Everyone wants to become popular, so what will it take for termed certificate of deposit accounts to become popular again? Over the last two years the Federal Reserve has raised its target rate by 150 basis points, and it plans on making the same increase over the next two years. Because of this, the long-term savings rates offered by financial institutions have been going up, slowly, but going up nonetheless.
Informa Financial Intelligence’s national average APY on a 12-month CD has gone from 0.30% to 0.55%, and the average APY on a 36-month CD has gone from 0.67% to 0.96%. For the first time in nine years there are financial institutions offering 12-month CDs with APYs as high as 2.50% (e.g., Poppy Bank in California) and APYs as high as 3.25% (e.g., Anchor D Bank in Oklahoma) for a 36-month CD.
But there is one question that everyone is asking — “are CD rates high enough yet for consumers to notice?” In other words, when will term rates be high enough that financial institutions are at risk of losing liquid saving balances to a competitor’s CD product?
To tackle this question, Informa surveyed 2,500+ consumers across the country to collect information about their attitudes and perceptions around CDs. The basic premise of the survey was to try to figure out at what price point consumers would take interest in CDs again.
Based on the results of the survey, it is our researchers’ opinion that the sleeping giant — the U.S. consumer — is going to wake up over the next two years. Ninety-three percent of the respondents think that an APY of 5.00% or more would be good value for a 12-month CD. However, consumers are savvy, and currently more than half of the surveyed people would question the legitimacy of an offering above 3.00% APY for a 12-month CD under the current market conditions.
We did discover that about a third would consider interest rates of at least 2.00% to be a good deal. So now that a few financial institutions are pushing interest rates above 2.00% APY, there are people that are taking notice. Based on the survey results, the tipping point for consumers seems to be between 3.00% and 4.00% APY for a 12-month CD. And once the market moves to the 4.00- to 5.00%-range, we will start to see a wave of interest in term accounts.
However, it is not just a simple matter of interest rates being high enough to guarantee demand for your CDs, people also need be educated on what those interest rates might mean for them. Good marketing is needed to bring about momentum, and this is something every institution should take into consideration.
Take credit unions, for example. Strong marketing on CDs from the credit union sector of the banking industry could yield a respectable influx of deposits. In Q1 of 2018, only 15% of people using credit unions said they currently own CDs from their credit union, although 45% said their credit unions would be their first choices for the product.
If you are an institution looking to capture more long-term CD deposits, one good marketing option is to educate customers about how much higher your rates are compared to the competition or the national average. Marketing materials that show your rates are x-times higher than the national average can be quite effective.
It will also be important for financial institutions to have products that appeal to consumers in an upward rate environment. It may be hard for consumers to lock their money into CDs when they think the rates are going to rise even more in the future.
The way to alleviate this concern is with bump rate CDs, variable-rate CDs, or indexed products. These products can be offered at a lower rate than a standard CD, but consumers like them because they do not miss out on future rate increases. As financial institutions prepare for the rising rate environment, Informa has seen an increase of these types of products at rate of 28% over the last two years.
As rates continue to move higher over the next year, financial institutions need to be prepared for an awakening of the U.S. consumer. Financial institutions need to be prepared to protect their current deposit balances and a well-formulated plan to capture new deposit balances is needed. At a minimum, the plan needs to encompass strategies for product offers, a robust marketing campaign, and financial education for consumers who have not seen a rising rate environment in quite some time.
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