Funds transfer pricing, or FTP, is a common framework maintained by bank treasury that ascribes value and cost to sources and uses of bank funding, respectively, in support of profitability measurement, pricing and risk management. While many banks have employed FTP for years to understand product economics, best-practice institutions are realizing that the product lens is limiting and that FTP needs to evolve to a customer orientation to better help them meet their strategic objectives. This has been put in stark relief recently in today’s environment of rapidly rising rates, shortening deposit lives and the ability for customers to move money quickly than ever through digital means. Focusing on customer behavior, not simply product sets, has become
increasingly important.
Why It’s Gotten More Complicated
Not surprisingly, FTP has been a topic of great interest in these tumultuous times for three fundamental reasons.
First, as a result of the rapidly rising interest rate environment, observed repricing betas have been higher in some cases than assumptions used in FTP. This has been particularly true for institutions with greater concentrations of rate-based depositor segments, such as consumer online and brokerage/wealth. It’s also true for commercial non-operating balances, especially those held by institutions with a high urgency to retain balances, such as those needed to fund held-to-maturity securities portfolios with unrecognized losses.
Second, rising rates and inflation mean deposit lives are shortening. While this is true across the board, it’s especially the case, again, for commercial rate-based deposits. According to balance decay analysis of account-level deposit data from Curinos Deposit Analyzer, which covers more than $7 trillion in U.S. deposit balances, weighted-average lives (WALs) have shortened considerably for consumer and commercial non-operational savings balances since the beginning of 2022. (See Figure 1.)
Figure 1: 12M Trailing WAL vs. Fed Funds Target
Note: WALs are calculated at 10-year truncation
Third, in light of U.S. bank liquidity events that saw outflows of more than 20% of total deposits in a single day, banks are, or should be, carefully reexamining the portion of balances that must be held in cash or other high-quality liquid assets to support potential stressed outflows. The “usual suspects,” such as financial-institution or non-operational corporate balances held by thin-relationship depositors, are under the microscope. But because social media and improved online account opening can accelerate outflows, we believe a broader review is warranted, and reliance on broad-brush regulatory assumptions needs to be replaced with internal liquidity-stress-testing analytics. Analysis of Curinos Deposit Analyzer data revealed, for example, that average outflows were markedly higher for wealth and commercial deposit segments than for the consumer segment in the week immediately following the collapse of Silicon Valley Bank. (See Figure 2.)
Figure 2: Average Weekly Balance Flow By LOB — Deposit Analyzer Participants
As % of Previous Week Total Balance
FTP With A More Customer-Focused Lens
With the spotlight on deposits and FTP, bank treasury functions should work to ensure that FTP methodologies are capturing the funding value of deposits accurately, while at the same time providing incentives to the lines of business to focus on core, primary customer growth — which is a pillar of a long-term value-add strategy for deposit funding.
One way to better align FTP with customer management is to orient FTP segmentation around full customer relationships, in a way that tracks behaviors across deposit products, rather than using a narrower lens on individual products. Though a product-centric approach is common among industry practitioners, it fails to acknowledge that customers manage their deposit wallet across multiple products depending on their specific needs — e.g., convenience vs. rate — and that these needs evolve over time and through rate environments. Using a product lens, customers transferring balances from checking to savings in an increasing rate environment, for example, would be interpreted as diminishing value to the checking product when, in fact, the customer funds are still sticky to the bank overall.
With that foundation established, FTP can focus on segmenting customers more thoughtfully, focusing on where there are measurable differences in behaviors that correspond with value. This begins with capturing distinct customer types. As the recent banking crisis has shown, there have been marked differences in outflows between mass-consumer and affluent-consumer deposits and between middle-market and larger-corporate deposits, which are sometimes comingled in single pools. To make meaningful strides, the best-practice banks are layering in the depth of a customer relationship by crediting core, multi-relationship customer balances differently than those of thin-relationship customers.
Finally, because customer behaviors change through evolving macroeconomic periods, they need to be measured, and even updated, more frequently, especially in dynamic market environments. To make this work, banks should embrace key performance/risk indicator measurement that is behavior-based and takes into account formal governance processes. Relying on years-old assumptions or reviewing assumptions updated annually risks missing important changes in customer behavior that drive changes to a bank’s risk profile.
Funds transfer pricing is an essential component of risk management and profitability measurement, and the recent market turmoil has only shone an even brighter light on its criticality. Especially in today’s volatile environment, banks need to understand the mechanics and value of FTP, especially as it can be enhanced by behavioral segmentation, and to adjust and enhance their processes and approaches to managing deposits accordingly, and with the speed demanded by a rapidly changing environment.
How Funds Transfer Pricing Works
Deposit-generating businesses are credited for the funding they provide, with FTP credits that can be considered interest revenue or worth-of-funds for deposits. Conversely, loan-generating businesses are charged for their use of bank funding, with FTP charges that can be considered loan interest expense or cost of funds. When combined with customer-facing interest rates, these FTP credits and charges produce FTP-adjusted margins that provide a profitability signal to the bank and thereby inform business pricing and investment.
FTP credits and charges are determined based on the interest rate sensitivity and liquidity characteristics of underlying customer balances. For products with behavioral elements or embedded optionality — for example, non-maturity deposits — banks need to perform behavioral analysis to understand these characteristics, which can be influenced over time by market and competitive dynamics. For deposits, here are the three relevant behaviors to track:
Repricing Beta
Expected Life
Stressed Liquidity
What is the sensitivity of deposit rates paid to changes in short-term market interest rates?
How investible for the long term are deposit balances given long-term liquidity life on the balance sheet?
What portion of balances should be considered investible only for the short term given volatility or the potential for sudden outflows?
The funding value, or quality, of deposits varies considerably by deposit type — with more stable, less rate-sensitive types of deposits such as checking or operating accounts receiving higher FTP credit and less stable, more rate-sensitive types such as commercial non-operating balances receiving lower FTP credit.
