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SAN FRANCISCO -Banks seem to be calling the shots and outpricing credit unions in the current rising rate environment, according to Wisconsin consultant Tom Farin. Addressing a Future Forum panel, Farin, head of his own Fitchburg, Wis. firm and a former Milwaukee banker, said CUs have historically paid the highest rate on deposits but banks “are firing the machine guns while credit unions are using pea shooters.” The primary reason for the turnaround is that banks are aggressively using segmentation techniques – like CD specials and premium MMDA accounts-to separate rate sensitive customers from non-rate sensitive customers. This allows them, he said, to aggressively price in attracting rate sensitive customers without paying higher rates on non-rate sensitive customers. Credit unions, in attempting to treat all members equally often fail to use segmentation techniques. As a result, the marginal cost of new funds raised from members is higher than for a bank employing segmentation strategies. Farin claimed CUs have a clear choice. Begin using more aggressive segmentation strategies and be in a position to offer the top rates in the market. Or, he said, maintain their member fairness doctrine and be outpriced by the banks. Farin also said CUs need to “upgrade their pricing process to track the effectiveness of past strategies.” He also suggested CUs develop pricing strategies for each of four sectors: checking, savings & MMDA, short-term CDs, and long-term CDs. “These strategies should be reviewed for effectiveness on a quarterly basis by the ALCO committee,” he said. Pricing strategies, he went on, are made up of the different accounts offered in the sector and pricing rules are based on competitive and wholesale rates, but he urged CUs to use these pricing rules as part of the weekly rate setting process. Make sure the offerings in each sector provide a significant number of value propositions to meet the needs of members and to effectively segment the member base. “Limit the amount of non-rate sensitive money flowing into premium accounts like CD specials with barriers to entry like new money requirements and minimum balance requirements,” he said. And have the pricing committee watch movements in wholesale rates like short-term treasuries. Movements in wholesale rates are leading indicators of what competitors are likely to do with rates in the next three to six months, he forecast. At the bottom of the rate cycle, merge regular accounts with premium accounts like regular MMDA accounts and premium MMDA accounts, getting all members back into the same pool. At the same time ready a new premium service line for introduction. When rates rise, introduce and use the new premium service line to compete with the top rate payers in the market. But hold the line on rate increases on what he called the merged service line. “I know some credit unions may not like some of my recommendations,” he concluded. “But you are involved in street warfare for deposits. The competition is flying F-16s. Too many credit unions are fighting back with pea shooters. If you are to effectively compete, you have to consider upgrading your armament.” [email protected]

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