Is funds-transfer pricing worthwhile? Community banks in high-growth mode often look to larger, more sophisticated banks to emulate their processes. Or, in some cases, the CEO has come from a large regional or national bank and is implementing what he has always done.
The one question to ask is: What kind of business decisions does the bank intend to drive as a result of these allocations? Few CEOs can answer. That’s because few decisions are driven by these numbers. Funds-transfer pricing is an internal measurement process used to allocate deposit funding costs between business units or branches that are either net providers of or net users of deposit funding. Banks use funds-transfer pricing to get a clearer picture of business unit or branch profitability. It’s also an element of overhead allocation: Banks that do funds-transfer pricing also typically “push down” overhead costs to the business units or branches based on an arbitrary formula.