In 2020, with interest rates in freefall during the pandemic and the Federal Reserve committed to accommodative policy, demand for CDs evaporated. Consumers were given little incentive to park their discretionary balances in a low-yield CD rather than a liquid checking account. The portion of bank balances in CDs had fallen to a historic low, and many had pointed to a generational shift: Millennials simply weren’t as interested in CDs than people in older cohorts.
This ultra-low yield environment had many bankers wondering, “Are CDs dead?” The answer has turned out to be a resounding “No.” CD demand has bounced back big as the Fed has carried out one of the fastest rate-rising cycles in recent history. What Curinos now hears from many of these same financial providers is, “If there’s only one thing I get right this year, it better be managing my CD maturities.”
With higher CD rates comes profitability challenges in how to best maintain customers in these CDs without “giving away the house” on margin. With rates at a decade-high peak and continued low-rate savings and checking balances moving to significantly higher-priced CDs, much of the low-cost deposit cushion that traditional banks have built up during pandemic years is draining. Depositors are expected to continue to switch to higher-rate CDs even as the Fed plateaus. Overall portfolio costs are set to rise broadly across all institutions, so having a CD maturity playbook in place will help not only better retain customer deposits but also preserve profit margins through tactical pricing instead of a “one size fits all” approach.
The New Bestseller
By raising their rates early and rapidly, direct banks were the first beneficiaries of the CD boom. That’s because most traditional banks were still awash in pandemic-related surge deposits, most of which ended up in checking and savings accounts, and they were slow to increase their rates on CDs. After many months of watching CD sales domination by direct banks, with their own customers well represented among the buyers, traditional banks finally reacted in Q3 2022 by raising their CD rates as an attrition defense.
Almost a year later, these high-rate CDs are now maturing (See Figure 1). By January 2024, the rate on more than half of maturing CDs will be 400 basis points or more. That could pose some significant retention challenges. Not only were these CDs booked at a high rate, most of them are renewing for the first time (See Figure 2).
Figure 1: CD Rate At Maturity For First-Renewal CDs | 12-17M | Jun ‘23 – Jun ‘24
Figure 2: % Maturing Balances By Renewal | 10-17M CDs | Aug ‘23 – May ‘24
Curinos’ analysis of CD renewals has consistently shown that attrition is highest for first-time renewals compared with CDs that have renewed at least once. The reason is that consumers are typically most alert at their first renewal and tend to consider alternatives for a better rate, both at their institution and elsewhere. Once a CD has renewed several times, the tendency to shop rate recedes.
High-rate CDs are typically more challenging to manage because consumers frequently look at their maturing rate as a marker for what they expect at renewal. If their CD auto-renews at a lower rate than what they’ve had, they’re disappointed. If it renews at the same rate, they’re satisfied, even if the rate when it was first booked is no longer competitive with the market. In this respect, rising-rate environments are favorable for encouraging CD auto-renewal. A Fed plateau, on the other hand, could complicate matters as auto-renewals become more expensive without interest expense relief afforded by higher lending rates if the Fed hikes.
Managing CD Renewals Amid Uncertainty
In managing CD renewals, many banks have set auto-renewal rates low – though not so low that renewing customers feel taken advantage of – while remaining competitive in at least one CD term for acquisition. This allows the institution to harvest margin from auto-renewals while providing rate shoppers with the option of a higher rate if those customers might look elsewhere at renewal.
The approach can be especially cost-effective when offered during months with high volumes of maturities, but this can also have drawbacks. Many direct banks are setting a consistently high rate for their flagship 12-month CD. In doing so, they’re retaining and attracting customers who want to know their bank is giving them a competitive rate, even if it’s not necessarily the very highest, and don’t want the hassle of shopping at each maturity.
As a result, traditional banks are exposed to deposit attrition as their most rate-sensitive customers move to direct banks. But these lost balances can be economically offset by offering a high top-rate CD requiring new money, thereby putting a fence around the offer to limit cannibalization from internal accounts. (See Figure 3).
Figure 3: % New Money vs. Acquisition Over Time | CD |
Jun ‘22 – Jun ‘23
Curinos has seen increasing efficiency in both the percentage of new money and overall marginal cost of funds (mCOF) when banks offer a top-of-market versus middle-of-the-road CD rate. (See Figure 4). A top-of-market rate captures an outsized amount of new money from other institutions, and when it’s fenced for new money only, it prevents existing customers from switching, which significantly improves the new offer’s economics.
Figure 4: Projected mCOF vs Acquisition Over Time | CD | Jun ‘22 – Jun ‘23
Simultaneously, existing customers need to have a CD option at a rate that’s “good enough” to switch to. The twin package ultimately can provide a better mCOF for traditional banks than having just a single high-priced CD for both new-money acquisition and retention of existing money.