Fund Transfer Pricing (FTP)
as Interbranch Interest Rate

When basel II is a must applied concept by any bank, there area several way have been elaborated to minimize the interest risk that could be occured in daily banking activities.One of the interest risk happend is interbranch funding transfer which usually involve with the banks comprised a lot numbers of branches.When pricing bank products, if you charge too little for your loans or pay too much for your deposits, you end up with less net interest income--that is, less profit.

A bank's total net-interest income is the difference between its interest income (generated from loans) and interest expense (paid on deposits). What's essential to know is that the net interest income is by far the largest driver of product profitability, typically accounting for up to 80 percent of a bank's revenue. Your income statement is designed to calculate net-interest income for your entire bank. It is not designed to calculate the net-interest income of your products. In order to calculate net interest income for your products, your bank needs to take value away from its loans by using a "funding rate"-and add value to its deposits by using an "earnings rate." This process is called funds transfer pricing (FTP).

Methods for calculating FTP

Single-Pool FTP: By using single-pool FTP, the funding rate is the same rate as the earnings rate. This rate could be your investment portfolio yield. However, single-pool FTP doesn't take into consideration the maturity of your products. For instance, the FTP on a 20-year mortgage would be the same as the FTP on a three-month TD even though a 20-year mortgage may be more risky to your bank (from an asset/liability management perspective).

Multiple-Pool FTP: By using multiple-pool FTP, each portfolio of products is given an FTP rate based on its maturity. The funding rates for loans and earnings rates for deposits are based on a yield curve. Short-term loans (e.g., credit cards or lines of credit) usually have higher interest rates than long-term loans (e.g., mortgage loans), resulting in higher net-interest income. Unlike a mortgage loan that is secured by your house, these short-term loans are not typically secured with collateral and therefore are more risky loans for the bank to make. Because they have more risk, the bank typically charges more interest for these short-term loans. On the other hand, short-term deposits (e.g, checking or savings) usually have lower interest rates than long-term deposits (e.g, TDs), resulting in higher net-interest income. Unlike a TD that requires a penalty when withdrawn before its maturity date, these short-term deposits can be very volatile because they can be withdrawn at any time without a penalty. Therefore, a bank typically pays lower interest for these short-term deposits than they pay for more stable long-term deposits.

Historical FTP: This is the most comprehensive method available for calculating net-interest income because it is applied at the account level (term loans and deposits) as of the date of origination. Banks that utilize historical FTP have a very powerful tool for pricing their products as well as managing their operations more efficiently. There are a number of benefits for having historical FTP data reside in your MCIF. CFOs typically use historical FTP rates to make weekly or monthly product pricing decisions. As a marketer, you can also identify which of your TD customers are rate sensitive--which could provide enormous savings to your bank! Senior management can also use the historical FTP that resides in your MCIF to reward branch managers and loan officers who set pricing based on historical FTP. Using FTP in an MCIF

Regardless of the method--whether it's single-pool, multiple-pool or historical FTP--by properly using FTP within your MCIF, you will be able to understand the profitability of your products based on their pricing, balance and even maturity attributes. You can also determine the profitability of your customers based on their product use. In effect, having FTP data in your MCIF transforms it into a sophisticated asset/liability tool.

Ricky Agustinus

Branch Banking

The come back

Is branch-banking back in business? Has the banking industry realised the limitations of using non-branch channels and banking on technology? Several research studies by international consultants has thrown some interesting findings on these issues.

Though the basic survey has been conducted in an international setting, it has some universal findings, which will of interest to the domestic banking industry, which is undergoing a paradigm shift with technology networking and reaching out to mass retail customers. To a basic question, whether state-run banks with a large branch network or private sector banks with sleek technology will call the shots in terms of customer loyalty and profitability, some pointers have been offered in this study.

Several researchs shows that after withering for 20 years, branch banking is making a comeback. And there is a good reason for this revival: branches are significant growth engines, helping acquire up to 90 per cent of new customers. Call-centers and the Web are fine for routine transactions, but the branch needs to be the centerpiece of the customer’s interaction with the bank because it is the best place to get personalised information and attention, and to conduct complex banking activities. It is also the best channel to encourage customers to entrust more of their assets to the bank as their needs change with time.

But the moot question is that can large retail banks revive the branch system without letting it become a costly drag on their profits? Absolutely, but only if they reinvent the management model so it can profitably deliver what consumers expect: choice, convenience, and customization, feels the study.

Research shows that up to 90 per cent of customer relationships are won or lost in branches. For today’s consumer banks, reinventing local branches as a hub to attract and retain customers is essential to profit and growth.

It is not enough for retail banks simply to open up more branches that run like existing ones or to redesign them to resemble hip retail stores. The successful branch bank of the future must be a financial-services resource center. Financial advisors could conduct seminars after hours on topics as managing debt, savings strategy, or how to transition from paycheck-to-paycheck banking to accumulating wealth.

For the “mass affluent” customer - the person who is already saving and investing - the branch can offer “light” relationship management. For example, a bank specialist who sold one financial product to a customer could periodically review that customer’s needs and recommend other appropriate products.

Research also shows that there is a good reason for the revival of branch systems: they are significant growth engines for retail banks. Moreover, the study found a high correlation between branch visits and sales.

Banks are reinventing the management model in a bid to profitably deliver what demanding consumers expect: choice, convenience, and customization. In the customer-centric, ‘federation’ business model, the study proposes that the branch is the hub of an integrated multi-channel banking framework designed to maximize local responsiveness. In 2003, the consultant collected data and conducted on-site observations of branch operations that show the enormous value of the branch. For example, evidence that customers favor branches over other channels for purchasing financial-services products was overwhelming. The survey showed 12 per cent of customers, who were seeking a home loan obtained information over the Internet, but 49 per cent closed the sale in a branch.

It is found that 90 per cent of a super-regional bank’s new customers were acquired in a branch. Equally important, almost all accounts were closed at a branch, suggesting that branches can be a first line of defence in retaining customers. Customers often provide predictable clues before they close their accounts. Banks spend heavily on customer relationship management (CRM) systems to predict customer defections, but a vigilant branch staffer can just as effectively use the personal touch to solve a problem and keep a customer from leaving. The branch customer service representatives handle simple product sales and know when to refer customers to a branch-based specialist. Customers perceive the value of consulting a “banker,” and the bank gets more involved with customers. when they are planning and optimizing their choices, not just when they’re shopping for products.

Ricky Agustinus