Alex Habet welcomes deposit expert Neil Stanley back to the show to talk about an interesting opportunity for banks to be heros for their customers by offering refinancing, but not in mortgages.
Listen
Watch
Subscribe
Related Links
[Article] The next refi boom won’t be mortgages
Transcript
Alex Habet
Hi, and welcome to The Purposeful Banker, the leading commercial banking podcast brought to you by Q2 PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Alex Habet.
So a few months ago, Neil Stanley, deposit expert and founder of The CorePoint, came onto the show to help bring a little bit more of a clear perspective into the world of deposits, especially given today's interest as an industry. And that interest has certainly not waned over the last couple of months. In fact, it's remained as intensive, if not more, right? In the very recent news cycle, it's been all about some pretty significant downgrades, at least in terms of number of institutions across a wide midsection of banks within the nation. It's a good number of them experiencing downgrades, and now a lot of the other rating agencies are coming in line with that.
The Fed continues raising the rates, though it's decidedly no longer clear what the future sentiment will be, right? A lot of it seems mixed, right? You're getting perhaps some clear signals from some parties, but less clear signals from others. The data is showing some positive indications. However, there are some other numbers that remain obviously below agreed-upon thresholds that are targeted. But even as the Fed has continued this campaign over the last year and a half raising rates, there appears to be an interesting opportunity that can be had as we've been along this upward slope, right?
So Neil sent me this really enthusiastic email, where he basically pointed to the fact that there is potentially a huge opportunity there and prefaced it by pointing to an article that he had published in the summer of 2022, aptly titled “The next refinance boom may not even be in mortgages.” So with that in mind, I invited Neil to come back to the show and tell us the story of this opportunity, right? No better time like the present and where we are in this cycle to see, well, how can there be places where banks can uniquely insert a new competitive advantage? And there's no better person than Neil to help us guide through that conversation. I hope you enjoy it.
We've now had a decent amount of mileage on this rate hike campaign for a while now. So before we dig into anything new, since the last time we talked, I just was curious as an expert, specifically from the deposits point of view, how would you tell the story of where we are today? It's the end of August, and this has been going on for a while now. There's been a lot of headlines, certainly this year and even last year. I just want to hear what's Neil Stanley's take on where we are now, and just at a macro level where you think we're going towards over the next six months to 12 months as a backdrop, so to speak.
Neil Stanley
That's a nice big question. So the first thing that pops into my mind is that old phrase about the market being, in the short run, a voting machine, and in the long run, a weighing machine. That seems to be very pertinent today because we've had so many opinions about how we couldn't stand these interest rates. We seem to be standing them pretty well, and Wall Street is having to reacclimate their expectations. I can tell you that anytime we had negative real interest rates, and we probably talked about this last time, that you know that rates have to go up. But now that we have positive real interest rates, it's anybody's guess as to where it goes. I tend to think we're kind of where we're going to be for a while. But the market hasn't quite accepted that until recently. In fact, in the last month, you're going to see that the Fed Fund's futures has changed a lot for the end of '24. We're now predicting that 450 might be the Fed Funds rate at what, that would be 15 months from now. So that's kind of where we're at, Alex.
Alex Habet
So clearly not going anywhere close to where we were before, but a slight, slight drop, maybe just a normalization drop for the long term. But you're suggesting that we should all just get comfortable and cozy because what we're experiencing today is by and large a proxy for what longer term might feel like?
Neil Stanley
Yeah, that's a good way to say it. I think the near future is not going to look like the near past. That doesn't mean it's going to look like the far past either. It's going to be a different future with technology and with interest rates that are non-trivial. So we're going to have people learning about managing money that never even thought that they could make money, managing their money. They just thought, "Oh, interest rates are nothing. They're trivial. And so it doesn't really matter what I do with my money. Now it matters what I do with my money.” So it's changing, Alex.
