Auctions and the Internet seem to go well together. For more than a decade, eBay (NASDAQ:EBAY) has helped people buy and sell diverse and often rare items that were previously almost impossible to track down. People looking for discount travel and hotel rates can pick their price and make a bid on Priceline.com (NASDAQ:PCLN) to pay what they want. Other specialized sites focus on narrow market segments but provide convenient access to many kinds of goods, including business equipment, auto parts, and real estate.
Now, Zions Bancorp (NASDAQ:ZION) is bringing the auction format to investors. In an attempt to capitalize on the popularity of Internet auctions, Zions is planning to offer certificates of deposit to investors via a bidding process. By letting the auction establish interest rates for its CDs, Zions hopes to entice investors into opening accounts with it, thereby collecting more assets for itself.
History of CD auctions
This isn't the first time that financial institutions have offered CD auctions. In the late 1990s, when the Internet boom was still in full swing, other banks, such as PNC Bank (NYSE:PNC) and the Internet-based bank Usabancshares.com, held auctions for CDs. Investors who took advantage of these auctions often received extremely competitive rates; some auctions started at a 10% yield, and some multiyear CDs were won with bids greater than 8%, which was far more than the prevailing rates at the time.
Unfortunately, those auctions were short-lived. PNC no longer offers CD auctions, and the Usabancshares.com website is no longer in operation, having been bought out by private Nova Savings Bank. Now, however, Zions is bringing back memories of the bubble by providing a new forum for CD auctions.
How auctions work
Zions has chosen to use a different format from other CD auctions. Previous auctions generally had bidders name the annual percentage yield they were willing to accept; each new bid would have to be lower than the previous bid, so as the auction proceeded, the rate would slowly come down. When the auction was complete, the bank would issue a CD that paid the winning interest rate on a monthly or quarterly basis.
The Zions format is much more similar to the way the U.S. Treasury conducts auctions of Treasury securities. Zions will establish an interest rate for the CDs, and then prospective buyers will decide whether they want to pay a premium to their face value or try to buy them at a discount. To make the mechanics of bidding easier, bidders will be able to name either the yield they want or the price they're willing to pay for the CDs. Unlike Treasury auctions, however, the bidding process is open, so investors will be able to see if their bids are still winning. If you've been outbid, then you can submit a better bid that has a higher chance of winning. The first auction runs over two business days, from the morning of Feb. 21 to the afternoon of Feb. 22.
One advantage of the Zions format is that even if you win the auction, you may end up paying less for the CD than the amount of your bid. Zions uses a technique known as a Dutch auction, in which all bidders pay the lowest price that will result in all the offered CDs being sold. To determine the winners, Zions will put all the bids it receives in order from highest price to lowest price. The bank will then start accepting those bids until it gets to the point where it has sold all the CDs it wanted to offer. The price of the last bid the bank accepts is the price that all winning bidders will pay.
The key, however, is that in order to bid, you must already have an account at Zions. In contrast, previous auctions allowed customers to bid first and open the account later on if they won.
Big bargains ahead?
The CD auctions of the late 1990s offered unique opportunities for investors to get above-market yields on deposits. In particular, when CD auctions first started, relatively few people knew about them, so there was less competition and rates remained high. When the auctions became more popular, more bidders tended to bid rates down to or below the rates available at other banks.
It will be interesting to see whether the Zions auctions will prove to have more staying power. At first, there may be relatively few participants, since you must already be a Zions customer to bid. With few people bidding, those who do may be able to get some great deals. In the long run, of course, Zions hopes that the auctions will attract new customers; they'd probably be willing to issue a few CDs with above-market rates as a temporary loss leader to bring in new business.
CD auctions bring the appeal of online auctions to investing. If you recognize what rates you can get at other banks and don't let the auction format affect your judgment, CD auctions are a no-lose proposition for investors.
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Fool contributor Dan Caplinger has nice memories of winning a few Usabancshares.com CDs, but he'll just be an interested observer this time around. He doesn't own shares of any of the companies mentioned in this article. eBay and Priceline are Motley Fool Stock Advisor picks. The Fool's disclosure policy isn't up for auction.
