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CD Promotion Challenges

Answered by: 
Andy Zavoina

Question: 
Our disclosures state that renewing CDs will automatically renew for the same term at the rate being offered to new deposits on that maturity date. We would like to offer a higher rate on a specific term at some of our branches for new deposits in that term; this would mean that any maturing CD in that term would renew at a lower rate. <ol><li>Can we do this and how do we handle the disclosure that customers have already received? <li>Can different rates be offered at different branches for the same term?<li>Is this an acceptable practice?</li></ol>
Answer: 

I'm not sure I understand exactly what you're asking. If you mean new deposits into the bank will receive a higher rate than those on the same term which are maturing, yes you could do that. But it depends on your contract with the customer and how upset you want existing customers to be. Lets look at your specific questions, and then customer service issues.

  1. You have disclosed to the consumer that you would renew their CD for the same term and at the offered rate on the date of renewal. You told them you didn't know the rate yet and gave them contact information. Create a new CD category that is new money only, and set it at the higher rate. The customer still gets the rate they were promised (but see below) and you have a new class of CDs that are a one time only rate. Renewals of these would be based on the "renewing CDs rate."
  2. Offering different rates at different branches is acceptable. You may do this to react to market competition. If the markets are well separated, that works fine. If they join or you put these rates on your web site, you'll have customer service issues. (See below.)
  3. Banks with separated areas and wanting new funds in the bank can do this and yes, there is nothing technically wrong with it. Depending on your goals and how you handle it, it may be "very right" in fact.

If your agreement with the customer is that you will renew, for example, an 18 month CD at the 18 month rate, you may check with counsel on creating the new (18-Month New Money CD" rate, or whatever you want to call it. But it would be a new product. The customer service issues can be difficult. What will you tell the customer who says "cash in my CD, I'm not renewing, make a check out to me" which you do, and then they offer you new money. To not accept it is to push it out the door either on the basis that they feel mistreated or the competition has a better rate than you offer on "old money."Also, if your markets are close enough that a customer works in one and lives in the other, they may want to use one branch over the other. The same holds true if you advertise on the web. The customer will demand "that other rate."I believe this can be done under the right circumstances but your customer contact staff has to be sensitive to the customers and able to explain why there are different deals than there were in the past.

First published on BankersOnline.com 2/21/05

First published on 02/21/2005

Filed under: 
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Filed under operations as: 
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