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Commentary

Credit Union Keys to Funds Transfer Pricing

This Opinion piece look at the importance of FTP and ways to extract value from the pricing system.

By Ken Levey | Updated on January 14, 2014
For decades, funds transfer pricing has been one of the most important management tools for the financial industry, as it is the key factor in determining the profitability of a credit unions’ members, products, organizational units and channels. With clearer insight into how these factors contribute to a credit union’s net interest margin, executives can make more informed decisions regarding its profitability drivers and therefore effectively determine product pricing.

The challenge is not necessarily the calculating of FTP rates but in how many of today’s credit unions fall short in terms of how they analyze and leverage that information to make more-informed decisions. Many institutions focus solely on calculating precise FTP rates, which under-utilizes the analytical value that a deeper FTP reporting tool would provide.

Implementing a sophisticated, well-structured FTP mechanism will provide credit unions with margin clarity throughout every level of the organization. To create a clearer picture of member, business unit, product or officer profitability, a credit union must start with a theoretically sound approach to calculating FTP. This would include an FTP system with comprehensive calculation methodologies that are inclusive of appropriate assumptions reflecting the characteristics of the institution’s products, such as FTP rates, a FTP yield curve and even spread adjustments. These are necessary as FTP, if calculated correctly, will be processed for each individual account (record level) and be based on that product’s characteristics.

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