The War Is On

Along with the usual holiday festivities, in my household December is a month for financial move-making. The tradition entails things like cashing out savings bonds that have been sitting in a safe deposit box since the ’80s, depositing all or a portion of the annually permitted $6,000 into a Roth IRA, and a lot of procrastinating and second-guessing around these things, because thinking about money can be scary, stressful and exhausting.

For my December 2022 financial move, I took a significant chunk of change out of my credit union money market account that was paying me a 0.05% dividend rate and put it into a Vanguard Federal Money Market Fund with a 7-day SEC yield of 4.32% after being alerted to the opportunity by my Dad. I made the decision based on the fact that I had an existing relationship with Vanguard, could withdraw money out of the fund at any time, and would earn enough interest by the end of 2023 to cover the majority of the cost of a trip to Europe I have planned this spring. And, at the time, my credit union had no high-yield savings offers available (to be fair, the credit union is now offering a 15-month CD at 5.00% APY).

The process was simple – I made one phone call to Vanguard to set up an individual brokerage account, and transferred the money from my credit union account online. I wasn’t required to speak with anyone from the credit union, saving myself the embarrassment of having to explain why I was taking my money out of the institution.

The other day, I checked my Vanguard account and saw it had already made about $200. It was first time I felt genuinely excited after looking at an account balance. Like, I squealed and did a little happy dance in my chair.

This financial move I made, while thrilling for me, represented a real-life blow to a credit union that wants to hold onto its deposits. And if I could do it so quickly and easily to my credit union, it must be happening to other credit unions too.

Turns out it is – or if it hasn’t yet for some credit unions, it’s coming. While introducing a Filene Research Institute webinar, “The War for Deposits,” in late January, Filene Research Director Paul Dionne said, “If you haven’t felt a squeeze on your deposits yet, get ready for 2023.” The webinar then went on to make sense of how the industry ended up in its current battle for deposits, and recommended ways for credit unions to weather the war (here’s recommendation number one – given that I’m so pleased with my recent Vanguard transaction, maybe don’t bother trying to get my deposits).

So how did credit unions find themselves on the front lines of this face-off for funds? Dionne summarized it at the top of the webinar as a ripple effect of the pandemic – COVID stimulus payouts and other COVID-related economic factors changed our macroeconomic climate, leading to rising interest rates and a near-universal tightening of liquidity. As a result, deposits hold economic value for the first time in decades.

Mike Higgins, managing partner for Mike Higgins & Associates (who, by the way, has been an excellent source for CU Times economic stories in recent months), went deeper as a speaker for the webinar and in a research brief, “Who Moved My Cheddar? The Sudden War for Deposits.” He explained that COVID stimulus programs and supply chain shortages funneled a lot of money into the economy, leading to major growth in the money supply and high inflation. To tame the inflation, the Federal Reserve aggressively raised the federal funds rate, which gave consumers the incentive to shop around for the best rates on deposit accounts. And, with inflation draining consumers’ cash reserves, the supply of deposits has dropped. At the same time, the investment spread on deposits (the amount an institution can earn by investing its deposits) has expanded significantly on institutions’ balance sheets, giving them the ability to attract deposits by raising the rates paid to consumers. What’s more, four factors are squeezing liquidity for institutions: Available-for-sale (AFS) securities are no longer the source of liquidity they once were, borrowers are making fewer loan prepayments, credit card and home equity loan balances are up, and, in a strategy known as quantitative tightening, the Federal Reserve is taking money out of circulation.

Now, credit unions are competing for deposits with other credit unions, banks, brokerage firms and neo banks. And Higgins pointed out that thanks to technology, it’s easier than ever for consumers to take their money wherever they like (just look at how painless it was for me).

So what are credit unions to do? Higgins outlined 10 tips in the webinar and his research brief, including the following:

• Segment out members according to their deposit relationship with the credit union, and come up with a strategy for targeting each segment. Identify large-balance members – those you most want to keep the most – and closely monitor deposit outflows.
• Be prepared to make difficult decisions for the sake of lowering the credit union’s expenses if net revenue declines. For example, with the slowing of mortgage and refinancing activity, credit unions may be forced to let go of commission-based mortgage staff instead of offering them salaries to keep them on board.
• Refocus on your core business model. Invest in projects that help reduce expenses or increase member affinity, and put unnecessary investments on the back burner.

During the Filene webinar, Harland Bengs, CFO for Farmers Insurance Group Federal Credit Union ($1.3 billion, Burbank, Calif.), gave some real-life examples of how his credit union has been approaching the battle. In the second half of 2022, it made its online savings account more attractive by raising its rate (it’s currently at 3.25% APY), and eliminating its tiers and minimum balance requirement, while leaving money market rates – which had already drawn in healthy balances – static. This led to an influx in online savings account deposits, according to Bengs. It also rolled out a special version of its online savings account for employees, which offers an additional 2% APY on employee balances up to $10,000.

To the credit union I recently pulled a chunk of my cash out of, I’m sorry. But I’m sure you’ll be fine. I hardly classify myself as one of your large-balance members. Plus, who can blame me for following the advice of wise old Dad while partaking in a family tradition?

Natasha Chilingerian is executive editor for CU Times. She can be reached at nchilingerian@cutimes.com.