FORT LAUDERDALE, Fla.-Credit unions need to get over their reluctance to segment accounts if they want to survive.
That was the take-away message from Thomas Farin, president of Farin & Assocites, during his presentation on core deposit analysis at the CUNA CFO Council conference.
"I know the credit union philosophy is against segmentation, but it is key," he said. "Look, your tax advantage gives you a pricing advantage of maybe 25 to 30 BPs, and I can beat that with a good segmentation strategy every day of the week."
Calling the pricing of core deposits "as much art as science," Farin noted that a lot of pricing strategies come down to SWAG, "that's a Scientific Wild Ass Guess." Pricing needs to look at more than what the market is doing-what the member is doing (and what the CU wants members to do) is just as important.
"The more features-other than rate that an account has that are important to your members, the less rate sensitive they'll be," he noted.
That's where segmentation comes into play. "Segmentation is important, and I know it's not very 'credit uniony,' but you need to be doing it," Farin said. "Basically, I've got ways to create barriers of entry. This is particularly useful when you're tryig to block cannibalization of existing deposits. Things like minimum balance, or minimum debit card transactions. Who does the minimum debit card transactions block? My mom. She's 91. She keeps her debit card in a drawer, with her PIN written on the back. Who doesn't it block? My 24-year-old daughter. She's had a checking account since she was a junior in high school, and to this day she has never ordered a single check."
'Good Answers For Regulators'
What regulators want matters, too. "If a regulator asks where did your assumptions [used for creating your pricing model] come from, do you think 'I SWAGged it,' is going to be a good answer? But that's what a lot of people are doing. OTS has been the primary source of pricing betas and decay rates for the industry for over 25 years. And where did those come from? Eight large thrifts in major markets in the late 80s. A lot has happened since then, don't you think? Regulators prefer pricing betas be derived from historical data, rather than SWAGs."
But even that historical data can be problematic if you're not careful about the slice of history you're looking at, Farin cautioned. "It's important when you do beta studies that you don't do it over too short of a time because rates haven't moved in a long time. Right now, we like to go back to June 2007, because that was the top of the rate cycle," he explained. "You also want to look at the lag. We typically lag more than a month, and I expect to see a longer lag in the next cycle because hey, why rush to raise rates?"
Decay rates are another aspect of pricing that have undergone a significant transition.
"If a member moves money from one account with you to a different acount with you, is that true decay? No, because the money is still in your institution," he said. "When I got my first job out of college, I moved to a new town, and when I got there, I opened a checking account at the local bank. Why? Because no one would cash a check on a foreign bank. Today, can you imagine a bank not accepting a foreign debit card? There's no real need to move a checking account any more. They are much sticker than they once were."
The Flight To Quality
Moreover, the "flight to quality" has created another difficulty in determining decay rate.
"The surge of 2009 was not as big as we thought it would be. It's coming up more and more in examinations-surge balances pushing the decay rate negative because the people who stuck around also added money to their accounts," Farin said. "You start looking at these numbers, and you start coming up with things that make it look like you're keeping people for 30 years. Do you think you can sell that to your regulator, that you're keeping people for 30 years, on average?"
Of course, the greatest fear related to all this liquidity hanging around is, ironically enough, it not hanging around. "People are worried that it will all walk away at once, but I don't think that's what will happen," Farin suggested. "That surge money will burn off quickly as rates change, but not all al at once."
And why does he believe that? If for no other reason than the reality that is the Baby Boomers. "I'm about 67 years old. I took a lot of money out of the stock market, but it's not likely I'm going to put it back in stock now. There are a lot of people like that, who simply cannot go through that again."