Types of Deposits Offered by Banks Transaction (Payments or Demand) Deposits Noninterest-Bearing Demand Deposits Interest-Bearing Demand Deposits Negotiable

able Orders of Withdrawal (NOW) Money Market Deposit Account (MMDA) Super NOW Account

Non-transaction (Savings or Thrift) Deposits

Transaction (Payments or Demand) Deposit An account used primarily to make payments for purchases of goods and services. This account requires financial service providers to honor immediately any withdrawals made either in person by the customer or by a third party designated by the customer to be the recipient of funds withdrawn.

Noninterest-Bearing Demand Deposits Interest payments have been prohibited on regular checking accounts in the US since passage of the Glass-Steagall Act of 1933. Congress feared at the time that paying interest on immediately withdrawable deposits endangered bank safety. Most noninterest-bearing demand deposits are held by business firms.

Interest-Bearing Demand Deposits Negotiable Orders of Withdrawal (NOW) Deposits that give the bank the right to insist on prior notice before the customer withdraws funds. Because this notice requirement is rarely exercised, NOW can be used like a checking account to pay for purchases of goods and services. They can be held only by individuals and non-profit institutions. Money Market Deposit Account (MMDA) Deposits having a term of only a few days, weeks, or months and on which the bank can pay any competitive interest rate to attract and hold the customers deposit. These accounts offer limited check-writing privileges. Unlike NOWs, MMDAs can be held by businesses as well as individuals. Super NOW Account Deposits that usually promise a higher interest return than regular NOW accounts but often impose restrictions on the number of checks or withdrawals the depositor is allowed to make.

Non-transaction (Savings or Thrift) Deposits An account whose primary purpose is to encourage the bank customer to save rather than make payments. Types of Savings or Thrift Deposits Passbook Savings Account Statement Savings Deposit Time Deposit (CD) Individual Retirement Account (IRA) Keogh Deposit Roth IRA

Interest Rates Offered on Different Types of Deposits Each of the different types of deposits discusses typically carries different rate of interest. Interest rates on deposits depend on: Core Deposits A stable and predictable base of deposited funds, usually supplied by household and smaller businesses, that is not highly sensitive to movements in market interest rates but tends to remain loyal to the bank. Core deposits are primarily small-denominated accounts that are considered unlikely to be withdrawn on short notice and so carry lower liquidity requirements. The maturity of the deposit The size of the offering institution The risk of the offering institution Marketing philosophy and goals of the offering institution

Why bankers feel so relaxed with high degree of core deposit? Because the availability of large block of core deposits increases the duration of banks liabilities and makes the institution less vulnerable to swings in interest rates. The presence of substantial amounts of core deposits in smaller banks helps explain why large banks and bank holding companies in recent years have acquired so many smaller banking firms to gain access to a more stable and less-expensive deposit base.

The Ownership of Deposits The dominant holder of bank deposits inside the United States is the private sector individuals, partnerships, and corporations (IPC), accounting for about four-fifths or more of all US deposits.

The next largest deposit owner is state and local governments (about 4% of the total), representing the funds accumulated by counties, cities and other local units of government. These deposits are often highly volatile. Banks also hold comparatively small amounts of US government deposits. Another deposit category of substantial size held by US banks is deposits held by foreign governments, businesses, and individuals, many of which are received in offshore offices. The final major deposit ownership category is deposits of other banks, which include correspondent deposits, representing funds that depository institutions hold with each other to pay for correspondent services.

The Cost of Different Deposit Accounts Other factors held constant, the managers of banks would prepare to raise funds by selling those types of deposits that cost the least amount of money or, when revenues generated by the use of deposited funds are considered, generate the greatest net revenue after all expenses. Research based upon cost accounting techniques suggests that checkable (demand or transaction) deposits and interest-bearing checking accounts are typically among the cheapest deposits that banks sell. Thrift deposits (money market accounts, time deposits, and savings accounts) generally rank second to demand deposits as the least costly deposits.

Pricing Deposit Related Services In pricing deposit services, management is caught between the horns of an old dilemma. It needs to pay a high enough interest return to customers to attract and hold their funds, but must avoid paying an interest rate that is so costly it erodes any potential profit margin from using customer funds. It is the marketplace, not the individual financial firm, that ultimately sets all prices. There are three ways for pricing deposit related services, such as Pricing deposits at cost plus profit margin Using marginal cost to set interest rates on deposits Pricing based on the total customer relationship and choosing a depository

Cost Plus Profit Deposit Pricing The idea of charging the customer for the full cost of deposit-related services is relatively new. Earlier, customers received most deposit-related services free of charges.