Alex Habet
Yeah, for sure. So it's interesting, the reason I asked this question to you again, given that we're towards the end, the summer of 2023 is slowly wrapping up, but early on in the campaign, a lot of the experts were pointing to the summer of 2023 as that's where you're going to see the major effects start to come in from the rate hikes. And I think what most would agree, and a lot of this is based on sentiment in the media, is that the potential for the soft landing is higher than it was before. It was a much more pessimistic view in 2022 of what the summer of 2023 could look like. And while inflation again is doing better, it’s not within the target range of the Fed. So the media engine is also today in full swing, or a lot of the experts are making the case for further hikes or against further hikes. You're suggesting that will there be any more or you think we're going to start to hit the pause soon?
Neil Stanley
I think we're pretty close to being patient with rates. My sense is that anytime you get to an equilibrium level, you're going to have people on both sides. But for so long now, we've like, "Well, rates have to go up." I mean, even the people who didn't want them to go up and we're like negotiating against raising rates, suddenly, yeah, it doesn't make sense what we're doing. We've got to have a real interest rate. But now we're at a point where you can authentically dialogue about either side of that situation today, and that's different than what it's been before. So relevant rates, relevant activity, ultimately supply and demand does play, even though we have in our society, we have delegated interest rates to a group or a committee. That committee, if it's not aligned with the real market, ends up taking us off course. And the real market does end up impacting the demand and supply of funds.
So they can't just do whatever they want. They have to do what they think is going to be ultimately aligned with the economy. And I don't know if you've heard of R-Star, but R-Star is the neutral rate of interest that isn't stimulative or accommodative or restrictive. It's just right, it's perfect, and it's always a search for where that is. And for a long time post Great Recession, we thought, “Oh, it's really low.” Now we're thinking, no, it's not ultra-low. It's something higher. And so R-Star is kind of where the long-term rates are going to be, and the Fed would like to think it fits their dot plot long term, but again, they're interpreting what they think the economy is going to do and then putting rates accordingly. But what the economy actually does, that's up to the economy.
Alex Habet
So R-Star, that's not ringing a bell from the college economics days, so probably will pick your brain a little bit more about that in the future.
Neil Stanley
You'll probably hear a lot more about it. I've started to hear in the media things about the neutral rate of interest now, where I didn't hear that for 15 years. Just didn't hear about it.
Alex Habet
It's interesting because I was listening to one of your old podcast episodes at another show and you started talking about real interest rates, and it just occurred to me, and I think we talked about this last time we talked, it's like, wow, we're going back to the old school textbooks talking about these different rate types again in a whole new way. I wanted to get your reaction on another set of headlines that we've had recently around some downgrades for some pretty sizable regional banks, especially I think even just yesterday we've had a fresh wave of S&P joining some of the other rating agencies and downgrading some of these institutions. What's your take on that? How do you think these particular institutions might be most impacted by this, and how does it more specifically impact their deposit-gathering strategies, you think?
Neil Stanley
Well, it obviously is a hindrance, just like it is to the U.S. government. When it gets downgraded, it makes the challenge just a little greater. But kind of going back to what I said earlier about the market, ratings are also a voting machine. There's an opinion, it's an assessment. Now it's a credible assessment because they tend to be pretty professional and pretty thorough. And so if a rating is being downgraded, there are going to be reasons and justifications. However, there's a big difference between being downgraded and no longer being relevant. So in a world where you have FDIC insurance that's still viewed as legit and real and impactful, most people say, "Hey, I'm safe. So if my bank is not rated as well, but it pays me more, it gives me more, it fits my needs more, I'm going to bank where it makes sense.”
But if everything else is equal, I'm going to try to be with the safest bank. That's why we had the move to the large banks when the regional banks were starting to be questioned. So I think it's real, Alex. In other words, I don't think it's a non-event, but I don't think it's going to be something we're going to look back and say, "Wow, those banks that took downgrades from the rating agencies, they had a significantly higher hurdle than everybody else.” No, but it certainly was another hindrance that they had to be more intentional about dealing with.
Alex Habet
So just more obstacles in the way more than anything, at least just not an existential issue.
Neil Stanley
That's a good way to say that.
Alex Habet
But maybe just some molasses along the tracks there.
Neil Stanley
One of the things I find in our world today, and again, I've been around a long time, but years and years ago, we used to expect things were going to be hard, it's just going to be hard. And now we seem to have this idea that we're either going to have utopia and everything's just amazing and wonderful, or dystopia, everything's going to be terrible. And I'm like, the real world is somewhere in between always. It's not utopia and it's not dystopia. So the pandemic created a dystopia mentality coming out of the pandemic. We kind of had a euphoria, and now we're like ... . Maybe it's somewhere in between.
