Zions Bancorp. says it is finding some success with its unconventional strategy of auctioning certificates of deposit through its Web site.
Since making the CDs available in February at its Zions Direct site, the Salt Lake City company has held more than 250 online auctions, said W. David Hemingway, an executive vice president.
Last week's auction results generated annual percentage yields of 4.95% to 5.04% on CDs with maturities from one month to one year and face amounts of $500,000 to $1 million. Five of Zions' eight banks offer CDs through the Dutch auction service.
Mr. Hemingway acknowledged that the strategy is an experiment. "We're treading where no one has ever trod before," he said. "Seven or eight years ago people experimented with it and quit. We're further along than anyone has ever gotten."
Ray Montague, the manager of deposit research at Informa Research Services Inc. of Calabasas, Calif., said the auction strategy could give Zions a way to avoid the "hot money" problem that bankers face with rate chasers.
With conventional high-yield deposit accounts, "if you're not No. 1 or No. 2, you might as well not be on the list," Mr. Montague said. "This may be a way for them to steer around that a little bit."
Zions prices its CDs like Treasury bills, offering a fixed interest rate and principal amount for a given term and then letting customers bid at a discount. In one auction last week its National Bank of Arizona offered $700,000 six-month CDs in $1,000 units with a rate of 4.25%. More than 30 bidders won, but five others bid too low and did not share in that offering. The market clearing price was 99.66, so all the winning bidders got an effective yield of 4.95%.
Mr. Hemingway said the auctions usually attract around 50 bidders. He would not discuss the financial impact of the auctions, except to say they help Zions attract new business.
"They tend to be wealthier customers," he said. "They have to open a relationship and put some money here."
With the financial crisis of last summer, it is too early to tell how rate chasers will respond when markets return to a calmer state, Mr. Hemingway said. "I think that's a question nobody knows right now," but with the collapse of NetBank Inc. in September and investor jitters over credit exposure at companies such as E-Trade Financial Corp., "we've got more customers coming here."
Mr. Montague said no competitors have come forward with CD auctions. ING Group NV of Amsterdam, Citigroup Inc. of New York, and HSBC Holdings PLC of London offer Internet-only accounts with high yields, but they simply take all comers, he said.
"Instead of trying to go head to head with the Internet banks like ING or HSBC," Zions' strategy "is to come out with something a little bit different," he said.
Zions Direct also offers flat $10.95 commissions on municipal bonds. "We lose money on every trade," Mr. Hemingway said. "We make it up on the banking business."
The goal is not to remake the fixed-income business, he said. "Our strategy is to provide our customers with a great vehicle where they can buy fixed-income securities at very competitive prices, and hopefully they will do their banking business with us because we give them such a great deal."
Zions also wants to attract more affluent customers.
"People who buy bonds have a lot more money than people who don't," he said. "Those are the customers you want."
This quarter Zions plans to introduce commercial paper auctions, Mr. Hemingway said. "We're building this out one day at a time."
