Effective Pricing Strategies in a Zero Interest Rate Environment

Credit unions currently face tightening margins and a competitive environment for deposits. This article examines a variety of pricing strategies that credit unions can employ based on different market conditions.


On December 16th, 2008, the Federal Reserve reduced the target range for the federal funds rate to 0 to 25 bps, its lowest point in history. They reaffirmed this action during their January meeting and indicated that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time." Treasury yields also currently hover around historic lows with little expectation of rising in the short-term. In this historically low interest rate environment, there is simply no place to move funds to achieve higher yields than lending.

To fund loans, deposits are needed. Credit unions are actually faced with an environment where there is not a strong correlation between Treasury rates, and consumer rates, particularly with regard to deposits. Tightly focused deposit pricing strategy and ALM management is critical in this environment, as many credit unions work to strike a balance that suits their goals and individual financial situation.

Our analysts have spoken with credit unions around the country to identify a variety of strategies currently being implemented by credit unions facing different market conditions. Please use this article as a forum to post comments about your particular market situation, sharing with your peers the pricing and ALM management strategies that you are utilizing in the unprecedented environment.

Different Market Conditions. Different Goals. Different Strategies.

Dried-up loan market? Time to cool things down.
While the overall credit union industry has seen record loan volume in the last 12 months, there is low demand for loans in some regions of the country. If a credit union attracts deposits to higher yielding accounts in a zero interest rate environment, but unable to lend, they may lose money on every dollar that is deposited. In this situation, a credit union can de-emphasize deposit rates and instead emphasize the overall holistic benefits of membership to attract new members and core deposits while they wait for the lending market to recover.

Competitors are aggressively chasing deposits.
Due to their need for funding after the collapse of secondary markets, many banks continue to aggressively pursue deposits. Credit unions in these markets often have to adopt a more aggressive pricing strategy if they wish to compete with these institutions for deposits. Credit unions can focus on offering a very competitive rate on one of their stickiest products and use it to anchor their promotion efforts. Some credit unions are adopting a different strategy, choosing not compete on rates across the board, but using a tiered pricing system to hold on to their larger deposits.

Your entire market is reeling.
Some regions of the country, such as California and Florida, have been slammed harder and faster by the economic downturn than the rest. Not only has the lending market all but evaporated, but individuals simply don't seem to have money available to save. Credit unions in these markets may not have experienced a flight to safety after the stock market tumbled. Members in these deeply affected markets may not be particularly rate sensitive. Some credit unions in these markets have focused on bringing in low-cost shares, while others have chosen to draw some attention to their institution by having an initial rate special on certificates.

High loan demand? Let's bring those deposits in.
Credit unions in portions of the country have experienced high loan demand, resulting from competitors dramatically tightening their underwriting standards, participation in the Invest in America auto lending program, or the refinancing boom that began when the Federal Reserve slashed rates back in December. Such credit unions continue to aggressively loan, and must fund these loans with an influx of deposits or borrowings.

Many of these institutions continue to price their deposits near the top of their market and may even implement a flagship product offering, such as a high-yield checking account coupled with member usage requirements. Such products can be a way to dramatically differentiate your credit union from other institutions in your market.




Feb. 2, 2009


  • Your article assumes that credit unions are earning more on loans than they can on investments. In fact, many credit unions are earing less than they can on investments after the cost of originating and servicing the loans is added to their loan losses. Most credit unions do not perform static pool analysis so they do not even know what they are actually earning. While high yield checking accounts may drive growth, they are often not worth the cost, particularly in this low rate environment..
  • You make a very good point. At the end of 3Q 2008 (full 4Q numbers have yet to be released), the average yield on loans for all US credit unions was 6.63%, while the average yield on investments was 4.16%. If you factor in the originating and services costs, the actual yield falls. Whether a credit union earns more on loan or investment yields ultimately depends on their individual strategy and distribution channels (e.g. internet vs branch). Products such as high-yield accounts generate excitement and can offset some of their cost by requiring a certain number of debit transactions, the adoption of e-statements, or direct deposit, but are certainly more costly than other options.
    Dane Coalson