Transcript File - Business at Sias

Chapter Ten
Managing and Pricing Deposit Services
Key Topics
•Types of Deposit Accounts
Offered
•The Changing Mix of Deposits
and Deposit Costs
•Pricing Deposit Services
•Conditional Deposit Pricing
•Disclosure of Deposit Terms
•Lifeline Banking
Introduction
p. 293
• Deposits are a key element in
defining what a bank does and what
critical roles it plays in the economy
• Deposits provide most of the money
for making loans and represent the
primary source of profits and growth
for a bank.
Introduction (continued)
p. 294
• Two key issues every bank must deal with in
managing the public’s deposits
1. Where can funds be raised at the lowest cost?
2. How can management be sure that the bank
always has enough deposits to provide loans and
other services people demand?
• So challenging has it become today to get large, new
deposits that many banks have created a new
leadership position – chief deposit officer
Types of Deposits Offered by Banks p. 294
1. Transaction 交易 (jiāoyì) (Payment or
Demand) Deposits
▫ Making payment on behalf of customers
▫ One of the oldest services
▫ Provider is required to honor any
withdrawals immediately
▫ Hottest item in the transaction deposit field
today appears to be the mobile check deposit
▫ Designed principally for customers on the
move, carrying camera-equipped smart
phones
Types of Deposits Offered by Banks p. 294
2. Nontransaction (Savings)
Deposits
▫ Longer-Term
▫ Higher Interest Rates Than
Transaction Deposits
▫ Generally Less Costly to Process
and Manage
Types of Deposits Offered by Banks
(continued) p. 294-295
Transaction Deposit
▫ An account used primarily to make
payments for purchases of goods and
services
1. Types of Transaction Deposits
A. Noninterest-Bearing Demand Deposits
▫ Interest was prohibited by Glass-Steagall
Act. Too costly to banks.
▫ One of the most volatile and unpredictable
sources of funds
▫ Most deposits are held by business firms
Types of Deposits Offered by Banks
(continued) p. 294-295
B. Interest-Bearing Demand Deposits
▫ Negotiable Orders of Withdrawal (NOW) – like
a checking and savings in one account. It pays
some interest but customers must give notice
before withdrawing funds.
▫ Money Market Deposit Account (MMDA) and
Super NOW due to Garn-St Germain
Depository Institution Act of 1982. Pay higher
interest rates backed by low risk securities,
bonds.
Types of Deposits Offered by Banks
(continued) p. 296-297
• Nontransaction Deposit
▫ An account whose primary purpose is to encourage
the bank customer to save rather than make
payments
2. Types of Nontransaction Deposits
A. Passbook Savings Account – small deposits, less
limits on withdrawels. Used savings book.
B. Statement Savings Deposit – e-statements
C. Time Deposit (CD) – purchased for as few as 7
days and up to 5 years.
Types of Deposits Offered by Banks
(continued) p. 296-297
D. Retirement Savings Deposits
▫ Individual Retirement Account (IRA) –
Save for retirement, tax deduction
▫ Keogh Plan retirement accounts – available
to self-employed persons
▫ Roth IRA – The Tax Relief Act of 1997
allows non-tax-deductible contributions
that can grow tax free and pay no tax on
investment earnings when withdrawn
Interest Rates Offered on Different Types of
Deposits
p. 297-298
• The Composition 组成 (zǔchéng) of Deposits
▫ Bankers would generally prefer a high
proportion of transaction deposits (including
regular checking or demand accounts) and
low-yielding time and savings deposits
• These accounts are among the least expensive
of all sources of funds and often include a
substantial percentage of CORE 核心 (héxīn)
DEPOSITS
Interest Rates Offered on Different Types of
Deposits
p. 297-298
• The Ownership of Deposits
▫ The dominant holder of bank deposits inside
the United States is the private sector
• The Cost of Different Deposit Accounts
▫ Managers of banks would prefer to sell only
the cheapest deposits to the public but it is
public preference that determines which
types of deposits will be created
TABLE 10–1 The Changing Composition of Deposits in the
United States
p. 298
Pricing Deposit-Related Services p. 302
• In pricing deposit services, management is
caught in a dilemma 困境 (kùnjìng)
• It needs to pay a high enough interest
return to attract and hold customer
funds, but must avoid paying an interest
rate so costly it takes away from profit
margin
Pricing Deposit-Related Services p. 302
• An individual depository institution has little
control over its prices in a financial
marketplace that approaches perfect
competition
• It is the marketplace, consumers like you
and me (the public), not the individual
financial firm, that ultimately sets prices
• Financial institutions, like most other
businesses, are price takers, not price makers
Pricing Deposits at Cost Plus Profit Margin p. 302-304
• The Glass-Steagall Act of 1933 – Federal
limits on interest rates paid on deposits
▫ The Depository Institutions Deregulation Act
of 1980
• Deregulation has brought more frequent use of
single (unbundled) service pricing as greater
competition has raised the average real cost of
a deposit for deposit-service providers.
Pricing Deposits at Cost Plus Profit Margin p. 302-304
• This means that deposits are usually priced separately from
other services
▫ Cost-plus pricing formula
Using Marginal Cost to Set Interest Rates on
Deposits
p. 305-306
• What deposit interest rate should the
bank offer its customers?
