Using HFTP data for pricing decisions.

• Author: Coffey, John J.
• Position: Database Marketing - Brief Article

Your bank's net interest income (the difference between the interest income from I loans and the interest expense of deposits) typically accounts for up to 80 percent of your bank's revenue. Therefore, your bank's most important pricing decisions involve its loan and deposit interest rates.

Historical funds transfer pricing (HFTP) is the most comprehensive method available for calculating net interest income because a funds-transfer-pricing rate is applied at the account level for term loans and term deposits as of the date of origination.

For loans, the net-interest-income percentage (also known as "spread") is the difference between the loan rate and the HFTP rate. For deposits, the spread is the difference between the HFTP rate and the deposit rate. To calculate the net interest income in dollars, simply multiply the spread by the loan or deposit balance.

Sources of funds transfer pricing data for your MCIF

All this said, you still need a source of HFTP data in order to perform these calculations. In the MCIF industry, there are currently three different options available to users who want to utillze HFTP data for their pricing decisions:

Cost-accounting interface. Building an interface between a cost-accounting system and your MCIF could provide a comprehensive means for utilizing HFTP data. Typically, if there is an HFTP module (along with the other cost-accounting modules) that calculates profit at the account level, then this account-level profit is imported directly into the MGIF and applied directly to each account. This method is the most expensive and complex option and can take years to implement.

HFTP table. Using an external table of HFTP rates could provide a simplistic means for your MCIF to calculate the net interest income for your products. While this is an inexpensive option, it may require you to purchase an additional module to perform the net-interest-income calculation. Also it may not take into consideration the cash flow characteristics of various product offerings (e.g., mortgages amortize differently than auto loans), and the data might typically be consolidated at the monthly level rather than the date of origination.

HFTP Service Bureau. For a number of years, MCIF users have shipped their data to demographic...