Credit Unions Need to Counteract High-Yield Savings Accounts

As financial institutions struggle to convert new users to the online channel and capture share from other banks, the next battleground is the lure of high yield savings accounts.

 
 

One in 10 online members is using a high-yield savings account at another financial institution, according to a recent survey conducted by Callahan & Associate’s Internet Strategy Consortium. The data shows that usage may be centered among some of the credit union’s most profitable members, as the proportion rises to 19% of online members with incomes greater than $100,000.

“With share growth at a historical low, credit unions should be proactive in their deposit gathering strategy. This survey highlights the need for credit unions to take a look at where their members are transferring money,” says Jay Johnson, executive vice president at Callahan. “Credit unions have a real opportunity to encourage savings at their credit union, and to help members meet their financial goals.”

What’s at Stake? Losing the Member Relationship

Financial institutions are actively using high-yield accounts to expand their own customer base, enhancing their ability to market their other products such as checking, mortgages and other loan types. Citibank’s new high yield savings account, released just two months ago, is expected to reach its target of $4 billion in deposits well before year-end. Schwab is expanding their offerings with a checking account linked to a brokerage account with online bill pay, a debit card, and rebated ATM fees. Even ING Direct is planning to launch a checking account in the future.

For some credit unions in the Consortium, close to one-fifth of their online members report using these accounts. Credit unions should check their own data to better understand funds being transferred and to which financial institutions. Over time, the outflows can be considerable.

Encouraging Savings at the Credit Union

While these members consider the credit union their primary financial institution, they are clearly willing to transfer funds elsewhere. However, the online survey conducted with more than 12,000 credit union members also reveals that many members are interested in similar accounts at their credit union – provided the rates are competitive.

“We have about $30,000 in HSBCdirect and ING because of the higher rates. I would move them to (my CU) or any other credit union if the rates were similar.”

Even those who have opened accounts elsewhere are interested in transferring funds back to their credit union.

“If the rate was competitive with ING, I’d go with the credit union first b/c I do most of my other banking with them but if ING has a better rate, then I’ll be opening these types of accounts with them (have considered it already)”

In fact, close to half (45%) of online members are interested in opening an online only savings account at their credit union. About one-third is interested in either a share draft account (34%) or share certificates (31%).

Strategies to Compete

Developing an “online only” account could be an advantageous strategy, but there may be additional product offerings that accomplish similar goals without involving a new account type. Sunmark Federal Credit Union ($423 million in Schenectady, NY) created the RateEdge account designed to reach new markets and that is competitive with Citibank’s CitiDirect accounts. While similar, they accomplish their goals in very different ways. Credit unions who are considering offering high yield accounts need to carefully consider the objectives in order to develop programs to that will meet them.

Variations on money market accounts or share certificates that include limits on withdrawals could accomplish similar goals. Additionally, offering better rates as part of a relationship-based strategy could accomplish two goals – increasing member relationships as well as rewarding self-service usage.

Interested in identifying ways to meet the needs of members online? The Internet Strategy Consortium is a shared cost research group of 15 credit unions who conduct online quarterly surveys and identify strategies for improving online services. Contact Denise Senecal at (800)-446-7453 or by email at dsenecal@creditunions.com.

 

 

 

July 10, 2006


Comments

 
 
 
  • Be careful before considering online only strategies like Sunmark. According to call report data, Sunmark did not see increased deposit growth attributed to their strategy.
    Anonymous
     
     
     
  • Denise, Great article - it's nice to see some hard data about this trend! Don't be surprised to see ING Direct start popping up as a PFI for many consumers if/when they offer online checking accounts.
    Trey Reeme