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Chapter Twelve: Managing and Pricing Deposit Services

The document discusses various types of deposit accounts and strategies for pricing deposits. It describes transaction deposit accounts used for purchases and savings deposits intended to encourage saving. Various savings deposit types are listed, and factors that influence interest rates on deposits are discussed, including maturity, size of institution, and risk. The document also outlines regulatory requirements for disclosing deposit terms, methods for determining the costs of deposits, and pricing approaches such as conditional pricing based on balances and relationship pricing based on number of services used.

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Tarique Adnan
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Download as PPT, PDF, TXT or read online on Scribd
60 views

Chapter Twelve: Managing and Pricing Deposit Services

The document discusses various types of deposit accounts and strategies for pricing deposits. It describes transaction deposit accounts used for purchases and savings deposits intended to encourage saving. Various savings deposit types are listed, and factors that influence interest rates on deposits are discussed, including maturity, size of institution, and risk. The document also outlines regulatory requirements for disclosing deposit terms, methods for determining the costs of deposits, and pricing approaches such as conditional pricing based on balances and relationship pricing based on number of services used.

Uploaded by

Tarique Adnan
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter Twelve

Managing and Pricing Deposit Services

Transaction Deposit

An Account Used Primarily to Make Payments for Purchases of Goods and Services

Types of Transaction Deposits

Noninterest-Bearing Demand Deposits Interest-Bearing Demand Deposits

Thrift or Savings Deposit

An Account Whose Primary Purpose is to Encourage the Bank Customer to Save Rather than Make Payments

Types of Savings or Thrift Deposits


Consumer Credit Linked Deposit Scheme Investment Deposit Scheme for Entrepreneurs Farmers Investment Deposit Scheme Investment Facilitating Deposit Scheme Monthly Benefit Scheme Monthly Savings Scheme Education Savings Scheme Hazz Scheme

Interest Rates on Deposits Depend On

The Maturity of the Deposit The Size of the Offering Institution The Risk of the Offering Institution Marketing Philosophy and Goals of the Offering Institution

Core Deposits
A Stable Base of Funds that is Not Highly Sensitive to Movements in Market Interest Rates and Which Tend to Remain with the Bank

Truth in Savings Act


Consumers Must be Informed of the Deposit Terms Before Opening a New Account Depository Institutions Must Disclose: Minimum Balance to Open Minimum to Avoid Fees How the Balance is Figured When Interest Begins to Accrue Penalties for Early Withdrawal Options at Maturity etc.

Cost Plus Profit Deposit Pricing

Estimating Unit Price Operating Planned Overhead Charged the Expense Profit from Expense Customer = Per Unit of + + Each Allocated to for Each Deposit Service Unit the Deposit Service Service Sold Function

Historical Average Cost Approach

Determines the Banks Cost of Funds by Looking at the Past. It Looks at What Funds the Bank Has Raised to Date and What those Funds Have Cost.

Pooled Funds Approach


Determine the Banks Cost of Funds by Looking at the Future. What minimum Rate of Return is the Bank Going to Have to Earn on Any Future Loans and Securities to Cover the Cost of all New Funds Raised.

Using Marginal Cost to Set Interest Rates on Deposits


Many Financial Analysts Would Argue That the Added Cost (Not Weighted Average Cost) of Bringing New Funds into the Bank Should Be Used to Price Deposits.

Market Penetration Deposit Pricing

The Method of Selling Deposits That Usually Sets Low Prices and Fees Initially to Encourage Customers to Open an Account and Then Raises Prices and Fees Later On.

Conditional Pricing
Schedule of Fees were Low or No Fee charged, If Customer Stayed Above Some Minimum Balance. But faces a higher fee, if balance falls below minimum. Conditional Pricing Based On One or More Of the Following Factors The Number of Transactions Passing Through the Account The Average Balance Held in the Account During a Designated Period (usually a month) The Maturity of the Deposit

Conditional Pricing
Economist Constance Dunham has classified checking account conditional pricing into three categories. Flat-rate Pricing (monthly account maintenance fee plus per transaction fee) Free Pricing (Free of cost, but causing opportunity cost) Conditionally Free Pricing (Free of cost, if the balance is kept upto a certain level)

Relationship Pricing
The Bank Prices Deposits According to the Number of Services Purchased or Used. The Customer May Be Granted Lower Fees or Have Some Fees Waived If Two or More Services are Used.

Basic or Lifeline Banking


Some People Feel That All Individuals Are Entitled to a Minimum Level of Financial Services No Matter Their Income Level

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