Alex Habet
Yeah, it's an interesting analogy that you bring up. I recall that former President Barack Obama said something similar. He said from his perspective, during his time in the job, things were always not as bad as they seemed, but they were also never as good as they seemed either. The world just operated somewhere in that middle zone, yet we kind of have this emotional reaction to go to the extremes. I know I certainly do as someone who entered the workforce in banking one or two years before the Great Recession where we were in that, hey, things are pretty rock, and I was a new hire at Merrill Lynch, things were flying high. Two years later, Merrill Lynch didn't exist. And then all of a sudden the tone of my own prospects in the career, and I've always now gravitated towards, well, there's doom around the corner at all times just because we're sort of institutionalized at this point for those extremes. So I appreciate you, at least, bringing us back to center and reminding us that things are probably a little bit more in the middle than we typically think.
So last time we chatted offline, one of the things that you brought to my attention, which I thought was interesting, was the notion of pressure gauges that you and your company tend to track across a variety of institutions. And when we chatted, you pulled up a couple of examples and just showed me just some of those things that you measure in that pressure gauge. Talk to me about how tools like that are really useful for whether you're an executive running a bank and you want to keep track of metrics or you're someone who's analyzing how the banks are performing. How do you leverage things like your pressure gauge for your day-to-day strategic decisions?
Neil Stanley
Well, this was certainly an evolution in its coming to be. When I started the business, I thought, "Oh, I'm going to help people. I'm going to help bankers and financial institutions manage the long-term savings." Well, who can I help? I figured I can help those who need it most. Those who are really struggling. And then I found the people who are sometimes really struggling aren't really that attentive to all the issues, and so it's hard to help them, but pressure, which means, "Hey, if we don't make the right decisions, there are going to be some consequences." Now if they don't have pressure, they just don't have as many potential negative consequences. But pressure doesn't mean performance. That's one thing I just like to say as I talk about pressure gauge.
Our pressure gauge for bank funding looks at two things. It looks at how much we're paying for our most expensive deposits, sort of the marginal deposit. If we need more deposits, we usually run a CD special. How much are we paying for those? So compared to the peer, are we paying more or less? The more we pay, the more pressure. And then loan to core deposit. There's no doubt, and the regulations are getting even more focused in on funding for obvious reasons. So if your loan-to-core-deposit ratio is high, you're going to get a lot of intense pressure from the regulators and probably internally from board, as well. So when we put those two things together years ago, and people would say, "Oh, who makes a good client for you?" We would say, "Well, it's not necessarily the people who are bad performers because there may be some reasons why they're struggling. We like to work with high performers who have a lot of pressure, and the consequences of their decisions make a difference.”
So when we find a high performer who has a high cost of CDs and a high loan-to-deposit ratio, let's talk to them. Let's go see if we can help them, because they're probably going to be interested in better ways. So we have that as kind of a private tool. We pulled the FDIC data, we had that data, and then people would call us and say, "How about this bank? And how about this one?" And then finally one day dawned on it, well, why don't we actually publish it? Because we're not making any judgments here. We're not saying, "Hey, this is a good bank, this is a bad bank." None of that. We're simply saying, "Here are the metrics. You decide.” And then we rank them by percentile. So this pressure gauge would tell you, if you pull up any FDIC cert number or bank name, key it in, it's going to tell you how much pressure they have relative to industry peers.
Now, if I'm in a market, I'd love to have my competitors have very little pressure, because if you look at the pressure of your competitor, I guarantee you, the ones that have a high pressure are going to be aggressive competitors when it comes to pricing and going out and getting business. So it's good to know what your pressure is, but it's also really important to know the pressure of your competitors because you can start to anticipate what their motivations are going to be and maybe some of the actions that they might take.
Alex Habet
And so are you suggesting that there's some sort of leading indicator factor in how they're going to show up in their go-to-market strategies behind that?
Neil Stanley
Absolutely. That's a good term for it. Leading indicator for someone who's going to be very attentive to deposits.
