Is the 8% Certificate the Future of Credit Union Growth?

Share certificate promotions can be a cost-effective way to grow a credit union, but there are some risks and alternatives to consider.


According to a Wharton Financial Institution Research Center study, it costs $116 to sell a product to a new client and $63 to sell a product to an existing client. In the first half of 2006, credit unions with more than $50 million in assets spent an average of $344 on education and promotion for each new member.

Given these costs, the expense associated with certificate promotions, which many credit unions are using to stimulate share growth, seem quite small. For example, if a credit union currently offers a one-year certificate rate of 5% and then offers a promotional rate of 8%, the added cost of the additional 3% is $30 per $1,000 deposited. If, for example, the credit union put a $2,500 cap on the money that would earn 8%, and a member deposited $5,000, the blended rate would still be 6.5%. This would cost the credit union an additional $75 versus a member who invested in the non-promotional 5% rate.

The real value of this member is achieved as the account matures and the certificate comes due. If the credit union can move the money that was paying 8% to a lower rate, say 5%, the marginal cost of funds of that money will be negative. From a long-term view, if the credit union can hold onto 80% of the money the 8% certificate brought in, then the cost of acquiring that account would be far lower than the numbers seen in the Wharton Financial Institution Research study.

Scenario analysis is important when estimating the marginal cost of funds beyond the initial funding date and based on expected future member behavior. The level of interest rates when the certificate matures will affect the marginal cost in today’s dollars. And credit unions need to look at a range of fund retention rates, being careful not to overestimate the ability to hold on to funds originally attracted by the promotional rates.

The Alternative to Share Certificate Promotions

When analyzing share certificate promotions, it is important to balance the short-term expense and possible cannibalization of lower-cost deposits with the longer-term implications of gaining new members and long-term stable funding. Some credit unions have opted to avoid the relatively higher uncertainty of share certification promotions as a funding strategy by borrowing funds from the Federal Home Loan Bank or their corporate credit union. When borrowing, the credit union doesn’t need to worry about cannibalizing its lower-priced shares, plus it knows the money will have a stable interest rate for a set term. The downside to borrowing is you do not get the opportunity to develop new member relationships.

On its face, an 8% certificate rate may not sound like the most prudent way to grow, but when the details and scenarios are analyzed, it could make sense for your credit union.

To learn more about evaluating share certificate promotion, View our webinar“Are Aggressive Share Certificate Promotions the Answer to the Industry's Liquidity Crunch?” a webinar brought to you by Callahan and Associates.




Sept. 18, 2006


  • This article touches on a very key point -- what are the "intangibles" of organic funding versus wholesale. How do we quantify -- extremely important point the article raises
  • Great article. I pursued this type of strategy successfuly for years at my old credit union, much to the chagrin of the CFO, who just did not understand the value. Marketing took many hits on using tactics like this to acheive historically strong deposit and member growth while maintaining an ROA well over 1.0%.
  • Throwing out a high rate to the public is the easy way out. Credit unions need to be more inovative in drawing in a member with lower cost of funds. Relationship pricing strategies, SEG penetration, financial services and business banking seem to be more difficult yet more cost effective in the long run. B of A just announced free on-line trading today.
  • Our credit union has followed a similar strategy with great success and it has been embraced by our CFO. She understands the value of attracting targeted new members with this type of offer and using it as a starting point to develop deeper relationships with members you may not have had any contact with otherwise. Of course, you could always take the unimaginative and easy way out of just borrowing money from the marketplace, but that develops NO new member relationships.
  • We have used this short term, premium priced CD special with a maximum limit of $1,000 in conjunction with opening a branch in a new market area. The CD special was only available at the new branch. While some of our existing members traveled to the new branch, the promotion also resulted in a significant number of new members and great exposure for our new branch, our services, and our superior member service. We have had such CDs opened for sons and daughters due to the limited amount. We only allow one of these CDs per member. We also have a Member Loyalty Rewards program designed to encourage members to utilize at least 3 different services and based on the aggregate total of shares and loans to qualify for the various tiers. We have also been successful in increasing the average number of services per member through an aggressive cross selling program in our front line areas.
  • Three problems with this approach in my experience: 1. Demographics of CDs are getting older and older. This will be an increasignly diminishing pool of money as time goes by. Has your son or daughter opened a CD on their own? 2. Rate specials bring out rate chasers. You'll have to have an equally high special when that CD matures, so they'll go elsewhere or you'll still be overpaying. 3. What are you going to lend 8% money out at in this rate environment?