Chapter Twelve Managing and Pricing Deposit Services Mc

Chapter Twelve Managing and Pricing Deposit Services Mc. Graw-Hill/Irwin © 2008 The Mc. Graw-Hill Companies, All Rights Reserved

Transaction Deposit An Account Used Primarily to Make Payments for Purchases of Goods and Services Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -2 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Types of Transaction Deposits • Noninterest-Bearing Demand Deposits • Interest-Bearing Demand Deposits – Negotiable Orders of Withdrawal (NOW) – Money Market Deposit Account (MMDA) – Super NOW Account Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -3 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Thrift or Savings Deposit An Account Whose Primary Purpose is to Encourage the Bank Customer to Save Rather than Make Payments Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -4 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Types of Savings or Thrift Deposits • Passbook Savings Account • Statement Savings Deposit • Time Deposit (CD) • Individual Retirement Account (IRA) • Keogh Deposit • Roth IRA Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -5 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Popular Types of CDs • Bump-Up CD – Allows a Depositor to Switch to a Higher Interest Rate if Market Rates Rise • Step-Up CD – Permits Periodic Upward Adjustments in the Promised Interest Rate • Liquid CD – Permits the Depositor to Withdraw Some or All of Their Funds Without a Withdrawal Penalty Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -6 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -7 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -8 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Check 21 and Substitute Checks • Effective October 28, 2004 – Permits Depository Institutions to Electronically Transfer Check Images • The Images are Called Substitute Checks and is a Legal Copy of the Check • Protects Depositors Against Loss • Benefits Institutions by Reducing the Cost of Check Clearing • Substitute Checks Can Be Sent Electronically Instead of Sending Bundles of Checks Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -9 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

FDIC Insurance Coverage • Banks Insured Through Bank Insurance Fund (BIF) • Savings and Loans Insured Through Savings Association Insurance Fund (SAIF) • Covers Only Those Deposits Payable in the U. S. • Many Types of Accounts are Covered Up To $100, 000 for Each Account Holder within the Same Bank (Even if Different Branches) • Deposits Placed in Separate Institutions are Insured Separately Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -10 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -11 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Cost Plus Profit Deposit Pricing Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -12 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Historical Average Cost Approach Determines the Bank’s 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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -13 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Pooled Funds Approach Determine the Bank’s 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? Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -14 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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. Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -15 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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. Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -16 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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 Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -17 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Upscale Target Pricing Bank Aggressively Goes After High. Balance, Low-Activity Accounts. Bank Uses Carefully Designed Advertising to Target Established Business Owners and Managers and Other High Income Households. Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -18 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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. Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -19 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Basic or Lifeline Banking Some People Feel That All Individuals Are Entitled to a Minimum Level of Financial Services No Matter Their Income Level Mc. Graw-Hill/Irwin Bank Management and Financial Services, 7/e 12 -20 © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.