Alex Habet
Got you. Got you. So with that in mind, you did also bring up, certainly after the last rate hike, which is I guess probably almost a month ago now, you sent me an email, and really that was the genesis of today's episode. You wanted to spotlight that there's actually a pretty interesting opportunity for many institutions out there. And to preface that, you also shared an article with me that you had published a year ago suggesting that the next refinance boom might not be in mortgages, but might be in CDs or other deposit products. So one of the things that you'd brought up to my attention is, hey, there's this, I guess maybe this under-the-radar strategy that certain institutions can employ. Do you mind sharing with the audience your thinking behind that, and perhaps to those bank executives that might be listening, what are some things that they could look into within their own institutions to implement a strategy like this?
Neil Stanley
Well, it's obviously something that we do want to talk about, and we do know that there's a lot of tension on this subject. Let me give you just a little history to set this up. So years and years ago when I started in banking, nobody knew what a refinance was. It just didn't happen. But we all know refinancing and mortgages today. Oh sure, if rates fall, I can lower my cost of my mortgage. And so if you mention refinance, everybody in the world knows what that is. So that changed, right? It wasn't that way, but now it is. Now for 30 years, rates went down, and at some point in my career, I said, "This refinance thing on mortgages would be just the opposite. If interest rates went up, we wouldn't refinance our debt. We as consumers would refinance our assets.”
So I'm managing a bank. I don't want that to happen to damage my bank. So what do we do? We modified early withdrawal penalties. We didn't have 90-day penalties anymore because that 90 days of interest penalty, that's all based upon an interest rate that has nothing to do with the financial opportunity of trading out the account. So Alex, I remember back 20 years ago, I went to a group of my peers and I said, "Guys, if we went to a freshman college class”—I mean these are not experts—and we said, “Hey, you're in a freshmen finance class. If you have contracts with people and the counterparty breaks the contract, how would you determine the damage that you would assess in the penalty?" Well, everyone without any prior knowledge would say, "Well, it should be based on the damage it does." Right?
Hey, if we have a long contract and the difference between that contract price and the new price that's available in the market today is major, then the breakage is going to have to be major. But if it's a short term and the difference between market value and the book value or the current rate is not much, then there shouldn't be much penalty. That 90 days or six months of interest has nothing to do with the damage done. And that was all interesting theory, Alex. But over time rates moved typically down and they'd come up a little bit, right? Nothing like we've seen here in the last 18 months. So if you go out today and you find various tools like CD Valet and depositaccounts.com, you'll find that in those tools someplace, they'll have something about breakage fees and calculating the value.
If you were to trade out of a current account that might have so many months of interest, just think about it. It was just a year ago that 1% was a pretty attractive CD rate. Like, "Oh, I'm getting 1%." But 1%, if you have a six-month penalty on a $100,000 CD, 1%, well, six months, half of one year's interest, that's $500. All right, $500. And that doesn't sound trivial, but how much could you make on $100,000 CD today on interest? 5%, $5,000 per year? That little $500 penalty’s pretty insignificant.
So what happened to us, to the banks that didn't acknowledge this vulnerability in their asset liability process? Most bankers that I talked to, and I brought it up to a lot of bankers, Alex, I'd say, "Hey, have you reassessed your early withdrawal penalties?" "They're the same as what they've always been and we haven't had any problems." Well, yeah, they might be the same structure. In other words, six months of interest, but they aren't the same as what they were back when interest rates were 4% or 5% because the interest rate determined, when you're using so many months of interest, determined the penalty.
And when do you need a penalty? When interest rates are low, I'm going to go higher. So the tension here, Alex, and the reason I thought that you and I'd have a good conversation is, there are a lot of bankers who are right now just holding their breath, hoping nobody finds out about this. "Hey, this is going to be our little secret because if our depositors knew about this, we would be losing deposits that we want to keep at 1% or sub 2% or sub 3% rates.”
