ORLANDO, Fla. -
Not completely, according to one analyst, who is challenging some basic assumptions about deposits, pricing and consumer behavior. After all, notes Dr. William J. McGuire, president and CEO of Scottsdale, Ariz.-based McGuire Performance Solutions, if rate were everything, all of the funds at nearly every credit union would be flowing out and moving to the INGs of the world.
"Deposit pricing is a particularly contentious area in credit unions," said McGuire. "It's a lot more complex in a credit union than a bank. At a bank you price as low as possible. At a credit union it's a much bigger picture. You want to provide as much as possible to the member."
What is necessary to competitively and intelligently price deposits, according to McGuire, is an understanding of the different types of depositors.
In remarks before a session at the annual meeting of the Florida Credit Union League, McGuire put to the test some credit union-held notions about how profitable members can be attracted and retained through the pricing of deposits. One point he noted several times. "My impression is we don't look at the data on the deposit side often enough."
A show of hands among credit unions listening to McGuires's message found less than one-in-five said they had been able to attract all the deposits they had been seeking over the past five months.
The issue within every CU, he noted is that the deposit side of the CU wants to pay high rates to attract deposits, the lending side wants to pay low rates to attract loans, and the CFO is where the two icebergs hit together. The additional dimension, he said, involves acting in the best interests of the next generation of members so that capital is built and the credit union is there for them in the future.
According to McGuire, credit unions must understand there are three different types of depositors:
* Service shoppers: This group wants rewards, and it defines that as service, convenience and the right product. Their motto: "Take care of me and I will rent you my money for a low rate."
* Rate shoppers. This group is seeking a good return on their deposits, but value local liquidity and the credit union experience. Their motto: "We want rate, but we also want safety and liquidity."
* Investors. This group is most recognizable. They want the highest return possible on their deposits or will move the funds elsewhere. "These people are on the Internet every day looking for the highest rate and it's all they want."
McGuire introduced a term he calls "Advantage Deposits," those that come into the CU for a low rate paid and stay with the CU for a long time. "This is very valuable funding. These are going to be the hardest thing to grow because they don't have a rate orientation." Advantage deposits are traditional checking and shares, the kinds of funds that remain on deposit until "probate," McGuire joked.
There are also "semi-advantaged deposits," which pay a higher rate and reprice more rapidly. As credit unions move up through those tiers to the investor level, they lose their advantage, said McGuire, noting there are different pricing strategies for all three.
"Why isn't everybody an investor," he asked. "I can go to ING and get 3.5% on a checking-like product, and 5.75% or 6% on a savings product. All I have to do is take my money out of the credit union and move it and make more money. Why isn't everyone in these high-priced products? I have a theory, and beware all theories, but the reasons members act differently with different deposits is that there are two motivators in bringing deposits to a financial institution. The first is the finance motivator or 'received value,' the interest I see once a quarter on my statement. If I have no other interest than the highest rate paid, if I am an investor, we need not go any further. But we know not everyone is an investor. We have seen money stay there even with rates low. So there's got to be something else."
That "something else," according to McGuire, is his theory of a "whole other dimension of value that your members see when they look at their share or share draft account."
It's a perceived value, he said, manifested in how members see checks being cleared and problems resolved when they enter a branch. "You can create value either by paying up on rate, or paying up with longer branch hours or more tellers or more drive-thru lanes. So there's two ways to create a profitable member."
McGuire added as an aside that he often hears from credit unions concerned they are "cheating" members by paying a low rate. His response is that if you ask people would they prefer 15 basis points more or faster service, they will opt for the faster service.
The non-rate driver is the answer to a long standing question, according to McGuire: why are some deposits supplied at sub-market rates. "The non-rate influence is not written down anywhere, but members tell you every day whether they are sensitive to rates paid by whether they move their deposits or not," he said. Historic behaviors, he said, show the true "revealed preference" of members.
To illustrate his point, McGuire pointed to what he called the "perfect test" of membership behavior: the Federal Reserve. The Fed raised the prime rate 425 basis points from June of 2004 through June of 2006. What's interesting, observed McGuire, is that most credit unions have kept rates flat on core deposit products over that time, and for the most part the money has remained stable.
"Since June of 04 most of the advantage deposits have stopped growing, but they didn't go away," McGuire said. "Members have stuck with you even though they could have gone out on the Internet and gotten higher rates. This is a classic example where the cost of holding money in the credit union has gotten really large. Those members could have moved money, but didn't." The flipside is CDs: everybody has repriced CDs. If you didn't there would be no money in the credit union. That's investment money. As long as we track the market we keep growing. As soon as we drop below the market, we stop growing."
McGuire noted that in credit unions he almost always sees graphs on loan rates and behavior, yet rarely sees the same analysis on the deposit side even though those deposits are half the balance sheet.
"Sometimes when we say 'deposit pricing' we put everything in the same batch and don't recognize that different categories have different motivators, and different categories have different pricing," said McGuire. "You have to tailor the rate to the preferences of your members. There's way too much focus on just rate; there are other dimensions to this relationship."
McGuire acknowledged there is a difference between rate sensitivity on a $3,000 share account and a $30,000 share account.
One answer, he said, is tiered pricing, even though tiers often divide some boards concerned over member equity. One "odd idea" to overcome that, he suggested, is paying a high rate of, say, 8%, on the first $1,000 in a savings account.
"You can grow your deposits by being known as the best credit union in town by using service, convenience and product," he reiterated. "Rate paid is only an advantage to people who care about rate paid. Everybody will take it, but the only place it will work is on the semi-advantage products."
