1

Managing and Pricing

Deposit Services

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Bank Management and Financial

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12-2

Key Topics
Types of Deposit Accounts Offered
The Changing Mix of Deposits and Deposit Costs
Pricing Deposit Services and Deposit Interest Rates
Conditional Deposit Pricing
Rules for Deposit Insurance Coverage
Disclosure of Deposit Terms
Social Banking
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Bank Management and Financial

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12-3

Key Issues Banks Are Faced With

regarding deposits:
1. Where can funds be raised at lowest
possible cost?
2. How can management ensure that there
are enough deposits to support lending
and other services the public demands?

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Bank Management and Financial

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12-4

Recent Trends
Pricing Schedules and Competitive
Maneuverings of Other Financial Institutions
Competitors: Mutual Funds, Credit Unions,
Cash Management Accounts at Brokerage
Firms and Insurance Companies, and
Interest-Bearing Investment Accounts
Offered by Securities Firms
An Important Executive Position of the Chief
Deposit Officer
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Bank Management and Financial

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12-5

Types of Deposit Accounts

Transaction (Payment or Demand) Deposits
Making Payment on Behalf of Customers
One of The Oldest Services
Provider is Required to Honor Any
Withdrawals Immediately

Time Based (Fixed) Deposits

Longer-Term
Higher Interest Rates Than Transaction
Deposits
Generally Less Costly to Process and Manage
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Bank Management and Financial

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12-6

Transaction Deposit

An Account Used Primarily to Make

Payments for Purchases of Goods
and Services

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Bank Management and Financial

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12-7

Types of Transaction Deposits

Noninterest-Bearing Demand Deposits
Interest Was Prohibited
One of the Most Volatile and Unpredictable
Sources of Funds
Most Deposits are Held by Business Firms

Interest-Bearing Demand Deposits

Negotiable Orders of Withdrawal (NOW)hybrid savings instrument
Money Market Deposit Account (MMDA)
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Bank Management and Financial

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12-8

Time Based (Savings or Thrift)

Deposit

An Account Whose Primary Purpose

is to Encourage the Bank Customer
to Save Rather than Make Payments

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Bank Management and Financial

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12-9

Types of Savings or Thrift Deposits

Statement Savings Deposit
Time Deposit (CD)
Individual Retirement Account (IRA)
300 day deposits, 500 days deposits.
Tax saving deposits

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Bank Management and Financial

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12-10

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
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Bank Management and Financial

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12-11

Core Deposits

A Stable Base of Funds that is Not

Highly Sensitive to Movements in
Market Interest Rates (Low InterestRate Elasticity) and Which Tend to
Remain with the Bank
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12-12

Insurance Coverage

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Bank Management and Financial

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13

McGraw-Hill/Irwin
Bank Management and Financial

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14

McGraw-Hill/Irwin
Bank Management and Financial

2008 The McGraw-Hill Companies, Inc., All Rights

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12-15

Truth in Savings Act

Consumers Must be Informed of the
Deposit Terms Before They 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
And the APY

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Bank Management and Financial

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12-16

Pricing Deposit-Related Services

Limits on Interest Rates Paid on Deposits
why?
Non-price Competition

Cost-Plus Pricing
Marginal Cost of Deposits
Conditional Pricing
Relationship Pricing

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Bank Management and Financial

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12-17

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

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Bank Management and Financial

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12-18

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?

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19

An Example
A Bank has raised Rs.400 mill
Rs.100 mill in S/B
Rs.200 mill in time deposits
Rs.50 mill from money market
Rs.50 mill from owners equity
10% of total deposits for cost and interest for
S/B
11% for thrift and money market deposits
22% for equity.
Reserves reduced fund by 15% in S/B a/c, 5%
in time deposits and 2% in money market
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Bank Management and Financial

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12-20

The Marginal Cost Approach:

Historical Average Cost Approach
Determines the Banks Const of Funds by
Looking at the Past. It Looks at What
Funds the Bank Has Raised to Date and
What those Funds Have Cost
Marginal cost rate=change in total
cost/additional funds raised

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Bank Management and Financial

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12-21

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.

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Bank Management and Financial

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22

An Example
Amt of
deposit
s (INR
mill)

Int rate

Total
Int cost
(INR
mill)

Margin
al cost
new
deposit

Margin
al cost
rate

Margin
al
revenu
e

Diff b/w
ma7rgi
nal
revenu
e and
margin
al cost

25

7%

1.75

1.75

10

+3

50

7.5%

3.75

10

+2

75

8%

2.25

10

+1

100

8.5%

8.5

2.5

10

10

125

9%

11.25

2.75

11

10

-1

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Bank Management and Financial

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12-23

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.

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Bank Management and Financial

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12-24

Conditional Pricing
Schedule of Fees were Low If Customer
Stayed Above Some Minimum Balance Fees Conditional On How the Account Was
Used
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 the Period
The Maturity of the Deposit
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Bank Management and Financial

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25

Bank-A

Bank-B

Min Bal-Rs.100
If min bal >=600, no fee
If between Rs.300-Rs.599,
Rs.5/pm
Less than 300,
Rs.10 pm
No limit on number of
checks written

Min Bal Rs.100

If min bal >=500, no fee
Less than Rs.500,
Rs.3.50/pm

Savings A/c
If min bal falls below,
Rs.100, Rs.3 pm

If min bal falls below,

Rs.100, Rs.2 pm

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Bank Management and Financial

If checks written>10,
Rs.0.15 per transaction

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12-26

Upscale Target Pricing

Bank Aggressively Goes After HighBalance, Low-Activity Accounts.
Bank Uses Carefully Designed
Advertising to Target Established
Business Owners and Managers and
Other High Income Households.

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Bank Management and Financial

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12-27

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.
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Bank Management and Financial

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12-28

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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Bank Management and Financial

2008 The McGraw-Hill Companies, Inc., All Rights

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