12-1.
Deposit plans can be divided broadly into transaction deposits, thrift or non transaction deposits,
and hybrid deposits. The primary function of transaction deposits is to make payments and these
deposits include regular checking accounts and NOW accounts. The principal function of thrift
deposits are to serve as accumulated savings and include passbook and statement savings
accounts, CDs, and other time deposit accounts. Hybrid deposits combine transactions and thrift
features and include money-market deposit accounts and Super NOWs.
12-2.
Core deposits are the most stable component of a depository institution’s funding base and
Usually include smaller denomination savings and third party payments accounts. They are characterised by
relatively low interest rates elasticity. Holding a substantial proportion of core deposits has an advantage in
having access to stable and cheaper sources of funding with relatively low interest rates risks
relatively low interest-rate risk.
12-3
There has been a shift in the public's holdings of deposits toward greater relative proportions of the highest-
yielding time deposits and toward hybrid accounts that maximise depositor returns, while still giving them access
to deposited funds to make payments.
12-4
Cost-plus deposit pricing encourages banks to determine what costs they are incurring in labor and management
time, materials, etc., in offering each deposit service. Cost-plus pricing generally calls for a bank to charge
deposit service fees adequate to cover all the costs of offering the service plus a small margin for profit.
Conditional pricing is used today as a tool by banks to attract the kinds of depositors they want to have as
customers. With this pricing technique a bank will post a schedule of offered interest rates or fees assessed for
deposits of varying sizes and based on account activity. Generally larger volume deposits carry higher interest
returns to the depositor or are assessed lower service charges, encouraging customers to hold a high average
deposit balance which gives the bank more funds to invest in earning assets. Finally, relationship pricing involves
basing fees charged a customer on the number of services and the intensity of use of services the customer
purchases from a bank.
12-5
Studies cited in this chapter indicate that households (individuals and families) appear to consider, in rank order,
the following factors in choosing an institution to hold their checking account: convenient location, availability of
other services, safety, low fees and low minimum balances, and high deposit interest rates. In selecting an
institution to hold their savings account households appear to consider, in rank order: familiarity, interest rate
paid, transactional convenience, location, availability of payroll deduction, and any fees charged. Business firms,
on the other hand, seem to consider such factors as the financial health of the lending institution, whether the
institution will be a reliable source of credit in the future, the quality of managers, whether loans are competitively
priced, the quality of financial advice given, and whether cash management and operations services are
provided.
12-6
The Truth in Savings Act requires financial firms to fully inform their deposit customers on the terms offered to
each depositor. The customer must be told when a new account is opened or if a deposit is renewed, what
annual percentage yield (APY) is being offered and what minimum balance is required to receive that yield.
Moreover, the depositor must be informed about any penalties or service fees which could reduce his or her
expected yield. If the terms of a deposit are changed in a way that would reduce the depositor's return advance
notice must be given to the account holder.
12-7
Lifeline banking consists of basic service packages offered by banks to customers not generally able to afford
conventional bank service offerings. The essence of these services is that they carry low service fees and usually
do not offer all of the features of banking services carrying full service fees. The pressure on managers to offer
basic or lifeline services has aroused a big controversy. From a profit motive point of view banks should not offer
unprofitable services. On the other hand, financial institutions are partially subsidised by government in the form
of low-interest loans and deposit insurance and, therefore, have some public-service responsibilities which may
include providing certain basic services to all potential customers, regardless of their income or social status.