Wells Fargo to Test $3 Debit Card Fees

by Tom 18. August 2011 13:12
In yesterday’s news, Wells Fargo has announced plans to test a $3 monthly fee for customers using debit cards. This is the latest initiative to come from the banking industry as a means to recoup losses from shrinking deposit fees. Whether it will prove acceptable to customers is another matter. According to a report in today’s San Francisco Chronicle, Wells Fargo will starting testing the monthly $3 debit card fee this fall. The fee will be applied to debit cards tied to all checking accounts opened in test states starting in October. This new fee would be in addition to the monthly service fees Wells Fargo already imposes on its checking accounts. Wells Fargo also announced that it is doing away with its debit rewards program. Wells Fargo is the latest bank to jump on this larger trend of scaling back customer perks and imposing new revenue-generating fees. Some analysts say that this latest announcement is partly in response to the new limit on how much banks can collect from merchants for debit card fees.

Blue Light Special on this CD Rate On Aisle Four–Now until Midnight….

by tom 11. August 2011 14:51

bluelightThis may seem a little arcane, but how many of you remember the K-Mart Blue Light Special, where a specific item would be put on sale for a limited amount of time to stimulate in-store sales. We have seen a similar phenomenon in banking that we call “back-pocket deals” or “bottom drawer deals,” which are specials that are not advertised but that bankers can offer to customers in the bank at their discretion.

It seems Umpqua has launched a similar initiative, offering new deals in moneydaywhat they call a Happy Money’s Day promotion every Thursday that expire that day. This week, they are offering a $5,000 T Series money market account at 1.05 percent.

With rapid fluctuations in the market as well as consumer confidence, being able to react quickly to consumer demands can be a real competitive advantage. Consider how this kind of banking blue light special works with today’s technology. You can offer banking specials using localized services such as Groupon that expire on a day or hour.

Or consider the possibilities offered by mobile technology. You are walking by a local bank and the bank reaches out to your cell phone and pings you with the latest deposit rate special.

it’s becoming more challenging to keep deposit rates competitive, and smart banks are becoming more aggressive in their marketing strategies, reaching out to customers through multiple channels such as the web and cellular technology, to remind them when they are ready to make a change or make an investment. We are sure to see more banks start promoting their own blue light specials, and how they reach prospective customers will determine who gets the deposits.

Cashing In on the Flight to Low-Risk Investments

by tom 5. August 2011 17:10

With the debt ceiling crisis that has been raging in Congress the last few weeks and mounting fear about the European economic crisis, investors are looking for safe harbors for their money, no matter what the yield. The result has been some interesting trends that were reported this week.piggy and cash

In a report today the Wall Street Journal notes that the Bank of New York Mellon is taking the unusual step of charging big depositors a fee to hold their cash, producing what is in effect a negative interest rate. Institutional depositors with more than $50 million on deposit would be charged 13 basis points. Other banks are expected to follow with similar tactics as more depositors convert their deposits to cash as a hedge against risk:

“While some banks are apparently deluged with deposits, they have few attractive uses for them. There also is the fear that the cash could leave their balance sheets almost as fast as it came in if things stabilize, meaning they aren't willing to use extra deposits to invest in instruments that are anything but super-short term in nature.

“Yet such instruments are paying next to nothing. That can make too high a level of deposits unattractive. Yields on one-month U.S. Treasury bills, for example, dipped into negative territory Thursday, while yields on two-year Treasury notes plumbed historical lows below 0.3%.”

At the same time, with the report of low yields on two-year Treasury notes, there has been a burst of activity as depositors turn to Treasuries as a secure investment. A report in today’s New York Times states:

“The low yields reflected a surging demand for Treasuries, which have long been considered almost as secure as cash. The 10-year rates approached depths not seen since October 2010, shortly before the Federal Reserve began to pump hundreds of billions of dollars into the economy amid fears of a slowdown.

“Rates on even shorter-term credit, including six-month Treasury bills and overnight loans in the vast market for repurchase agreements, swung toward zero Thursday. Yields on one-month bills actually fell into negative territory before closing at zero.

“Above all else, cash has become the investments of choice this week as the deepening economic and debt worries in the United States and Europe have made stocks look like a minefield to be avoided.”

The same news report indicates that money market funds are starting to look more appealing with the raising of the debt ceiling and the ongoing decline of stocks. This week, $13.1 million when back into money market funds on Tuesday and Wednesday.

