Are Higher Share Certificate Rates the Answer?

With credit unions relying more and more on share certificates for growth, are higher rates working?


It has long been thought that higher rates will lead to higher deposits.  But with the overnight federal funds rate at 5.25% and the 30-year bond at 4.71%, credit unions are facing real share pricing challenges.

As the industry struggles for share growth, many credit unions are targeting share certificates to grow deposits, raising rates much more aggressively than on core deposits.  Share certificates currently have the highest average rate of all deposit products, even though as term products they fall farther out on the yield curve than demand deposits.  They have also been the fastest-growing deposit product as of late, even with higher minimum deposit requirements. 

Are raising share certificate rates a reliable strategy for increasing deposits?
A long-held assumption is that the higher the rate of return, the more attractive the product is to the member – and the more the deposit product will grow.  This may have held true in the past, but with all the financial options available to individuals today, it may not be as easy to attract deposits anymore.  With Americans spending beyond their income, fewer dollars may be available for saving – regardless of rate attractiveness.  The analysis below supports this hypothesis.

We compared the change in share certificate rates over the past year to the change in share certificate deposits over that same period, and the results are quite surprising.  This analysis results in a 0.07 correlation coefficient—which means no discernible relationship between the two variables. 

In the graph below, the lack of correlation between the change in the rate and share certificate growth becomes clear.  Credit unions are having a vast array of experiences: high rate changes and no growth, high rate changes and high growth, and low rate changes and high growth. 

This finding goes against the conventional wisdom that higher rates will automatically yield higher growth. 

With today’s ultra-competitive financial services market, individuals have access to a wide variety of services including high yield online accounts, the renewed popularity of stock market investing, and more competitive rates from banks. 

With this interesting result, credit unions may want to consider re-analyzing their share growth strategy.  Raising rates to stimulate growth that doesn’t occur adds more pressure to the net interest margin and ROA.  Because every institution faces its own unique constellation of challenges and environmental factors, no one magic bullet will fix every challenge. 




Jan. 8, 2007


  • If you're looking to buy these articles make it way esaier.
  • EXCELLENT ANALYSIS! This is the kind of insight I come to this site for!
  • Excellent article as it appears to have resulted in much discussion and shared thought. I agree that although a percentage of members appear to be rate insensitive, I also belive that a "good market rate" is the basic price of admission to retain and grow deposits.This holds even more true for "high savings per member" credit unions whose members are quite price sensitive. Member Internet knowledge and the resulting sharper competition will add greatly to our industry's pricing challenges in the future.
    Mike Mastro , Los Angeles Firemen's Credit Union
  • This just doesn't tell the whole story. SCs are a product with many variables: rates, term, features and minimum deposits. And deposit growth has even more variables with marketing and promotional differences at every CU. All this article does is make CU CEOs think that rate doesn't matter. Which is exactly what they want to hear. But it's not true. Rate matters a great deal but are not the ONLY story in the growth of deposits with share certificates. This article is like a drunk using a light post -- more for support than illumination.
  • Despite comments to the contrary, I agree 100% with the article's premise and, in fact, have experienced a discernible lack of rate sensitivity among an overwhelming majority of certificate-holding members. The exception to this is the older/larger depositor who shops rates at every maturity. They tend, however, to handle their business in person, thus giving our people an opportunity to match rates--which we do with considerable success. With margins where they are, most of us can't afford to pay the highest rates in town. Had our cost of funds been at peer levels, our buck-forty 2006 ROA would have dwindled to virtually zero. So, pay higher rates when you have to and run specials occasionally, but realize that a vast majority of your deposits are toally lacking in sensitivity to rate.
    Larry Davis, VaCap Federal Credit Union
  • While well intentioned, the premis of this article is flawed. The correct analysis would measure the growth of certificates versus the spread above a whole sale rate such as LIBOR. A change, up or down, in the rate offered is meaningless. The real question is the attractiveness of the rate offered compared to alternative market offers. We have found that there is still plenty of money available if you price it high enough. The problem is that assets do not earn as much as they used to. (Know any A+ borrowers that are willing to pay prime rate on a car loan?) Since you have to earn it to pay it, it has become much more difficult to grown.
    Kendrick Smith
  • Interesting information but limited in scope. If CUs are to truly compete for deposits a more realistic view of the market needs to occur. SCs can offer competitive rates - BUT compete against on-line accounts offering much easier access to the funds (if desired). CUs are always looking for a bigger piece of the pie, but, unfortunately, are only one pie in the bakery. Marketing impacts are evident in this phenomena.
  • Thank you for your comment! With the data available, unfortunately we are unable to do that in-depth of an analysis. Three terms are available for the SC but rate is not broken down by the term, nor is a minimum deposit available. As the NCUA begins to collect more in-depth data each quarter, hopefully this will become available. For now, this is a tip-of-the-ice berg analysis that I feel provides some interesting insight but will definitely be delved into more detail in the future. Thanks again!
    Mike Werstuik - Author
  • I agree with Mr. Smith in comment # 5. To only look at the change in cd rates not only ignores the level of attractiveness that exists compared to the rest of the market, but also the comparable advantage that was present when the analysis began. Obviously members prefer higher rates, that point was made well by the “Deposit Product Rate vs. Growth” chart at the top of the article, it’s also very dangerous to think the only way we can buy money is with rates. However, it would also seem equally as dangerous to try to and convince ourselves that we can ignore how our rates compare to the market over an extended period of time because our members just like our level of service.
    Dave Stacey
  • While I can see the points made by some about the quality of the analysis in this article, I would compel those who appear to want to "shoot the messenger" to appreciate this reality- The current rate environment is not favorable to building sustainable growth using a SC price up strategy. The comment that " there is plenty of money available if you price it high enough" does not reveal a very sophisticated level of thinking, nor does it address the real challenge facing all financial institutions who are battling a higher cost of funds to fund asset growth. Whether you like the analysis or not, if your answer is to default to raising rates, you will lose long term. And this analysis really can not be disputed!!!
    Jamie Elmore