mgr Sylwia Stachera-Włodarczyk
Technical University of
Czestochowa
Faculty of Management
Department of Finance,
Banking and Management Accountancy
Deposit products of a bank and their
valuation
Introduction
Functioning
on the market in conditions of aggressive competition and growing risk
connected with a bank activity as well
as increasing customer’s requirements force banks to put particular emphasis on
financial aspects of their activity. Planning the bank income is determined by
the price policy and applied calculation methods with reference to particular
products.
1. THE ROLE OF DEPOSIT
PRODUCTS IN BANK ACTIVITY
Growing customers’ requirements as well as constantly increasing
competition of other financial institutions caused that the offer of bank
products is currently very various. Classic forms of bank products are
especially deposits, credits, settlements as well as products connected with the
service of foreign or capital markets.
Fig 1. Types of bank
deposits Own work based on:
Z. Dobosiewicz, K. Marton-Gadoś: Podstawy bankowości. PWN,
Warszawa 2005, s.66 oraz W. L. Jaworski,
Z. Zawadzka: Bankowość. Zagadnienia podstawowe. Poltext, Warszawa 2005, s. 132. -
Deposits, which are the basic financial source for banks,
play a special part in their activity. Deposit products concern performing
customer’s instructions on his commission, where he bears responsibility and
risk and which are also performed from resources being in his disposal.[1]
Because the main aim of depositing money by natural
persons, business entities and other units is keeping cash and obtaining
interest, banks compete against each other in the scope of offering and
enhancing different forms of bank deposits[2].
It is mainly expressed by the way of adding interest to a deposit, taking fixed-term
deposits for untypical periods of time, diversifying a minimum deposit, more
gentle treatment after an early withdrawal of a deposit, taking deposits of
high value as well as diversifying kinds of access[3].
However deposit products usually are in
form of current and fixed-term deposits which has been presented in Fig.1.
Deposits constitute currently about 75% of the whole cash in the
circulation. Considering their size they are of vital importance for the functioning
of banks and country economy. The structure of deposits towards the end of 2008
was as follows:
Chart
1. Deposit structure of the financial and non-financial sector
As it results from the above picture, the deposits reached
the value of 516,9 billions PLN altogether, including non-financial sector
deposits which were 461,6 billions PLN (89,3%); the deposits of commercial
banks were more than ten times higher than those of cooperative banks (471,4
billions PLN to 45,6 billions PLN) Moreover in both groups of banks the deposit
structure of institutional sectors was alike, although savings and deposits of
households entrusted to cooperative banks were more than ten times higher than
obtained company resources, so in commercial banks they equalled 63,6% and in
cooperative banks - 88,4% of non-financial sector deposits.
2. THE NATURE AND SIGNIFICANCE OF THE BANK PRICING
POLICY
A bank which wants to attract customers’ needs to
offer them profitable conditions of depositing which means a high interest rate
and suitably low payments for deposit products. Therefore planning bank
receipts depends on the pricing policy [4] which is used.
Fig 2. Elements of the bank product price Own work based on:
W. L. Jaworski, Z. Zawadzka: Bankowość.
Zagadnienia podstawowe. Poltext, Warszawa 2005, s. 203-204.
The
pricing policy of a bank includes all the decisions concerning establishing the
prices of bank products, both those which the bank already provides and some
new services. Therefore the pricing policy involves: the price level, the way
of establishing it, the rules of diversifying, the circumstances of introducing
changes and applying all the kinds of price reduction. The price of products
offered by the bank is not only the interest rate of deposits, credit or
payment for other bank activities or services. The interest rate is the main
but not only element of the product price (Fig. 2).[5]
The interest rate of deposits and credits as well as commissions make the price
of a bank service. Moreover such forms as the grace period, discounts,
additional free services and different kinds of payments usually both charged
and given a discount on should be included here. Combinations of all these
factors are the basis to establish the product price for a particular customer.[6]
The
aim of the bank pricing policy establishing such prices of bank products which
guarantee particular profitability of its service activity and they influence
the stability or strengthening the bank position on the market. The bank
decisions in the scope of pricing policy depend on the determinants defining
the costs of producing a service as well as on the determinants defining market
conditions. The basic determinants shaping the bank pricing policy have been
presented in Fig. 3.[7]
During establishing bank
product prices a psychological price aspect (so-called price paradox) should be
taken into consideration. It means that prices are accepted by customers at
some level. Establishing a price at a
much higher or lower level than an acceptable price might cause customer’s
negative reaction. Too low price is usually associated with poor product
quality and too high might cause a significant sales decrease.[8]
However it should be emphasised that the combination of price elements depends
on general pricing policy of a particular bank.
