By John J. Coffey, C.P.A. and Gene Palm, www.profitres.com, originally published March 2001, ABA Bank Marketing

Which MCIF reports are useful for asset/liability management?

How do you use historical funds transfer pricing data within your MCIF to price your products?

One of the first things you learn in Marketing is that you shouldn’t sell your products by lowering your prices.  You’ve probably also learned that you should always try to differentiate your products and services from your competition so you can sell based on value.  But how do you create value when the public perceives bank products as merely commodities?  A CD is a CD is a CD.  Who’s got the highest rates?  Isn’t that all that matters?

      Fortunately, an MCIF can help you understand the relationship your customer has with you so you can sell them products they need when they need them at a price that is best for the customer and the bank.  After all, don’t you want to make your best product offers to your best customers?

Which MCIF reports are useful for asset/liability management?

            An MCIF can be a powerful asset/liability tool.  One of the most versatile reports in an MCIF is a Product Summary Report.  This report breaks out your products into separate portfolios.  It can also illustrate the number of accounts, balances, weighted average rate, net interest income, non-interest income, non-interest expense and profitability for each subproduct, product, group or service.  You can use this information to increase your net interest income and increase your non-interest income for a particular product.

Another useful report is the Date Analysis Report that shows households with maturing CD or loan balances in a given time period.  By segmenting this report based on profit and the number of services a customer has with the bank, you could offer a better CD rate or a better loan rate for your most profitable customers who have multiple services – when they need these services!

How do you use historical funds transfer pricing data within your MCIF to price your products?

            One of the most exciting developments in the MCIF industry is the use of historical funds transfer pricing (FTP) data within an MCIF.  With FTP, a bank’s loans are given a funding rate and it’s term deposits are given an earnings rate at the account level as of the date of origination.  These rates, which can be based on Treasury rates for various maturities, are then used to calculate each account’s unique net interest income, based on the account balance, account rate and alternative sources and uses of funds available in the market.  It’s important to note that net interest income is by far the largest driver of product profitability, typically accounting for up to 80% of a bank’s revenue.

There are many benefits for having this FTP data reside in an MCIF.  For instance, you could identify your most profitable products based on spread (the difference between the interest rate of the product and the FTP rate).  You could identify your most profitable branches based on product deployment and effective pricing.  And, you could get to know which of your CD and IRA customers are rate sensitive!

CFOs typically use FTP rates to make weekly or monthly product pricing decisions.  However, Senior Management could use FTP to reward branch managers and loan officers who set pricing based on FTP as a benchmark.  For example, a loan officer could be held accountable for pricing an auto loan at not less than 2.00% above the FTP funding rate.

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 to a profit center.  It’s that powerful!

John J. Coffey, C.P.A. and Gene Palm are the principals of Profit Resources, a consulting company that specializes in MCIF technologies.  © Profit Resources, Inc. 2006