Projections for National Average APY for August

by tom 2. August 2011 14:59

Many of our clients have been asking us to change the National Average APY report to take a more forward-looking stance on deposit pricing. Now, rather than issuing a weekly retrospective, starting this month we will be issuing a monthly projection of National Average APY performance. Here are the projections from this week’s report":image

During this month, the national average APY for Regular term accounts is projected to decrease 0.01 percent from its current APY of 0.70. The national average APY for Special term accounts is projected to decrease 0.01 percent from its current APY of 1.16 (see Figure 1).

Among Regular term accounts, the 36-month CD is projected to have the greatest decrease of 0.02 from its current APY of 0.95, whereas the 30-month CD is projected to remain unchanged at 0.84 (Page 3, figure 3 in the report).

Among the Special term accounts, the 3-month CD is projected to decrease 0.05 from its current APY of 0.25, and the 24-month CD is projected to decrease 0.05 from its current APY of 1.17. The 48-month CD is projected to increase by 0.05 from its current APY of 1.81 (Page 3, figure 5 in the report).image

The national average APY for Regular liquid accounts is projected to remain unchanged at its current APY of 0.17. The national average APY for Special liquid accounts is projected to increase 0.10 from its current APY of 0.55 (see Figure 2).

All Regular liquid accounts APY are projected to remain unchanged this month (Page 4, figure 7). Among the Special liquid accounts, checking is projected to increase 0.25 from its current APY of 0.75, and MM account is projected to increase 0.06 from its current APY of 0.30. Saving account is projected to decrease by 0.01 from its current APY of 0.60 (Page 4, figure 9 in the report).

Note: The monthly APY projection for deposit accounts is based on national averages and has a confidence level of 95%. Identical projection for individual pricing regions (states) may be ordered. This projection accounts for customary fluctuation in economic indicators such as Fed funds rate, inflation and others. However, the projection may have to be revised if a drastic change occurs in some of the economic indicators during the projected month.

CDs Get a Makeover

by tom 27. July 2011 17:34

We got a call from the Wall Street Journal’s Smart Money earlier this week. They were research a story on how banks are trying to lure depositors by giving CDs a makeover. Of course, we have been following this trend for a while through ProductBuilder, our searchable database of new banking products. The Smart Money article notes (and we have been tracking), depositors are moving cash into more liquid accounts, since the CDs haven’t had the yield they offered in the past.

To try to revitalize CDs, banks have done away with early withdrawal penalties, locked-in interest rates, and other unpopular features. Some are offering cash incentives and gift cards to open new CD accounts. Why?

“For banks, it is a chance to lock in deposits at low rates—and a sign banks think rates have nowhere to go but up, says Dan Geller, executive vice president at Market Rates Insight, which tracks bank rates. The incentives paid for longer-term deposits are worth it, if the banks can use that money to make loans at significantly higher rates in the near future.”

According to our National Pricing Indicator report, deposit rates have been stable for some time, and it may be time to rethink some of the old staid deposit products.

“While the new CDs respond to some of savers' age-old objections, they still aren't quite good enough, critics say. Most offer interest rates that still are well below inflation, currently at about 3.6% for the past 12 months. It is hard to find a CD with both flexibility and rising rates, and even the most-liquid CDs may limit withdrawals.”

Surge in Deposits Driven by Demand for Cash Cushion Against Credit Woes

by tom 26. July 2011 17:47

Banks are accumulating cash in an effort to create a cushion as a response to panic about the response to global markets. In a report from Reuters earlier today, the market experts are pointing to the potential of a U.S. default or downgrade if a resolution isn’t reached to raise the debt ceiling:

“Market experts say a downgrade or default would trigger higher margin calls across Wall Street on trillions of dollars' worth of transactions. On Monday, CME Group Inc. (CME.O) stack-of-cashbecame the first major clearinghouse to raise collateral requirements for trades backed by Treasury bills.

"In an environment like this ... you want to keep liquidity as high as possible," said Terry Belton, global head of fixed income strategy at JPMorgan Chase. "I think most firms have been trying to achieve that."

“Belton and others involved with preparations by large banks said the industry has been moving into shorter-term investments that can be turned into cash immediately, even if interest margins suffer from weak yields.”

As a result, banks have lots of cash on the books, as revealed during their second quarter conference calls:

  • Goldman Sachs is sitting on $166 billion in excess liquidity in its balance sheet, which is 18 percent of its balance sheet.
  • Wells Fargo has a cash reserve of almost $90 billion in liquidity, which Reuters reports “is not even earning the cost of Wells Fargo's deposits.”
  • JPMorgan Chase reported that its global liquidity was $404 billion, an increase of 28 percent from the previous quarter.

