Rate Wars: A New 6.17% APY and T-Mobile Enters at 4.00%
Effective today, DCU, the largest credit union in Massachusetts at $8.6B, is offering a 6.17% rate on the first $1,000 in a simple savings offering, with a tiered structure thereafter.
I believe this is an improvement upon its prior 5.00% offering. The annualized cost of funds to DCU on the $1,000 after compounding, by my projections, is ~$68.00. This rate should attract more customers while only slightly re-pricing some existing depositors. A base customer acquisition cost of $68.00 annualized for that $1,000 account is clever for the following reasons:
· It dilutes DCU’s existing sunk operating costs across a broader member base, while adding nominal unit-based cost;
· The funds are a source of liquidity to capitalize higher yielding loans and the blended average yield of the rate on the total deposit in relation to the average loan yield is truly the metric worth monitoring. The compounded annualized APY paid on 2nd $1,000 deposited at .25% is ~$2.47. This means the blended rate on a $2,000 deposit is closer to 3.2% and decreases exponentially with each additional dollar deposited thereafter which creates greater spread in net interest income.
· Undoubtedly, the funds will be used to capitalize loans and it appears their lowest loan rate across their offerings is 3.50% on a 5/1 ARM. Though, markets being as they are, it is more likely the funds will be used to capitalize higher yielding, lower balance, consumer loans such as credit cards or their “quick loan” no-credit-check offering which is yielding 22.00%.
The genius here is likely a cycle of taking in $1,000 at 6.17%, and churning that same $1,000 out almost on a revolving basis at 22.00% for a spread of 15.83%. By my calculations, that’s an annualized net interest income amount of $168.00 per first $1,000 if utilized in such a manner, even after accounting for supplemental loss reserve expense for any anticipated increase in charge-offs on a higher risk product. Assuredly, both the high yielding deposit rate, as well as the convenient and trusted alternative to payday lenders are attractive offerings to the DCU members. This illustrates the benefit of creativity and flexibility in product offerings.
Meanwhile, it creates upward rate pressure on in-market competitors to match. Anyone following earnings calls across the banking industry have noticed flattening net interest income and flat deposit trends. Meanwhile still, it’s +33% more interest than the latest high-yield offering from banking upstart …. T Mobile. Yes, that T Mobile. When compared against the hundreds of new deposit taking fintech entrants offering ~3.00% deposit rates, I personally would prefer a relationship with a full-service, regulated, established, trusted, credit union like DCU.