So what's happening today is that the banks that are progressive, instead of going out and battling for all the accounts, looking for a home, like, "Oh, I've got a CD at mature, now I need to go find a home for it. I'm going to go look for an opportunity." Here's what the brightest are doing. They're saying, "You know what? I know there are people in my market space or out of my market space who have low rates. And they think they're trapped in those because there are supposedly substantial penalties for early withdrawal. And they're sitting there, mostly senior citizens, sitting there going, ‘Just kicking myself, I shouldn't have let that CD renew last time because I still have another 13 months or 23 months or some amount of time. But gosh, I hear there's a penalty for early withdrawal.’ ”
Here's what the best and brightest are doing. They're reaching out using direct mail, using digital marketing, and they're reaching out and saying, "Alex, do you or a loved one have a bank or credit union CD? Give us the numbers, and we'll run a no-obligation analysis. We'll just run a complimentary assessment of would you be better off to take the penalty. We don't know what your penalty is until you do the research and find out what it is, but you should know what your penalty is. Take your penalty off of the principal and interest, bring that money over to our bank, and we're going to give you a fair price today. And when you run the numbers, we're going to give you a certificate that matures on the exact same day as your current CD. So you're not going to take any risk. You're not going to have any repricing risk. Oh, now I've got a different maturity. No, we can actually create a CD that matures on the exact same day as your current one, and you can calculate if you leave it in that account that you have currently, what's it going to be worth. This is just simple finance, math. What's it going to be worth if you leave it? Then if you were to pay the penalty and transfer it over to us, we're going to show you exactly in dollars what it would be worth."
Alex, today we run that on a $100,000 CD. It is not unusual to have $3,000, $4,000, $5,000. We even have sometimes $7,000 of difference depending upon how long the CD is and what the interest rate differential is. These people can put thousands of dollars in their pocket, and the financial institution helping them do it isn't paying a premium. The financial institutions actually can pay sometimes a little less. Because just think about it, if you're out there, you've got your matured account and you're looking for a home for your ... Well, you're going to shop. You're going to go, "Hey, I need to get the highest rate.” And I'm going to look for all the highest rates. But if I come to you and I say, "Hey, my financial institution can trade you out of your old account and I can give you several thousand dollars worth of gain." There's a rapport being built there. You're going, "Wow, is this legit?"
Oh yeah, it's legit.
Alex Habet
Seems scammy a little bit upfront, right? When you're promising that kind of differential.
Neil Stanley
But you do have to run the numbers. We have a tool that we can visually show them, and they can confirm with their current bank, "Hey, yeah, if you keep it here, this is what you're going to get." It's just math. But we can confirm if you transfer that money net of penalty over to us, you're going to get, sometimes it's $5,000, sometimes it's $6,000. It depends on the size of the CD and everything, but running the numbers every CD owner should today be doing. Now we're talking to a group of financial institutions today, and when I say that, they're all going, "Oh no.” We don't want our clients running the numbers. So here's what we do. We don't broadcast this in social media. We're not out there saying to every consumer, "You should refinance your accounts." What we do instead is we work with companies like Amsive, they're a direct marketing company, and they pull the data from our clients, and they say, "Oh, you have all of these accounts."
We do not want to introduce this idea to them, but in this market that you want to go after, here are a bunch of likely prospects. Let's send a targeted message to them that says, "Do you or a loved one own a bank CD? If you do, you'd be wasting thousands of dollars." And the responses by those people is, well, this seems like you said, I'm a little skeptical, but I got nothing to lose by just finding out. And they contact us and we run the numbers for them. And back in the day before interest rates went up, here's what would happen. "I can't really make you much money, but thank you for the opportunity. If interest rates rise in the future, would you like me to get ahold of you?" And in order to run the analysis, they told us what bank or credit union they were with, they told us how many dollars they had.
They told us when it would mature. They told us what interest rate is that. Alex, this is huge CRM value. We're getting information. So as it gets close to maturity, this isn't happening now, this was happening before rates rose. Just running the idea, gave us valuable information about that perspective depositor. Now, of course, virtually all of them have a net benefit to transfer right now, there's no waiting around. Very significant net benefits to transfer. Now, as interest rates stop rising or potentially fall, that window will close for the value of immediate transfer. But the value of having the consultative conversation about should consider options today trading out of an old account into a new one, it's still valuable even if they don't transfer today.
I covered a lot of bases there. You probably have a question or two.
