Hiding software complexity: Profitability
There are many features in deposit pricing software beyond price optimization. For example, check out profitability. Under Funds Transfer Pricing (FTP), profits are the difference between wholesale cost of funds and all-in rate (interest paid to depositors and servicing costs). This makes logical sense, but does not contain the important relationship between rate and balance. Therefore, it misses the time component.
- What happens to profits as balances change?
- What happens to profits when wholesale rates change?
We can look at any set of rates - whether we change what we give customers or if the external economy changes. Let’s look at what happens if rates stay flat, but treasury rates follow the forward rates embedded in today’s yield curve.
These rates will affect balance flows and therefore, profits. The profit graph on the right shows how profits change over time.
Finally, let’s bring this all together by viewing wholesale cost, servicing cost, and interest all in one screen. The difference (profit) is shown in green.
The deposit pricing approach is helpful in a few ways beyond the added accuracy:
- Provided in a pivot chart - the user can drill down to different regions or account types.
- Integrated with the other numbers used by the bank - no wasted effort nailing down discrepancies.
Next: Economic Value
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