▫ We need to know
▫ The marginal cost of moving the
deposit rate from one level to another
▫ The marginal cost rate, expressed as a
percentage of the volume of additional
funds coming into the bank
Using Marginal Cost to Set Interest Rates on
Deposits
p. 305-306
TABLE 12–2 Using Marginal Cost to Choose the Interest
Rate to Offer Customers on Deposits
p. 305
Using Marginal Cost to Set Interest Rates on
Deposits
p. 306-309
• Conditional 有条件的 (yǒu tiáojiàn de)
Pricing
▫ Where a bank sets up a schedule of
fees in which the customer pays a low
fee or no fee if the deposit balance
remains above some minimum level,
but faces a higher fee if the average
balance falls below that minimum
Using Marginal Cost to Set Interest Rates on
Deposits
p. 306-309
• Conditional Pricing
▫ Conditional pricing techniques vary deposit prices
based on one or more of these factors
1. The number of transactions passing through the
account (e.g., number of checks written,
deposits made, wire transfers, stop-payment
orders, or notices of insufficient funds issued)
2. The average balance held in the account over a
designated period (usually per month)
3. The maturity of the deposit in days, weeks,
months, or years
Using Marginal Cost to Set Interest Rates on
Deposits
• Conditional Pricing
▫ Deposit pricing policy is sensitive
to at least two factors:
1. The types of customers each bank
plans to serve
2. The cost that serving different
types of depositors will present to
the bank
EXHIBIT 10–1 Example of the Use of Conditional Deposit Pricing
by Two Banks Serving the Same Market Area
p. 309
Truth in Savings Act
p. 307
• Passed in November 1991
• Consumers must be informed of the deposit terms
before they open 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
The APY
Pricing Based on the Total Customer Relationship
(Pricing) and Choosing a Depository p. 310
• Related to the idea of targeting the best customers for
special treatment is the idea of pricing deposits
according to the number of services the customer
uses
▫ Customers who purchase two or more services
may be granted lower deposit fees compared to
the fees charged customers having only a limited
relationship to the offering institution
• In theory, relationship pricing promotes greater
customer loyalty and makes the customer less
sensitive to the prices posted on services offered by
competing financial firms
TABLE 10–3 Factors in Household and Business Customers’
Choice of a Financial Firm for Their Deposit Accounts (ranked
from most important to least important)
p. 310
Basic (Lifeline) Banking: Key Services for
Low-Income Customers
p. 312-313
• Should every adult citizen be guaranteed access
to certain basic financial services, such as a
checking account or personal loan?
• A recent survey found that a substantial
segment of the U.S. population is either
• “Unbanked”
▫ No deposits or loans of any kind
• “Underbanked”
▫ Having access to some critical services
but not others
Basic (Lifeline) Banking: Key Services for
Low-Income Customers
p. 312-313
• Among the “underbanked” are those
families relying on expensive payday
loans, check cashing firms,
pawnshops, and money order services
to pay their bills
• Racial and ethnic minorities are more
likely than the general population to
be “underbanked”
Quick Quiz – Concept Check Q and A
1. What are the major types of deposit plans that depository
institutions offer today? A: Deposit plans can be divided
broadly into transaction deposits, thrift or nontransaction
deposits, and retirement savings deposits. The primary function
of transaction deposits is to make immediate payments to the
customers. The principal function of thrift deposits is to serve as
savings accounts and pay higher interest rates than transaction
deposits do. Thrift deposits include passbook and statement
savings accounts, certificates of deposits (CDs), and other time
deposit accounts. Retirement savings deposits are an instrument
especially for saving for the future.
2. What are core deposits, and why are they so important
today? A: Core deposits are the most stable parts of a banks
funding base and usually include smaller savings accounts. They
are characterized by relatively low interest-rates. Holding a large
amount of core deposits has an advantage in having access to a
stable and cheaper source of funding with a relatively low
interest-rate risk.
Quick Quiz – Concept Check Q and A
3. Describe the essential differences between the following
deposit pricing methods in use today: cost-plus pricing,
conditional pricing, and relationship pricing. A: Cost-plus
deposit pricing calls for a bank to charge deposit service fees
adequate to cover all the costs of offering the service plus a
small margin for profit.
Conditional pricing is used today as a tool by banks to attract the
kinds of depositors they want to have as customers. With this
pricing technique a bank will post a schedule of offered interest
rates or fees assessed based on account activity. This type of
pricing encouraged customers to hold a high average deposit
balance which gives the bank more funds to invest in earning
assets.
Relationship pricing involves basing fees charged to a customer
on the number of services the customer purchases from a bank.
Many services means a lower fee or no fee.
Quick Quiz – Concept Check Q and A
4. What does the 1991 Truth in Savings Act require financial firms selling
deposits inside the United States to tell their customers?
A: The 1991 Truth in Savings Act requires banks to fully inform their deposit
customers on the terms offered to each depositor. The customer must be
informed about any penalties or service fees which could reduce his or her
expected yield. If the terms of a deposit are changed in a way that would
reduce the depositor's return, advance notice must be given to the account
holder.
• 5. What is lifeline banking? What pressures does it impose on the
managers of banks and other financial institutions? A: Lifeline
banking refers to basic service packages offered by banks to
poorer customers not able to afford conventional bank service
offerings. Banks are helped by government in the form of lowinterest loans and deposit insurance and, therefore, have some
public-service responsibilities which may include providing
certain basic services to all potential customers, regardless of
their income or social status