Crazy Eddie comes to banking
Ever notice prices so strange, you couldn’t believe your eyes? When I was a kid, Crazy Eddie advertised how insane his prices were. Today, it’s the “fiscally conservative” banking industry instead.
While the subprime mess has captured all the recent headlines, the distortions in retail deposit pricing are just as striking. A recent WSJ article points out that today’s astronomical rates are beginning to come back to earth. It also gives an indication for how out of orbit prices have been.
According to the article, consumers can still buy a 4 year CD from a nationally-respected institution at 5%; this isn’t just a great retail rate - this is better than banks pay wholesale.
So let’s do the numbers. Wholesale rates for four-year money are currently 3.88% at the FHLB. This means the bank in the article is paying 1.12% above wholesale. Even at the $10,000 account minimum, the bank pays the consumer $510 above cost over 4 years. Put another way, for every $1MM of deposits the bank accepts, it loses at least $50,000.
Leaving aside complications like servicing cost, marketing fees, and cannibalization of existing customers, this practice still costs beaucoup bucks. Maybe there’s a little profit in cross-selling other accounts or in higher-profit renewals later, but nowhere near enough to claw back the losses on the front end.
Solid deposit pricing can be tricky. Often, a bank needs to predict customer behavior and run tricky mathematics to find the most profitable price. Sometimes, though, the answers are clear even without the statistical crystal orb. As one deposit pricer recently summed it up to me, “If you can’t profit on a single account, how are you going to make it up on volume?”
Next: How banks went crazy
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