CD customers encounter different decision spaces when a CD maturity decision moment occurs. Considering most Institutions routinely experience renewal rates in excess of 75%, CD renewals present an enormous opportunity for portfolio management to gain more control over term structure, cost of funds and liquidity.

Let’s consider a simple example to illustrate what we mean.

When a CD reaches maturity, our Customers are thrust into a decision moment. They have to make a choice. The CD that has matured has effectively turned into a zero-term, zero-yield asset that needs to be redeployed. For simplicity our example will just consider rate differentials (option costs).

Suppose we have a customer with a maturing 12-month CD. The renewal offer is 3.50%. The current 24-month rate is 3.55%. The benefit of switching terms is five basis points.

Another customer faces a very different decision. They have a 6-month CD maturing and a renewal offer rate of 2.0%. Compared to the same 24-month rate of 3.55%, moving to 24-month term has a materially better option value of 155 basis points.

In one case the benefit of switching is marginal. In the other, it is substantial.

The decision spaces those two customers encounter are not the same. The options are different. One customer is likely to renew to the same term. The other is far more likely to renew to a different term. All within the boundary of the Institution’s CD offerings at exactly the same moment in time.

Once we frame it that way, predicting renewal term choices becomes less mysterious, if not obvious. Differences in decision space options influence how populations of Customers will choose to act.

Now the management opportunity appears.

If we can identify customers facing unusually attractive alternatives, we can selectively alter the decision space options to influence Customer choices.

Suppose ALCO has identified a need for more 24-month money. We can identify customers whose option benefit to move longer is already substantial. Those customers are already leaning in the direction we want.

But how do we convince the person with the 12-month term to switch to 24-month? The rate sheet incentive of 5 basis points is not likely enough. An additional incentive, offered only to the people we want to influence may tip their decision from same-term to different term renewal.  We can get the 24-month money we need with very little incremental cost by incenting the Customer to cross the Boundary between the Renew Same Term and Renew Different Term decision spaces.

Notice what we are not doing. We are not repricing the entire CD portfolio. We are not increasing rates for every customer. We are not launching a broad promotion. Instead, we are focusing on customers whose decision spaces make a particular outcome more likely.

What emerges is a different way of using incentives. Presenting Customers with an incentive to choose one term over another. Selectively. Deliberately. To manage the term structure of the portfolio.

That is a very different approach to deposit management.

Traditional pricing tends to assume that if we want more of something, we should change the rate for everyone. Decision-space management suggests a more precise alternative. Find the customers whose choices are still in play. Measure the strength of the alternatives they are facing. Then selectively alter the value equation where influence is most likely to matter.

Another powerful notion is that rates are only one possible lever to influence choice.

A decision space contains more than price. Term flexibility, liquidity features, relationship benefits, renewal privileges, service features and other product characteristics can all influence the perceived value of an option. The effort required to consider other options and to execute the action they want also come into play as costs. A customer does not just evaluate a rate. A customer subjectively evaluates an offer’s net benefit.

That becomes important because it creates management flexibility.

Everyone knows rate increases are expensive. Adding ten basis points across an entire portfolio is a costly decision. Offering a targeted feature to a small population is much less costly. If the objective is to influence a specific decision outcome, selectively changing the value equation may be far more efficient than changing the rate sheet for everyone.

Managing Customer decision spaces becomes an operating model. We begin by observing how customers respond to different decision environments. We identify situations where alternative options create a strong incentive to change behaviour. We determine which outcomes are desirable from a portfolio management perspective. Then we selectively modify the decision space for customers whose decisions are still open.

The customer still decides. We can thoughtfully shape the environment in which the decision is made. That is a fundamentally different way of thinking about deposit management.

And because those decision spaces can be identified using data we already possess, the first steps are surprisingly practical, inexpensive and immediately actionable.