“The times, they are a changin’.” This famous refrain from Bob Dylan’s song (https://www.youtube.com/watch?v=e7qQ6_RV4VQ) is as real today as it was in the early 60s, especially when we look at deposit needs for financial institutions.
In 2008, FIs had to shrink deposits as a tactic to keep their expense ratio in line with the regulators. Marketer became accustomed to focusing almost exclusively on loan balance growth and were not at all concerned with liquidity of the credit union. Today the opposite is true. Lending is attaining record growth and liquidity has suffered. It is not uncommon as I work with credit unions and community banks to see 90% or higher loan to share/deposit ratios. The CFO is constantly struggling with the question of borrowing from the Feds or growing deposits. The decision, very often, is made based upon the cost of funds number. Which way has the lowest cost of funds?
Let’s look at this challenge differently though, not from the prism of the CFO but from the prism of the credit union membership, credit union operations, and marketing tactics.
First, credit union membership:
Which serves the holistic needs of the member? The member needs a safe, competitive place to save money. All credit unions were established with the premise, we will use member deposits to loan to other members. This is our heritage and business model. This aggregating member deposits as the loan funding source also helps to create that need to help our members become better savers.
Second, credit union operations:
Credit unions that a strategic leader for their lending products. This lending executive makes sure the credit union is doing what it needs to do to hit their loan balance goals every year. They are also responsible for the product offering, the features and benefits, and the pricing of those products.
Who, in your credit union, has this kind of ownership and responsibility for the deposit portfolio? In most credit unions I see the following scenario play out:
CFO or CEO goes to marketing and says, “We need more deposits.” Marketing responds to this ask by, wait for it, running a CD promotion. Marketing does this because they know, the hottest money in the market are CDs. They also know, if you throw a great rate out there, the money will come in. It’s worked time and time again. But what the CFO wants are the low cost of funds deposits, ideally deposits that cost less than the Fed rate, not CDs where you are paying a premium for those deposits.
If there was a strategic leader for deposits, the need to meet liquidity demands would be operating at all times. They would understand how to price to grow all deposits, not just high cost of funds deposits, and they would make certain the product suite was relevant to consumers, the competition, and they would have a pricing strategy to meet the liquidity needs of the credit union.
Three, marketing tactics:
Marketing has repeatable tactics to drive loan and deposit balances. What they need to learn is how to identify the needs for loans and deposits, real-time so they know when to deploy a deposit growth tactic versus a loan growth tactic. Equally important, they need to learn how to build promotions and campaigns that are not solely reliant on Certificates. They need to learn how to grow and sustain core deposits, the low cost of funds kind, like checking, savings, and money markets. They need to know how to position their existing core deposits to meet the deposit needs of their members.
I assert, if a CFO could see a way to quickly grow core deposits, she/he would be less inclined to rely so heavily on borrowing from the Fed. The member wins and the credit unions net interest margin win.