The document discusses different types of bank deposits and methods for pricing deposits. It describes transaction deposits like checking accounts and savings deposits like passbook accounts. It also outlines various approaches banks use to determine their cost of funds and how they price deposit services, including using historical average costs, marginal costs, fee schedules based on balances and transactions, and relationship pricing that offers discounts for multiple services.

1. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
13
Managing and Pricing
Deposit Services
This chapter has multiple goals. One of the most important is to
learn about the different types of deposits banks offer and, from the
perspective of a bank’s manager, to discover which types of deposits
are among the most profitable for banks to offer their customers.
We also want to explore how a bank’s cost of funding can be
determined and examine the different methods open to banks to
price the deposits and deposit-related services they sell to the public.

3. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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

5. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Check Imaging
New Technology Which Allows Any Bank
Staff Member to Search On Screen for a
Check or Other Document By Account
Number, Date, Dollar Amount or
Document Number As Well As Perform
Other Functions

6. Copyright © 2002 by The McGraw-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

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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

8. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Interest Rates on Deposits Depend On:
 The Maturity of the Deposit
 The Size of the Offering Bank
 The Risk of the Offering Bank
 Marketing Philosophy and Goals of the Offering Bank

9. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
The Changing Composition of Deposits in the
U.S.
Deposit Category 1983 1987 1991 1993 1996 1998
Nonint.-Bearing Dep 37.90 20.50 17.90 20.80 19.80 19.50
Interest-Bearing Dep. 62.10 79.50 82.10 79.20 80.20 80.50
Transaction Deposits 31.90 32.30 29.70 33.40 29.30 24.30
NonTransaction Dep. 68.10 67.70 70.30 66.60 70.70 75.70
Demand Deposits 25.40 22.90 19.10 20.20 22.10 18.90
Savings Deposits 30.20 36.20 38.30 41.20 39.80 43.50
Time Deposits 44.40 40.90 42.60 38.60 38.10 37.60

10. Copyright © 2002 by The McGraw-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

11. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost Plus Profit Deposit Pricing
Unit Price
Charged the
Customer
for Each
Service
=
Operating
Expense
Per Unit of
Deposit
Service
+
Estimating
Overhead
Expense
Allocated to
the Deposit
Function
+
Planned
Profit from
Each
Service Unit
Sold

12. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Historical Average Cost Approach
Determines the Bank’s Cost 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?

14. Copyright © 2002 by The McGraw-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.

15. Copyright © 2002 by The McGraw-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.

16. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Deposit Fee Schedules
A Conditional Method of Pricing Deposit
Services in Which the Fees Paid by the
Customer Depend Mainly Upon the
Account Balance and the Volume of
Account Activity

17. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Deposit Fee Schedules May Vary Depending
on the Following Factors
 The Number of Transactions Passing Through the
Account
 The Average Balance Held Over Some Designated
Period
 The Maturity of the Deposit in Days, Weeks or Months

18. Copyright © 2002 by The McGraw-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.

19. Copyright © 2002 by The McGraw-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.

20. Copyright © 2002 by The McGraw-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

21. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Expedited Funds Availability Act
Sets the Maximum Delay for Receipt of
Deposit Credit Banks Can Use and
Requires the Bank to Notify Customers of
Their Policies for Making Funds Available