Alex Habet
Yeah, no, no. I mean, I think there's just something probably unique about where we are in the cycle of changes that makes this, right? Because if we were anticipating even further hikes in the future, then it might not be, because you potentially would have to do this kind of play again and again. However, given that we're likely reaching the top, now it's a good opportunity. Maybe it's like a once in a generation opportunity to run this kind of play, especially as rates now might start to stabilize and not fluctuate as much, which would take this kind of play off the table in a year or two years down the road, right?
Neil Stanley
You got it. So I like how you brought this up to the audience here. You mentioned that I wrote an article a year ago, and I did, and it was sort of that anticipation of this. And then after writing the article, I kind of went, let's just keep this on the down low for a while. And the reason being exactly what you said, if we would've gotten really aggressive with this and it was kind of marginal impact, it's like we could, we could, maybe. But today, it's not a marginal impact. If you want to move money from your competitors to you today, there's no better way than coming across to that depositor as the hero of the story. We are heroes. When we help people do something that they thought they were trapped in a bad deal and we liberate them from it. Today that liberation is a real opportunity.
They won't remember every CD that they owned, but I guarantee you they will remember who helped them get out of a deal they thought they were trapped in, that was not good, and they open the door to significant value. Now, usually when I talk to bankers, they see it as a zero-sum game. "Hey, to get value, we have to give up value." This is not a zero-sum game, because we can give really good value to that depositor and they can get really good value. The loser is very clear, the bank of current deposit, the banks that are sitting there with trivial penalties. Even against our advice over all these years, we say,
"Hey, check out your penalties." You can find lots of articles where we've said, "Fortify your penalties, bankers. Fortify them." Guess what most bankers did. Nothing, right?
Alex Habet
They thought the moat was deep enough that they didn't have to worry about that. And now they're little puddles maybe. I don't know.
Neil Stanley
I have empathy, but I can tell you there were lots of warnings, and those who didn't take the warning, there are consequences. Now, here's the deal though. The opportunity to do this today, and that's the reason why I contacted you. This is prime time. This is the time where the depositors can get real value, and the current bank of depositor's going to lose. Yeah, they're going to pick up their penalty, but they're trivial. So that's why I had to be super patient. It was hard. I wanted to call you January 1st and say, "Alex, we should do a podcast about refinancing CDs." And even when we talked last time, I wanted to emphasize it more. I feel like now's prime time.
Alex Habet
Now's prime. So to all the bankers out there, how can they learn more about this? How can they reach out to you and have a conversation?
Neil Stanley
Thank you for that invitation. Our website is thecorepoint.com, and if you go out there, you'll see a little link that you can set up a demonstration and it is going to have my calendar out there. It's going to find an open spot, set up a demonstration, and we would be happy to show you what we call CD Revolution. That's our brand name for this refinancing, we talk about it as refinancing, but internally, our proprietary name is CD Revolution.
Alex Habet
Excellent. Excellent. Well, I want to thank you, Neil, again for coming on to The Purposeful Banker. You're officially now on regular status having now done your second episode this year, and we certainly look forward to you stopping by again in the coming months. I would actually love to get a retrospective on this particular strategy. I want to see or maybe hear some stories of some of the conversations that you're having with your clients on a day-to-day basis around strategies just like these, because there's no shortage of institutions out there that could use a pretty good strategy right now. So we certainly appreciate your wisdom here on the channel.
Neil Stanley
Well, and I know your audience is a cut above the industry average because they are attuned to really good technology, and we've brought together technology and the interest rate environment with this particular product. And it would be an honor to be back on and give you a retrospective or maybe just an update, because it's probably not going to be over anytime soon. But we would love that, Alex. So thank you for the opportunity.
Alex Habet
And that's it for this week's episode of The Purposeful Banker. If you'd like to catch more episodes, please subscribe to the show wherever you like to listen to podcasts, including Apple, Spotify, Stitcher, and iHeartRadio. You can also catch a show now on YouTube. Don't forget to subscribe and hit that like button. It really helps get the message out there. And if you have a moment to spare, let us know what you think in the comments. You can head over to q2.com to learn more about the company behind the content. Until next time, this is Alex Habet, and you've been listening to The Purposeful Banker.