American Banker reports that the increase in deposits booked at domestic commercial banks is the largest it has been in the past two years. The American Banker article calls this a flight to safety driven by “the relative change in deposits at U.S. branches and agencies of foreign banks and other foreign-related institutions.”

Social Networks Pose New Threat in Credit Card Arena

by tom 22. July 2011 16:58

Interesting news today that offers yet another challenge to banks and credit unions – Google has issued its own credit card. Today Google announced that they will be offering a new credit card aimed specifically at small business users. With the aid if World Financial Capital Bank, Google has launched the new beta version of its AdWords Business MasterCard.

Unlike a conventional credit card, this card lets business users barter for AdWords to help them ramp up campaigns. As quoted in Bloomberg News:

“The card will allow small and mid-sized businesses to spend on advertising when they need to, such as before a peak selling season, and pay for it when revenue comes in, a Google spokesman says. The card, which carries an 8.99 percent rate and no annual fees, must be used exclusively for Google AdWords purchases. Google says the credit limit will vary by cardholder but declined to be more specific. The company won’t say how many cards it plans to issue.”

20970_google-cardThis is not exactly a new strategy for Google. They have been offering a direct line of credit to larger advertisers, but this new initiative allows advertisers to purchase ads using Google AdWords at a lower rate than offered by most credit card companies. Offering credit cards directly to advertisers reduces the risk of exposure to advertisers reneging if you extend a direct line of credit. And it’s a huge potential user base – more than a million Google AdWords users.

So think about the potential threat this poses to financial institutions. Consider the implications of a Facebook Visa card or a YouTube credit card. As one blogger at Actiance, a company that secures the use of social networks for financial services, points out,

“Hundreds of millions of people use Google every day to search through many petabytes of the world’s knowledge, in 146 different languages. It goes without saying that Google has become a threat to the bricks and mortar business of our traditional financial services organizations. They’ve built a loyal following (where would we be without Google maps these days?), a dependency ingrained within us (a colleagues 5 years old upon finding that her father couldn’t answer a questions retorted with an exclamation – “What do you mean you don’t know, why don’t you Google it?”) and that loyalty, that dependency is one small step for consumers, one giant leap for Google’s increasing domination.”

It seems as though anyone can challenge financial institutions to attract new customers. Is this trend an anomaly, or will we, indeed, start seeing new credit cards emerge from other quarters as well. Will we start seeing Dell credit cards offering computer points, or Microsoft credit cards for software? What are you doing to promote customer loyalty at your bank or credit union?

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Banking Technology | Credit Cards | New Products | Internet Banking | In The News

Negative APY premiums; a new phenomenon in deposit pricing

by tom 18. July 2011 16:01

According to this week’s National Pricing Indicator report, for the first time in at least ten years, the APY imagepremium on the 12-month CD is negative. This means that the national average APY of 12-month specials is lower than the regular APY offered on the basic CD. In June of 2011, the APY premium of the 12-month CD was negative 0.02 (Figure 1).

APY premium is the incremental interest rate that institutions offer on top of the basic rate in order to attract new money. The higher the premium, the greater the desire of the institution to attract new money for that particular product tier and term.

The fact that the 12-month CD offers negative premium is an indication that institutions are not trying to attract money for the one-year term. 

In the first six months of 2011, the APY premium for some CD terms has declined, and for some of the terms it imagehas increased.

The following is the change in APY premium of CDs from January to June 2011 (see Figure 2):

  • 3-month CD decreased from 0.32 to 0.18,
  • 6-month CD decreased from 0.48 to 0.43,
  • 12-month CD decreased from 0.21 to –0.01,
  • 24-month CD decreased from 0.58 to 0.45,
  • 36-month CD increased from 0.60 to 0.72,
  • 48-month CD increased from 0.54 to 0.68,
  • 0 month CD decreased from 0.82 to 0.57

The Revival of Commercial Demand Deposit Accounts (Reg Q)

by tom 15. July 2011 18:52

The repeal of Regulation Q, introduced during the Depression, has reintroduced interest-bearing commercial checking accounts for businesses. there are some interesting implications for the resurgence of these Demand Deposit Accounts (DDAs), as explained by our own Dr. Dan Geller in a recent article on how to price DDAs in BAI Banking Strategies.Regulation_Q_l

Dr. Geller lines that like the introduction of any new product, DDAs offer an opportunity to increase market share, but banks could experience pressure on existing commercial accounts due to “heightened competition and misguided pricing”:

“Since the category of interest-bearing DDAs is new, with the exception of credit unions previously offering such accounts, no empirical data is available to analyze historical trends in order to make assumptions and decisions. Therefore, it is critical to obtain some level of competitive data, on account structure and pricing, in order to make better-informed decisions.”

