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.”


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