3. THE METHODS OF
DEPOSIT PRODUCTS VALUATION
A bank operating on a financial market has competition. Therefore to
attract customers entrusting their money to it, the bank has to offer suitable
depositing conditions. It means a high interest rate and suitably low payments
for deposit services. At the same time the offered interest rate cannot
significantly differ from the interest rates in other banks. [9]
The bank has two possibilities – to gain a customer by offering him an
attractive interest rate which results in the decrease of the bank mark-up or
to lower the interest rate to increase the profit. The choice of the method
used by the banks to calculate prices of products they offer depends on their
type. In case of deposit products, the bank has a choice between four basic
methods which have been shown below:
Fig. 4.
Calculation methods of deposit products Own work based on: K. Gigol: Podstawy tworzenia planu finansowego
banku. Twigger, Warszawa 2003, s. 207
The aim of the „cost plus profit” method is
establishing the price of deposit services at the level that enables them to
pay the costs of providing such services. Therefore it is important for the
bank to act in such a way that customer service would never exceed the profits
coming from the resources[10]
used by it. To limit labour intensity of an account service and to lower
service costs, the banks charge different payments for deposit services
performed for a customer. With this calculation method customers pay flat rate
for the account service which means that even if a customer in a given period
does not use any other service he will bear the costs of maintaining the
account.[11]
The
second method of calculation of deposit product prices is the method of
marginal costs. A marginal cost is a cost of gaining new resources. It is the
product of a new interest rate and the sum of funds gained with an old interest
rate. Gaining new customers by the bank involves the necessity of offering them
a higher interest rate which means not only additional costs but also the
increase of the deposit interest rate of current customers. Therefore the value
of a marginal cost might be defined in thee ways:[12]:
- by assuming the change of a deposit interest rate,
- by assuming that an interest rate will stay at a stable level but some
additional costs for the advertisement will be paid,
- by assuming the change of a deposit interest rate and the increase of
additional costs.
This method is applied when interest
rates are not stable.
The
characteristic feature of the method connected with customers’ segmentation is
a dependence of the price a customer pays for deposit services on the way he
uses his bank account. It is usually dependent on the number of performed
transactions, the balance of the account as well as the deposit maturity date.
In case of the presented method there are three possibilities of charging
payments. The first concerns charging a payment for maintaining an account and
for particular transactions which means that the customer who performs the
fewest transactions pays the least. In case of the second the bank charges a
set payment for maintaining an account which causes dissatisfaction among
customers who have low balance in their accounts. The third involves not
charging any payment for maintaining an account by the bank which is connected
with decreasing the interest rate of deposits (so-called free valuation).[13]
The method connected with customers’
segmentation is particularly useful during the valuation of clearing and
savings accounts.
The
method based on the market search is used by those banks which want to attract
as many customers as possible in a longer period of time. They offer higher
interest rate than it is on the market or they decrease the payments for
performing deposit transactions incurred by the customers. This method is based
on the belief that the customer after having deposited his money in the bank
will be willing to extend cooperation with the bank and try other products, not
necessarily deposits.[14]
Therefore
the deposit product valuation significantly influences shaping the structure of
bank customers as well as their decisions about the amount of available
financial resources. Moreover it should be emphasised that any changes in the
scope of deposit valuation influence mostly current customers and then might
influence gaining new customers.
Conclusion
The most
important strategy of every commercial bank is gaining financial resources to
deposit them in bank products which bring in the profit. Therefore the banks
have to be able to evaluate performed operational activity on the basis of
profitability, to manage possessed cash efficiently and maintain financial
liquidity, solvency, competitiveness and to have suitable abilities in the
field of management.
Biblography:
1. Bankowość
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Finansów i Bankowości w Katowicach. Gdańsk -Katowice- Warszawa
2005
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Harasim J., Szustak G.: Finanse banków. Stowarzyszenie księgowych w
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Marton-Gadoś K.: Podstawy bankowości. PWN, Warszawa
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Świecka B.: Elementy finansów i bankowości. Ce DeWu, Warszawa
2006
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Opłacalność działalności kredytowej banku. Twigger,
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Podstawy tworzenia planu finansowego banku. Twigger, Warszawa 2003
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Marketing bankowy. Biblioteka Menedżera i Bankowca, Warszawa
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Marketing bankowy. Oficyna Wydawnicza Branta, Bydgoszcz-Łódź
2004
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L., Zawadzka Z.: Bankowość.
Zagadnienia podstawowe. Poltext, warszawa 2005
10. Otto J.: Marketing relacji. Koncepcja i
stosowanie. CH Beck, Warszawa 2001
11. Rose P.S.:
Zarządzanie bankiem komercyjnym. Tom 2, Związek Banków Polskich,
Warszawa 1997
12. Swoboda U.:
Bankowość detaliczna. Ce De Wu, Warszawa 2004
13. Sytuacja finansowa banków w 2006 r. NBP, Warszawa 2007.