating factors to sort out. Chief among them is determining the appropriate rates: Is 0.5 or 1% enough to attract new members in your particular market? This challenge is further compounded by the competition offered by online banks, many of which offer 2.00% or higher on interest rates for savings accounts.

As is usually the case when singing credit unions’ praises, being explicit about the myriad perks they provide on top of better rates is the most straightforward approach for enticing prospective members. While online banks may extend the highest rates, they don’t provide the intimacy or reliable service offered by physical locations. By the same token, big banks may boast name recognition and the impression of dependability that conveys, but credit unions fulfill all of the same functions with better rates, and more often than not, a more palpable sense of community.

Historically, user engagement rises commensurately with each whole percent rate increase. Based on analysis from Curinos Comparative Deposit Analytics surveying more than $3 trillion in account-level deposit data, hitting 1% has been shown to stir customer movement for banking institutions, with subsequent tipping points at 2%, 3% and so on. There are clear advantages to hitting bigger numbers, and while credit unions shouldn’t promise more than they can reasonably deliver on, they should make full use of the flexibility they possess that larger banking entities lack. With the right deposit management strategy, credit unions can convert competitive rates during lean years into robust membership numbers poised to remain steady in any economic environment, boom and bust alike.

Adam Stockton Head of Retail Deposits Curinos New York, N.Y.