Banks today work in a highly competitive and complex profitability landscape which requires them to perform exceedingly well in order to meet heightened expectations.
An effective Fund transfer Pricing model acts as a large piece of the puzzle and can effectively aid robust performance management. When a well-defined system is deployed it primarily has two advantages.
- It incentivizes risk-return tradeoffs much more effectively
- Helps to understand how particular products and business lines affect the productivity of the firm
Why is FTP important
FTP provides credible metrics, data, and information to help banks take important financial and business decisions. In a scenario where a bank miscalculates FTP or deploys a solution which is misaligned, the consequences can be grave. FTP can be a critical component in profitability management and can be a key differentiator in times to come. Systems need to align to advanced platform solutions to provide banks with the much-needed edge to help them forge ahead in the face of competition.
Limitations of Homegrown systems
Homegrown models for Fund Transfer Pricing are vastly different from platform models. They have quite a few limitations which does not make them the ideal choice for banks and financial institutions.
- For starters, they are not scalable and cannot be leveraged in a rapidly changing financial environment.
- They have hardly any room for customization, nor do they provide central management options for users.
- Homegrown models work at a small scale and are not built to provide for multiple pricing options.
- These models cannot be relied upon for modern banking needs and have become obsolete, as they have not adapted with the changing times.
- Homegrown models are not capable of supporting ever emerging regulatory standards as they are not built to account for pricing liquidity.
- Not capable of separating the components of net interest income to truly understand what drives enterprise performance
- These models don’t have tools and techniques to accurately reflect instrument behaviour
- Challenges in calculating TP with matched maturity concept and unable to provide due transparency
- Challenges in handling Data Quality/Sufficiency issues
- It is not possible to integrate Automation with data sources in homegrown models
Homegrown systems are good when the bank begins operations and looks to optimize on fund transfer transactions. But as it expands its operations geographically, and across business lines, it outgrows the home grown system’s capabilities.
How are platform models better than home grown systems?
Platform models can enable an accurate assessment of profitability along product, channel, and business lines. These models also help in the centralization of interest rate risk to be effectively managed. Across countries, regulators and banks within a country, the fund transfer pricing models are evolving gradually as the macro-economic environment landscape is evolving. Some technology companies have a privilege to work across evolving economies and learn nuances that drive fund transfer business for banking. Platform models are built around the cumulative learning that these technology companies bring together for the banks
The key benefits that platform models provide are:-
- A wide range of financial instruments with set transfer rates
- Risk is actively incorporated into decision making
- Individual customer relationships are assigned flexible transfer rates
- Helps to chalk out a clear understanding of option and liquidity costs
- Assists to identify break events and calculate economic loss
- Calculate rate lock options and use forward rates for price loan commitments
- Requires minimal maintenance, with easy to use interfaces
- Capable of publishing web based daily FTP rate cards for standard products
Platform models provide the much-needed speed, accuracy, and scalability to banks and financial institutions which allows them to adapt to rapid changes in the regulatory environment. A well tailored platform allows banks to provide full transparency into their pricing process. It also has the ability to scale to any volume of data for processing on a daily or near real-time basis . A good platform helps generate cash flow-based FTP and utilizes granular data attributes on an individual or pool. Additionally, it provides room for customization. It also provides banks to understand the risk profile of individuals, selected portfolios or the entire organization.
What should banks keep in mind while deploying an FTP framework
- The overall goals of the firm need to be aligned at the business unit level and the specific challenges need to be addressed effectively.
- Transparent frameworks result in efficiency and productivity. Transparency becomes a critical factor in ensuring success and fosters business growth.
- Establishing robust governance goals and reporting practices will go a long way in building a competitive ecosystem
In summary: The way forward
Keeping up with the fast-changing regulatory landscape is going to be critical to the success of a good FTP solution and this would require an agile and robust technology which will ably power banks through. There has to be continued focus on planning and governance so that it is aligned to the goals of the firm. Banks also need to make sure that there are well-calibrated methodologies and they are able to capture granular information quickly with minimum effort.
Oracle Financial Service’s Fund Transfer Pricing platform helps address the needs of rapidly growing banking organizations.
Some of its key differentiators are:-
- Scalability to large volumes of data
- Tremendous flexibility and transparency
- Easy to use and maintain
- Automated processes which can be run in a lights out mode