Thrill of CD Auctions Lures Investors
(I did not write nor claim any of this article as my own. It was written by the below mentioned person)
By DONNA KARDOS
(The Wall Street Journal)
As the stock market continues to be roiled by volatility, investors are turning to a surefire way to make their money grow, but with a modern twist: certificates of deposit that are auctioned off online.
The yield rates from the auctions aren't always better than the average retail CD rates. Still, investors have been turning to CD auctions for the thrill of the game, the comfort of a fixed rate and the chance that the rate they get might be above average.
MoneyAisle.com and Zions Direct offer two of the most well-known CD auction services. Both only offer CDs from banks insured by the Federal Deposit Insurance Corp., and have seen monthly hits to their sites and auction activity accelerate as the recession continues to affect consumers' investment decisions.
The FDIC currently insures deposits up to $250,000 per depositor per bank, but that coverage is scheduled to drop back to $100,000 in most cases at year's end.
Zions Direct, run by Utah-based regional bank Zions Bancorp, puts the bidding in customers' hands, giving them the chance to bid on CDs offered by multiple banks for terms such as one month, two months, three months, six months and one year. There are no sign-up charges and no broker fees, but investors need to deposit at least $1,000.
MoneyAisle.com asks investors what they want to deposit and for how long, prompting 112 banks to vie for the deposit. The site—which charges banks a fee to participate—chooses the bank that offers the best rate for the investor. It then presents the offer to the investor, who can back out if unsatisfied with the rate.
MoneyAisle Chief Executive Mukesh Chatter says he developed MoneyAisle to counter the idea that consumers have to find the best deals for things they want to buy on their own. "We're removing that burden," he says. Monthly hits to the site have jumped fivefold to more than 75,000 visitors in February from 14,586 visitors in July, its first full month in operation.
David Hemingway, executive vice president of Zions Direct, touts the fact that the Zions auction process—a modified Dutch auction similar to the way the Treasury Department auctions off its Treasury bills— gives investors the chance to control the auction. He says investors can secure CDs at yields higher than those they bid for because the auction gives all winning bidders in each auction the same yield.
In March, the auctions site on Zions Direct received 18,500 visits, more than triple the 5,600 hits it got in March 2008. Auction accounts soared 71% to just under 8,000 bidders in February from a year earlier.
Most banks auctioning CDs via Zions Direct are Zions affiliates, but those that aren't are charged a flat fee to participate. "What we are really interested in is the deposits that come with the new bidders' brokerage accounts," Mr. Hemingway says, though he noted the auctions currently contribute just a small fraction of the parent company's deposit base.
The Zions and MoneyAisle sites also are attracting users seeking entertainment value, says Motley Fool senior analyst Dan Caplinger. "Auctions are kind of fun," he says. "You feel like you're participating in things and getting a bargain you wouldn't otherwise get."
That's not necessarily always the case for CD auctions, though. While some result in better-than-average CD yields, others don't. Still, Zions' Mr. Hemingway points out, "they may not be excited about the yield, but people are happy just not to lose their money."
© 2009 Dow Jones & Company. All Rights Reserved.
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