Many financial institutions have only one rate for retention and acquisition of each deposit product. For example; a rate of 0.50% for a one-year CD of $10,000. The problem with this type of “generic” pricing is that it was dome based on a competitive survey that includes both – base and high-yield rates of the competitors.
As a result, the 0.50% rate that was established for the one-year CD is overpriced for retention and underpriced for acquisition, which means that this institution is paying too much to maintain existing balances and too little to attract new customers. Here is how you can avoid this situation by practicing yield management of deposits.
1) Separate base from high-yield rates: Make sure that your competitive survey distinguishes between base rates and high-yield rates. This means that each of your deposit products, tier and term is listed twice – once with the base rates of each competitor and once with the high-yield rates of your competitors. High-yield is anything that is not “pure vanilla” i.e., specials, relationships, new money etc.
2) Position base rates and high-yield rates separately: Using Deposits Dynamics establish the optimal pricing position for base rate and for highest yield of each product. The optimal pricing position for your base product is calculated to maintain the status quo of your current balances at the lowest level of interest expense. The optimal pricing position for your highest-yield rate is calculated for efficient acquisition of new balances based on the highest-yield rates your competitors offer.
3)Marketing expense vs. interest expense: The best high-yield product you can offer, regular or special, is a relationship product to checking account. This means that if a new customer wants to take advantage of the higher yield of your deposit products, this customer is required to open a checking account at your institution. The reason a relationship account is best suited for high yield is because the premium you are paying to make this product high yield is not really additional interest expense, but rather part of marketing expense since you are acquiring a new customer.
In summary, practicing yield management for deposits is the only way you can achieve your liquidity needs at the most efficient level of interest expense. Moreover, by distinguishing between retention and acquisition rates, you are avoiding overpaying for existing balances and underpaying for desired balances. With Deposits Dynamics, you can establish the optimal pricing position of your base rate as well as your high-yield rate.