Deposit Insights. Ready to Put Money to Work

Transcription

1 Deposit Insights Ready to Put Money to Work

2 Contents Executive Summary 3 Introduction 4 Rising Rate Environment 5 Consumer Perceptions and Expectations for Deposits 7 Deposit Balances Continue to Grow 7 Demographic Analysis of Deposits 9 Anticipated Demand 12 Liquid Deposits 14 Term Deposits 18 How to Manage Deposits in a Rising Rate Environment 21 Identifying At-Risk Customers 22 Rate Movers 26 Investments 28 Financial Planning and Advisory Services 30 Insurance Services 32 Retirement Products 33 Strategic Implications for Deposits and Investments 35 Market Deposit Products Where Consumers Will Look for Them 35 Find Opportunities Among Millennials 37 Identify Opportunities Among Older Segments 38 Leverage Digital Infrastructure 39 Tactical Recommendations 39 Survey Methodology 42 About 45 2

3 Executive Summary The current interest rate climate presents unique challenges for financial institutions: With interest rates on the rise, they face pressure to maintain deposit balances while keeping funding costs manageable. Further complicating matters are attitudes toward deposit products that vary widely among generational and consumer segments. Banks and credit unions must adapt their approach to these groups, whether helping a Millennial save to pay down student debt or a Baby Boomer save for retirement. In Ready to Put Money to Work, Raddon Research Insights examines consumer behavior and perceptions with regard to deposits, investments and retirement funds. We explore current trends and expectations among customers that can help financial institutions identify growth opportunities and manage their deposit products in this demanding environment. The topics covered in this report include: Rising effective federal funds rates (EFFRs) put pressure on financial institutions to raise the yields of their deposit products. Raddon s Consumer segments provide insight into deposit product usage. Consumers say higher rates make them slightly more likely to open a new deposit account, but will they actually do it? The value of understanding consumers saving goals. Term deposits: Whatever you do, don t call them certificates. Consumers are less rate sensitive than one might think, but it s still important for financial institutions to assess flight risk by identifying rate movers and liquid holders. The increasing significance of noninterest income to financial institutions: investment services, financial planning, financial advisors, insurance services, and retirement products. Strategies to help financial institutions identify opportunities for deposits and investments among their customer base. Use of deposit products is down relative to 2008, with certificates showing the strongest decline in usage. 3

4 Ready to Put Money to Work While the Federal Reserve continues to raise the EFFR at regular intervals, long-term rates have barely moved, leaving a flat yield curve and putting pressure on financial institutions to retain or acquire deposit balances while maintaining a low cost of funds. Consumers increasingly expect rising rates and have ample money saved in liquid accounts to move. In this study, we examine consumer behavior and perceptions for deposits, investments and retirement funds while identifying opportunities for financial institutions to manage their deposits in this challenging environment. Publication Date: December

5 Rising Rate Environment Since December 2015, the Federal Reserve has raised the target rate for overnight funds (fed funds) seven times, from 0% 0.25% to 1.75% 2.00% (see Figure1). While the rate increases intend to slow down the economy and reduce the risk of inflation, they have the additional effect of putting pressure on financial institutions to raise the yields of their deposit products. Thus far, the increase of short-term rates has had negligible impact on long-term rates as buyers of longerterm treasuries seek less of a premium in exchange for the economic risk of holding long-term bonds. As a result, the yield curve, expressed as the different rates sought for Treasury bonds of varying terms, has become extraordinarily flat. A flat yield curve creates a challenging environment for financial institutions. When deposits, priced at the short end of the curve, are paying as much as loans, priced at the long end, are earning, institutions margins are squeezed (see Figure 2). Rising short-term rates also encourage consumers to seek out better yields for their deposits. While banks and credit unions held the line on funding costs through 2017, 2018 has seen a fairly dramatic increase in funding costs, particularly for banks (see Figure 3). Figure 1: EFFR Target 6% 5% 4% 3% 2% 1% 0% Source: Federal Reserve Board of Governors 5

6 Figure 2: Yield Curve of U.S. Treasuries Over Time 6% 5% 4% 3% 2% 1% 0% Federal Funds 3 Month 6 Month November 2006 April 2010 September 2018 September 2017 July 2012 Source: U.S. Treasury Figure 3: Cost of Funds for Financial Institutions 4.0% 3.5% 3.47% 3.0% 2.5% 2.78% 2.0% 1.5% 1.0% 0.5% 1.49% 1.41% 1.21% 0.93% 0.59% 0.52% 0.53% 0.57% 0.62% 0.70% 0.42% 0.33% 0.37% 0.48% 0% Source: FDIC, NCUA Credit Unions Banks 6