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The CD Cycle: Managing Runoff with Customer Treatments

With rates hovering at zero, how do you keep customers who have been getting more than 150 basis points on their deposits for the past year?

 

More importantly, do you want to?

That is one of the conundrums banks face as $1 trillion of CDs are set to expire in coming months. At a time when the industry is awash in deposits, banks must use this opportunity to focus on quality and relationships of those CD customers even before the CD matures.

Novantas believes banks can use customer-level treatments to drive behavior among current customers and attract new ones. They can then optimize these treatments across channels to deepen engagement with these desired customers. This will allow banks to acquire deposits inexpensively now and reap the benefits over the longer term.

CD portfolios are on pace to run off 40% of balances over the course of a year. That would be modestly higher than levels seen in 2007-2009. The runoff is driven by low rates and the desire of customers to switch from term deposits to liquid savings. This proprietary snapshot from Novantas’ Comparative Deposit Analytics (CDA) platform shows the trend.

Annualized CD Growth | All Terms

Source: Novantas Comparative Deposit Analytics (CDA) Database, July ‘20 | Simple average used to protect participant anonymity

In the past, banks that sought to reprice these time deposits as quickly as possible – for as little as possible – later discovered that strategy didn’t work. Not only did they see large outflows, but they later had to pay more to re-acquire these deposits when rates rose. Banks that can retain these deposits now when they are inexpensive (but not the cheapest in the market) can reap the benefits over the longer-term.

More than 60% of current CDs are priced above 1.5%, according to Novantas research. Many of those customers will feel “sticker shock” when they consider choices for those maturing funds. Banks need to consider multiple strategies for these customers.

Standard Rate Discipline
  • Lower rate sheet rates in line with competitors
  • Avoid ‘area of indifference’ – worst place to be is ‘not the best, not the worst’
  • Acquisition rates dampened for now but likely to return as excess liquidity flows out and branch traffic rebounds
Shift to MMDA
  • Consider proactive shifting of promo CDs into MMDA/Savings to lean into market trends and customer preferences
  • Short-duration offers can help shift deposits while improving retention, delivered on a back pocket or proactive basis
  • Cashable CDs provide similar outcomes if available
Slow Play Exceptions
  • Customers with prior exceptions have self-identified (sometimes with banker assistance) as rate sensitive
  • These clients are at highest risk for near-term attrition, but depending on other characteristics may be long-term persistent
Standard Rate Discipline
  • Lower rate sheet rates in line with competitors
  • Avoid ‘area of indifference’ – worst place to be is ‘not the best, not the worst’
  • Acquisition rates dampened for now but likely to return as excess liquidity flows out and branch traffic rebounds
Shift to MMDA
  • Consider proactive shifting of promo CDs into MMDA/Savings to lean into market trends and customer preferences
  • Short-duration offers can help shift deposits while improving retention, delivered on a back pocket or proactive basis
  • Cashable CDs provide similar outcomes if available
Slow Play Exceptions
  • Customers with prior exceptions have self-identified (sometimes with banker assistance) as rate sensitive
  • These clients are at highest risk for near-term attrition, but depending on other characteristics may be long-term persistent

Since not all CD customers are alike, banks need to assess their anticipated behavior before the CDs mature.

Term Renewal Segmentation

Expected Behavior

Likely to auto-renew at go-to rate/term

Not likely to auto-renew, likely to respond to term switch offer

Not likely to auto-renew or respond to term switch offer

Illustrative Treatment

No additional treatment

Provide term offer with higher rate than current on-sale

Provide savings offer to retain balances in the bank

Term Renewal Segmentation

Expected Behavior

Likely to auto-renew at go-to rate/term

Not likely to auto-renew, likely to respond to term switch offer

Not likely to auto-renew or respond to term switch offer

Illustrative Treatment

No additional treatment

Provide term offer with higher rate than current on-sale

Provide savings offer to retain balances in the bank

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