For example, Geller notes that competitive data helps you better position interest-bearing DDAs. If the competition is offering a choice of interest or Earned Credit Rate (ECR), then you can compete more effectively by offering both. the competitive rate information also is critical because you don’t want to cannibalize other commercial accounts.

With the return of DDAs, there also will most likely be a balance shift between different commercial accounts a the same institution at the point of rate convergence (i.e. when the rate on DDAs matches the rates on money market accounts). Commercial depositors will tend to flow money into a DDA instead of other types of interest bearing accounts because they want more flexibility.

If you want more insight into how DDAs will impact commercial deposit rates and accounts, read Dr. Geller’s article or contact us for more information at info@marketratesinsight.com.

Guideline for Structuring and Pricing the New Interest-Bearing Demand Deposit Accounts (Reg Q)

by tom 11. July 2011 15:22

This week’s National Pricing Indicator report from Market Rates Insight includes a guideline for structuring and pricing the new interest-bearing Demand Deposit Accounts (DDA), which takes effect July 21, 2011.

The introduction of interest-bearing commercial checking accounts, aka Demand Deposit Accounts (DDAs), brought about by the repeal of Depression-era Regulation Q, is much like the introduction of a new product by a major consumer-goods company in that it represents an opportunity for increased market share and profitability. Yet, banks may also experience adverse effects on existing commercial accounts due to heightened competition and misguided pricing.

Since the category of interest-bearing DDAs is new (with the exception of credit unions previously offering such accounts), no empirical data is available to analyze historical trends in order to make assumptions and decisions. Therefore, it is critical to obtain some level of competitive data on the account structure and pricing in order to make better-informed decisions.

Competitive information on the structure of the account is helpful in determining how best to position the interest-bearing DDAs. For example, if the competitive set offers only a choice of interest or Earning Credit Rate (ECR) on the new account, you might decide to offer both. At the same time, competitive rate information is critical in pricing the interest-bearing DDA at the optimal point of competitiveness without self-cannibalization.

Flexibility as Competitive Advantage
The interest-bearing DDA is a multi-dimensional product because it can come in three different variations; interest-only, ECR-only, or a combination of both (hybrid). The flexibility of this account can be a  competitive advantage if used correctly, and it can also be a disadvantage if not structured in accordance with customer demand.

The competitive advantage lies in offering commercial customers the option to “make your own account” by allowing them to choose the mix of interest and ECR based on their own preferences. For example, a commercial customer may choose to receive ECR up to a certain credit level, and switch to interest thereafter. Or, the customer may choose to use ECR to offset all fees associated with the maintenance of the account, after which the account will start bearing interest. Thus, commercial customers can structure the account based on their cash flow needs and taxation considerations (interest income is taxable). There is, however, a logistical challenge to such flexibility: not every back-office system can handle it. And there is a risk of losing the business to a competitor if you can’t provide customers with the account structure they desire.

Pricing Competitively Without Cannibalization
It is also very likely that the introduction of interest on commercial checking will trigger internal and external shifts of balances. Internal shift refers to a balance flow from other commercial accounts in the same institution; external shift references a flow of balances in or out of the institution. image

A balance shift between commercial account types at the same institution is likely to occur at the point of rate convergence, meaning the point at which the interest rate on the DDA is identical to the rate offered on commercial money market (MM) accounts. For example, assuming that the interest rates offered on the
DDA will mirror the rates currently offered on high-yield ($10,000 and over) retail checking accounts,
which is currently at 0.28%, it is likely that balances of commercial MM accounts, currently at 0.26%, will flow to the DDA because the yield and flexibility of the account is greater (see Figure 1).

The same logic applies to maturing commercial  certificates of deposit of nine months or less, which currently yield 0.28%. Thus, institutions may cannibalize their own accounts, and, in some cases, pay higher interest for the same balances they already have.image

Balance shift among institutions is likely to occur due to the anticipated competition for DDA customers. Currently, a large number of high-yield retail checking accounts are priced above the national average, which indicates heightened competition (Figure 2).

Therefore, the main challenge for banks that are going to offer interest-bearing commercial DDAs is how to price them at the optimal point of competitiveness without cannibalizing their other existing accounts. The only way to achieve both objectives is by obtaining current, comprehensive and precise competitive data that will help pricing managers establish the correct pricing point.


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