Many managers soon found reason to question this marketing strategy, because they were flooded with numerous low-balance, high-activity accounts that ballooned their operating costs.

Historical Average Cost Approach Determines the banks cost of funds by looking at the past. It looks at what funds the bank has raised to date and what those funds have cost.

Pooled Funds Approach Cost-plus pricing demands an accurate calculation of the cost of each deposit service. One popular approach is to base deposit prices on the estimated cost of raising funds.

This requires management to: I. Calculate the cost rate of each source of funds II. Multiply each cost rate by the relative proportion of all funds coming from the particular source III. Sum all resulting products to derive the weighted average cost of all funds raised Pooled Funds Approach: An Example Suppose a bank has raised a total of $400 million, including $100 million in checkable deposits, $200 million in time and savings deposits, $50 million borrowed from the money market, and $50 million from its owners in the form of equity capital. Suppose that interest and non-interest costs spent to attract checkable deposits total 10% of the amount of these deposits, while thrift deposits and money market borrowing each cost 11% of the fund raised. Owners equity is by far the most expensive source of funding, costs an estimated 22% of any new equity raised. Suppose reserve requirements, deposit insurance fees, and uncollected balance reduces

Using Marginal Cost to Set Interest Rates on Deposits Many financial analysts would argue that the added costs (that is, marginal costs, not weighted average costs) of bringing new funds into the bank should be used to price deposits.

Market Penetration Deposit Pricing The method of selling deposits that usually sets low prices and fees initially to encourage customers to open an account and then raises prices and fees later on. Deposit Fee Schedules A conditional method of pricing deposit services in which the fees paid by the customer depend mainly upon the account balance and the volume of account activity.

Deposit Fee Schedules Deposit fee schedules may vary depending on the following factors: The number of transactions passing through the account The average balance held over some designated period The maturity of the deposit in days, weeks or months

Upscale Target Pricing Bank aggressively goes after high-balance, low-activity accounts. Bank uses carefully designed advertising to target established business owners and managers and other high income households.

Relationship Pricing The bank prices deposits according to the number of services purchased or used. The customer may be granted lower fees or have some fees waived if two or more services are used. In choosing a financial firm to hold their checking transaction accounts, household consider Convenient location Availability of many other services Safety Low fees and low minimum balance High deposit interest rates In choosing a financial firm to hold their savings deposits, household consider Familiarity Interest rate paid Transaction convenience (location) Location Availability of payroll deduction Fees charged In choosing a financial firm to supply their deposits and other services, business firms consider Financial health of lending institution Whether bank will be reliable source of credit in the future Quality of bank officers Whether loans are competitively priced Quality of financial advice given Whether cash management and operations services are provided

Basic or Lifeline Banking

Some people feel that all individuals are entitled to a minimum level of financial services no matter their income level.

Pricing of Deposit & Lending Related Services in Bangladesh Banks are now free to fix their rates of interest on their deposits of different types after withdrawal of restriction about the floor rate of interest in 1997 [BRPD Circular No. 01 dated February 19, 1997]. Banks are also free to fix their rates of interest on lending except for export sector, which has been fixed at 7% per annum with effect from January 10, 2004 [BRPD Circular No. 01 dated January 10, 2004]. In 2001, the Bangladesh Bank reduced the bank rate with a view to decreasing the lending rate and, consequently, increase the volume of lending. It has been observed that following the reduction of bank rate, most of the NCBs and the PCBs have reduced their lending rates more or less proportionately. As a result, the actual spread for the banks was supposed to decline. However the actual spread of the NCBs is not expected to decline because of their simultaneous reduction of deposit rates.

Savings Trends in Bangladesh The savings rate increased from a level less than 5 percent before 1980s to more than 17 percent by 2004. The private savings in Bangladesh constitute the largest portion in the domestic savings that is largely derived from the household savings, with a small proportion contributed by the corporate sector. The public savings rate in Bangladesh is considered better than most other South Asian countries, but this is probably due to the relatively higher level of foreign aid received by Bangladesh.