Why Your Bank Should Tie Checking and CDs Together

Boosting Deposit Performance

As deposits become more valuable, banks are getting more aggressive about raising funds. While we are not big fans of increasing liabilities through certificates of deposits (CDs), banks that do may want to consider requiring a checking account in order to increase performance. In this article, we look at some banks that do just that and how it helps them mitigate the performance degradation that normally occurs when offering higher-priced CDs.


Offering a Package of Products


Grouping products together gain you more than an additive advantage. Having multiple products help boosts retention and profitability thus increasing the cumulative lifetime value of the relationship. Further, having multiple products also increases the likelihood that the account will use an additional product.


Perhaps there is no greater example of this than when banks tie a CD and a checking account together. A CD is a transactional product with traditionally one of the lowest profitability profiles of any core deposit product while checking is one of the best. By combining the two, banks can gain a suitable profitability and performance profile while still offering an attractive rate to the marketplace.


Let’s take the real-life example below. Here, the bank offers a paltry 0.03% yield when purchases alone. However, when combined with a mid-tier checking account, the CD customer can gain a 2.20% rate for 36 months. To put this in perspective, this compares to the 36-month national average of 0.94%, a top quartile rate of 2.45%, and a 4.07% top rate. We also point out that the 3-year swap rate, the index in which we measure value against, is at 2.94% at the time of this analysis. 


Cross-selling Bank Products


The 2.20% rate is attractive enough to motivate those customers within this bank’s service area to want to open a checking account in-person or online, but not that attractive to pull in out-of-area deposits which tend to be more sensitive.


The net result is an increase in combined performance (below). The CD alone has a duration or interest rate sensitivity of 2.84. When combined with a mid-tier checking account, this duration more than doubles to 6.19 thereby providing more protection for a bank’s assets.


This better performance almost triples the profitability of the account as risk-adjusted return on equity goes from 21.5% to 58.0%. 


Combining CDs and Checking Accounts


In this case, the qualifying checking account can be opened with any minimum balance but has a $25 per month fee that is waived when combined balances are over $25,000. 


While an effective customer acquisition bundle, this combo also helps with cross-sell as this bank actively goes to each existing CD holder and offers to increase the rate if they open a qualifying checking account.


Fine Print To Boost Performance


If combining CDs and checking together isn’t a smart enough move for you, it is worth considering this bank’s fine print in the CD offering. This bank further boost CD performance by use of the following terms:


Auto-renew: At every maturity, the bank notices the customer and then automatically renews the CD into a similar maturity CD. This feature extends the cumulative lifetime value of the customer while also serving to dampen interest rate sensitivity.


Early Withdrawal Penalty: The bank charges a $50 early termination fee PLUS the greater of 180 days of interest or 50% of the remaining interest amount. This penalty dramatically decreases optionality and increases convexity.


Interest withdrawal and Grace Period: The bank allows a 10-day grace period to withdrawal funds with every purchase or renewal. In addition, the bank allows the withdrawal of interest at any time without penalty. These two features provide the customer with some flexibility.


Putting This Into Action


Increasing your CD rate is the fastest way to make your deposit base more interest sensitivity. However, there are many tactics that banks can use to limit this effect. By requiring a checking account with a CD, banks can boost performance and limit the impact of higher offering rates.


As competition for deposits heats up, banks need to put more resources into deposit structuring, pricing, and marketing to outperform the competition.