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PCBB Banc Investment Daily August 11, 2015
Banc Investment Daily
August 11, 2015

New Customer Special

A new yoga studio opened in our town so we dropped in for a class during its first week of operation to see what was going on. We had a good time and went back for another class a couple of weeks later. When we arrived the second time, we saw there was a special for new customers - 5 classes for $25. We had only been there once, so we asked for the special but were told no. It seems that since we'd already taken a single class that we were not eligible. This special deal represented a significant savings over the normal cost of $17 per class. We thought we had done the new business a favor by coming in the first week of operation, but instead the rewards were set up to incent the opposite. While we understand the idea behind the marketing effort, we can't say it made us feel exactly cherished as a customer.
We find in our study of banks, that similar tactics can come up in customer pricing and this can be especially true for deposits. Given such low rates overall, most banks just haven't paid much attention to deposits in a while.
This could be a mistake in the long term, and there is evidence that some banks are beginning to look for deposits now. Whether this pertains to the new Basel III rules for large banks (must have more core deposits), the need to fund assets (many banks are finding opportunities to grow loans) or simply opportunity, this is a good time to rethink and plan a little more carefully for the future. After all, while customers have been insensitive to deposit rates for a long time, they probably won't remain that way once rates begin to rise or competition increases.
Looking at the new issue market for the brokered CDs we sell to investors, we found anecdotal evidence that demand for deposits is picking up. These are primarily offered by the big consumer finance banks like Discover and American Express and recently, two big brokered CD issuers (Amex and Capital One) rolled out CD offerings using an additional new FDIC certificate number. This would appear to be an effort to draw in more deposits from depositors seeking to stay within FDIC insurance limits. We note that this is unusual, as there have been few additions to the pool of high paying issuers.
In areas where loans are growing, community banks are making efforts to ramp up deposit growth as well. Banks are used to talking about interest rates and customer service reps are comfortable telling customers about a great interest rate they can offer. This practice needs to be modified, as rather than selling a comprehensive set of services and communicating the other benefits of doing business with the bank, the focus immediately moves to rate. If your bank mostly communicates its value in terms of rate, and deposit rates begin to move in general, then pressure can build quickly for your bank to raise its deposit rates.
Another tactic we have seen frequently is to offer deposit rate specials and then specify they are only available for new customers. The idea here is that the existing low cost deposit customers will remain satisfied and new customers will be attracted by the rate. As with our yoga example above, there are a couple of problems with this approach. First, a rate special tends to attract the most interest rate sensitive new customers and therefore those most likely to leave if your banks stops paying an above market rate. Second, your existing customers will probably make note of the special and say - hey I want that too. Otherwise they will feel slighted.
There may be times when running a rate special is necessary, but we tend to think it should be like the fire hose behind the glass - break only in the case of an emergency. If your bank does decide to run a rate special, be careful how you advertise it and be willing to pay the advertised rate not just for new customers, but for new money regardless of where it comes from.