Six Loan and Deposit Pricing Lessons

Don’t base loan and deposit pricing decisions on what your competitors are doing.

April 11, 2013
KEYWORDS deposits , farin , loan , pricing
/ PRINT / ShareShare / Text Size +

Don’t base loan and deposit pricing decisions on what your competitors are doing, warns Thomas Farin, president of Farin & Associates.

That’s because “if there’s an idiot in your area, you become an idiot, too,” Farin told attendees of Credit Union Reality Check 2013 in Atlantic City, N.J.

Instead, Farin suggests six lessons to keep in mind when pricing loans and deposits:

1. Know that pricing models are used primarily to separate well-priced loans and deposits from those that are poorly priced, based on rates in a competitive market.

“Well-priced loans are often found where demand exceeds supply, and the best-priced products are often found outside the box,” Farin says.

2. Choose the best way to look at profitability. “Probability is the most important tool right now because most of you have excess liquidity,” Farin says.

Other important measures of profitability include valuation, which is important if you’re going to sell; return on equity (ROE), which is best used when capital and funding are scarce; and return on assets, which measures profitability in the context of balance sheet when ROE isn’t an issue.

3. Understand principal and interest cash flows. “The contract doesn’t define cash flows,” says Farin. “Behavior defines cash flows and is something you can measure.”

4. Use marginal yield and cost as decision tools. Average yield and cost are the most common decision tools, but they fail to consider the effect of pricing actions on existing volume, Farin says.

Marginal cost is a better decision tool, but is rarely used.

5. Understand members’ behaviors. “Make sure you’re using survey data effectively,” Farin advises. “Break products into sectors and subsectors, and compare your pricing to [that of] competitors on sector and subsector levels.”

6. Use segmentation strategies to reduce funding costs and improve loan yields.

“Pay up for rate-sensitive deposits without paying up for deposits that aren’t rate-sensitive deposits,” he says. “Reduce rates on new loan volume without lowering rates on existing loan volume.”

Credit Union Reality Check 2013 ends today.






Steve Rodgers is Credit Union Magazine's editor-in-chief.

Post a comment to this story


What's Popular

Popular Stories

Recent Discussion

Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

Your Say: Who should be Credit Union Magazine's 2014 CU Hero of the Year?

View Results Poll Archive