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What is Funds Transfer Pricing?

Using FTP FTP
 in full file transfer protocol

Internet protocol that allows a computer to send files to or receive files from another computer. Like many Internet resources, FTP works by means of a client-server architecture; the user runs client software to connect to
 for your bank's pricing could also transform your marketing department from a cost center into a profit center.

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  • Aeneas Coffey, French inventor
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  • Brian Coffey, Irish poet
  • Cath Coffey, British vocalist of Stereo MC's
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  • Chip Coffey, American medium
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consulting firm

business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a
 that specializes in MCIF MCIF Marketing Customer Information File
MCIF Marketing Central Information File
MCIF Miniature Card Implementers Forum
 technologies;

What is Funds Transfer Pricing Funds Transfer Pricing (FTP) is a process used in banking to measure a funding source's contribution to overall profitability. External links
  • Introduction to Funds Transfer Pricing From the Journal of Bank Cost & Management Accounting
?

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 30-year mortgage would be the same as the FTP on a three-month CD even though a 30-year mortgage may be more risky to your bank (from an asset/liability management Asset/Liability Management

A technique companies employ in coordinating the management of assets and liabilities so that an adequate return may be earned. Also known as "surplus 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 Short-term

Any investments with a maturity of one year or less.


short-term

1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time.
 loans (e.g., credit cards or lines of credit) usually have higher interest rates than long-term Long-term

Three or more years. In the context of accounting, more than 1 year.


long-term

1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-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., five-year CDs), resulting in higher net-interest income. Unlike a CD 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 Origination

The process through which a mortgage lender creates a mortgage secured by some amount of the mortgagor's real property.

Notes:
Also known as loan origination, everyone must go through the origination process when securing a mortgage for a piece of real
. 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 CD and IRA Ira, in the Bible
Ira (ī`rə), in the Bible.

1 Chief officer of David.

2,

3 Two of David's guard.
IRA, abbreviation
IRA.
 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. Using FTP for your bank's pricing could also transform your marketing department from a cost center into a profit center.
COPYRIGHT 2001 Bank Marketing Assn.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001 Gale, Cengage Learning. All rights reserved.

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Article Details
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Author:Coffey, John J.
Publication:ABA Bank Marketing
Article Type:Brief Article
Geographic Code:1USA
Date:Nov 1, 2001
Words:683
Previous Article:ABA Offers New Services, Discounts for Bank Members.
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