Chapter Twelve
Managing and Pricing Deposit
Services
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Transaction Deposit
An Account Used Primarily to Make
Payments for Purchases of Goods and
Services
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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
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Thrift or Savings Deposit
An Account Whose Primary Purpose
is to Encourage the Bank Customer to
Save Rather than Make Payments
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Types of Savings or Thrift
Deposits
• Passbook Savings Account
• Statement Savings Deposit
• Time Deposit (CD)
• Individual Retirement Account (IRA)
• Keogh Deposit
• Roth IRA
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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
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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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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
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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
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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
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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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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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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
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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?
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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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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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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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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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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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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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