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Improving acquired high-cost deposits

How to reduce merger pains that result from rate changes and deposit attrition

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  • Written by  Neil Stanley, consultant & banker
When your bank acquires another you'll find large depositors who you won't want to lose. A fair way to keep their business without overpaying is the "limited edition savings account." When your bank acquires another you'll find large depositors who you won't want to lose. A fair way to keep their business without overpaying is the "limited edition savings account."

Ms. Jones had her money safely invested in a deposit account at a special promotional rate. But when her institution (Bank A) was acquired by Bank B, the special promotional rate quickly surfaced as a market outlier.

Bank B didn’t want to pay that rate.

Ms. Jones didn’t want to accept a significantly lower rate.

So who wins and who loses?

Management of Bank B knew that an above-market interest rate for overnight money was a poor pricing decision. However, management didn’t want to put all the newly acquired account balances at risk with a dramatic reduction in rate. Bank B decided to employ a special-purpose savings account.

Let’s take a deeper look behind the strategy of Bank B, which was able to successfully retain most of the accounts like Ms. Jones’ without simply continuing the high interest rate that Bank A had been paying. Ms. Jones is now a happy customer at Bank B knowing that her accounts are a wise, safe choice.

Challenge for every merger

Aligning deposit offers and pricing in merger situations often causes bankers to experience—or inflict—discomfort. The new deposit clients are sensitized by the merger announcement and related activities and any perceived loss of value can lead to attrition.

When an acquired bank announces new product structures and pricing that depositors didn’t choose, but had chosen for them, problems may result. This event can create a call to action for depositors that can be detrimental to the underlying purpose of the merger—profitable business expansion.

Putting a special deposit strategy into place maximizes the affordability of higher interest rates while aligning proper pricing across your product set.

Use tools you know: a simple savings account

Mergers can be traumatic events for all involved. Depositors will react to news that things are changing. You don’t want to push people away. But Bank B was vulnerable to Ms. Jones’ opportunity to take her money elsewhere.

Frontline bankers often find themselves in a match-it-or-lose-it position. Instead of simply matching the acquired bank’s pricing or that of the competitor down the street, leaders can create a better option.

Operational changes generally create a climate of tension between retail, compliance, finance, and information technology departments when new ideas are introduced. From this perspective, it makes sense to turn to tools that are already in the banking toolkit.

Offer a savings account that pays a CD rate. A simple savings account proves to be very useful in balancing the interests of the depositors; the bank; and frontline employees.

This account, often called “Limited Edition Savings,” can be a great bridge from the old to the new. At conversion the bank automatically transitions accounts that bank management is unwilling to retain at interest rates previously offered.

Although this account has the appeal to depositors of a traditional overnight deposit account, it is not traditional. By prohibiting any new deposits, the account life lengthens because the rate paid has become valuable and scarce.

Bank B prohibited Ms. Jones from adding new deposits to her account in order to gain the following:

• Greater stability and duration of the deposit balances justifying higher interest rates.

• Avoidance of the opportunity of the depositors to consolidate lower-yielding accounts into the high-yield account

Align pricing through process

To keep interest expense down while maximizing the retention of deposits and depositors, a special-purpose savings account is a great way to systematically stabilize relationships with new depositors without abandoning pricing discipline or allowing grandfathering of old accounts. The latter creates burdensome and confusing account options.

Although most financial institutions maintain a simple pricing structure within limited edition savings, the product can be priced with tiers. In addition, incremental rates may be adopted where relationship pricing is justified.

With such an approach, the bank has a better opportunity to price deposits profitably and use these accounts to retain a substantial portion of deposits that would otherwise leave. This structure can also be used on an ongoing basis with CD renewals and following deposit promotional specials.

Banks can transition existing deposit balances to a special purpose savings account and when appropriate open a second account as needed as a companion account. This companion account should be one of the deposit-accepting account structures already promoted by the bank. By offering the combined features of these two accounts the depositor can best achieve yield results they are seeking alongside the other deposit features they require.

Answering common questions

Here are some questions I’ve been asked about this approach:

Q. Is there a maturity date on this special account?

A. No.

Q. Is the interest rate fixed?

A. No, the rate on this account is variable. However, it is not a teaser rate. The rate offered should be consistent with what the bank would be willing to continue to offer given the current interest rate environment. The bank can set the rate and the depositor can withdraw anytime they believe the rate is too low. Both parties have some control.

Q. What if every customer wants a Limited Edition Savings Account?

A. It’s important to understand that a Limited Edition Savings Account should never be promoted or offered generally. The idea here is to have an exclusive, invitation-only product for qualifying depositors. This account is:

• Designed to defend deposits, not to attract new ones.

• Mean to be the retail bankers’ solution of last resort, reserved for existing depositors who otherwise would conclude that none of the bank’s conventional products are suitable for continuing the relationship.

Q. How does this appeal to my new customer?

A. Given the extended life of this exclusive savings account compared to typical money market savings accounts, the bank can afford to pay more and the depositors are satisfied with this account that can be priced competitively with CDs while the depositors still have contractual overnight liquidity.

Q. What rate would a bank offer on this savings account?

A. The bank retains control of pricing this variable-rate, special-purpose savings account, and although it should not be formally indexed, the pricing can be based on a predictable formula. The recent average rate of new and renewed time deposits is a good metric to consider.

About the author

Neil Stanley is founder and CEO of the CorePoint, Omaha, Neb. His firm offers a web-based retail deposit pricing and sales platform and performance analytics. Stanley is also president of Community Banking at TS Banking Group, Treynor, Iowa. He can be reached at [email protected]

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