Innovating and Marketing CD Products.

• Author: Weinstein, Lynn
• Position: Certificates of deposit

Problem:

Our bank needs to gear up our marketing of certificates of deposit in order to gain deposits and increase our liquidity. We would like to reach out to both old and new customers, perhaps by offering unique products in nontraditional ways. Are there ways to increase interest in this conservative instrument?

Solution:

The recent stock market gyrations have opened up opportunities for banks to introduce relatively new CD products. Because these are new products, banks have opportunities for marketing them in new ways. Of course, banks also have opportunities to market traditional CD products in innovative ways. We'll examine both traditional and nontraditional products, the market segment that each product appeals to, and marketing approaches that have been taken successfully to reach each segment.

A variety of new options have emerged in the CD product line, including callable CDs, index-Linked CDs and custom CDs that allow the customer to set maturity dates or to add or withdraw funds. A callable CD may be set, for example, on the London Interbank Offer Rate (LIBOR) plus 15 basis points on a quarterly, floating basis ("Looking for Funds," ABA Bankers News, April 3, 2001). A callable CD requires that an investment banker or underwriter be

involved to do an interest-rate swap in order to add some credit enhancement to the transaction. Educating the sales force and consumers to the exact nature of this product is important, as the SEC logged more than 300 complaints during 2000 from consumers who were not aware that their principal was at risk due to the deposit fluctuations of this CD ("Hybrid CD Raises Questions," Northwestern Financial Review, Feb. 1, 2001).

Some banks are experimenting again with hybrid, variable-rate CDs that are tied to an index, such as Standard & Poors, Nasdaq, certain foreign markets or particular domestic stock sectors. Unlike the callable COs, the equity-linked certificates generally protect the depositors' initial investment and reward them only if there are market gains. Maturities typically begin at five years, and minimum investments are frequently as high as $10,000 or more. While the products are often designed for getting the toes of cautious investors wet, mid- to high-level investors are frequently drawn to equity-based CDs.

Market segments that find this product appealing include risk-adverse investors without any immediate need for liquidity or income, those saving for retirement, and younger...