According to a Wharton Financial Institution Research Center study, it costs $116 to sell a product to a new client and $63 to sell a product to an existing client. In the first half of 2006, credit unions with more than $50 million in assets spent an average of $344 on education and promotion for each new member.
Given these costs, the expense associated with certificate promotions, which many credit unions are using to stimulate share growth, seem quite small. For example, if a credit union currently offers a one-year certificate rate of 5% and then offers a promotional rate of 8%, the added cost of the additional 3% is $30 per $1,000 deposited. If, for example, the credit union put a $2,500 cap on the money that would earn 8%, and a member deposited $5,000, the blended rate would still be 6.5%. This would cost the credit union an additional $75 versus a member who invested in the non-promotional 5% rate.
The real value of this member is achieved as the account matures and the certificate comes due. If the credit union can move the money that was paying 8% to a lower rate, say 5%, the marginal cost of funds of that money will be negative. From a long-term view, if the credit union can hold onto 80% of the money the 8% certificate brought in, then the cost of acquiring that account would be far lower than the numbers seen in the Wharton Financial Institution Research study.
Scenario analysis is important when estimating the marginal cost of funds beyond the initial funding date and based on expected future member behavior. The level of interest rates when the certificate matures will affect the marginal cost in today’s dollars. And credit unions need to look at a range of fund retention rates, being careful not to overestimate the ability to hold on to funds originally attracted by the promotional rates.
The Alternative to Share Certificate Promotions
When analyzing share certificate promotions, it is important to balance the short-term expense and possible cannibalization of lower-cost deposits with the longer-term implications of gaining new members and long-term stable funding. Some credit unions have opted to avoid the relatively higher uncertainty of share certification promotions as a funding strategy by borrowing funds from the Federal Home Loan Bank or their corporate credit union. When borrowing, the credit union doesn’t need to worry about cannibalizing its lower-priced shares, plus it knows the money will have a stable interest rate for a set term. The downside to borrowing is you do not get the opportunity to develop new member relationships.
On its face, an 8% certificate rate may not sound like the most prudent way to grow, but when the details and scenarios are analyzed, it could make sense for your credit union.
To learn more about evaluating share certificate promotion, View our webinar“Are Aggressive Share Certificate Promotions the Answer to the Industry's Liquidity Crunch?” a webinar brought to you by Callahan and Associates.