What does a deposit rate increase really cost?
More than the interest on the new money. A rate increase is paid on every balance it reaches, including money that was going to stay anyway. That is often the larger part of the cost, and it is the part a proposal tends to leave out.
Why does the usual math understate it?
A proposal to raise a savings rate can open with the money it might bring in: match the market, win back $10 million. The cost is then shown as the interest on that $10 million. But a savings rate is not paid only to new money. Every existing balance in the tiers that move starts earning the new rate on the day it changes.
Lending leaders raise it too. A credit union's chief lending officer told us that any high-yield savings idea starts with one question: how much of the savings already on the books will simply move up to the higher rate without adding a dollar. A lending vice president at another credit union told us the same question comes up in pricing discussions there: do we do this to the whole book? New money comes in, but the yield on the existing book goes with it.
How do you count the full cost?
Count the rate change on every balance it reaches within a year, then add the interest on the new money. We call the total the Full Reprice Cost. Which balances count depends on the product.
| What changes | Balances it reaches in the first year |
|---|---|
| A savings or money market rate | Every existing balance in the tiers that change, at once |
| A standard certificate rate | New certificates, and existing ones as they mature and renew |
| A certificate special | Every certificate opened at the special, including money that would have been placed at the standard rate |
A savings product holds $200 million at 3.00%. Raising it to 3.25% to bring in $10 million costs $500,000 a year on the $200 million already there. The new $10 million earns 3.25%, or $325,000. The Full Reprice Cost is $825,000 a year. Spread over the $10 million it raised, that is far more than the rate on the page.
How can you limit the cost?
Each of these reaches fewer existing balances. Each has its own cost, so price it the same way.
- Launch a new product alongside the old one rather than repricing it in place. The existing book keeps its rate. The cost to count is the money that moves across from the old product.
- Pay the higher rate on new money only, or above a balance threshold. Fewer balances reprice. The rules have to be clear enough that a customer understands them at the counter.
- Use a term. A certificate special reaches only the money placed at it. Count the money that would have been placed at the standard rate anyway.
- Tie the rate to a relationship, such as direct deposit. It costs less where it reaches only customers who bring more, and it can bring a deeper relationship rather than rate-shopped money.
What should the committee see?
Three numbers, before any debate about whether customers will respond:
- The Full Reprice Cost of the move, in dollars a year.
- What the move has to bring in to be worth it, against the next-best way of raising the same money.
- Where the new rate sits against the market: inside the Shrug Zone, where it reads as in line with the market, or beyond a Switch Line, where it stands apart.
The first two are arithmetic on the institution's own balances. Only the response is a forecast. Settling the arithmetic first keeps the meeting on the part that needs judgment.
See something wrong? Report an error.