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Funds transfer pricing is a strategy used to measure the contribution of each funding source to the overall profit generated by a business or entity. It is commonly used in the banking industry to evaluate the profitability of products, employees, and operating locations. The calculation involves establishing a curve to reveal data that would not otherwise be apparent.
Funds transfer pricing, often identified as FTP, is a strategy used to measure each funding source associated with a particular project or resource. The goal is to determine how much each of these sources contributes to the overall profit generated by the business or other entity. From there, it is possible to determine if that particular font is worth keeping as it is, if it should be reworked in some way, or abandoned entirely. Therefore, funds transfer pricing can be seen as a valuable tool in ensuring the continued profitability of an organization.
The concept of funds transfer pricing is most commonly associated with the banking industry. In this context, FTP helps to identify and assess both strengths and weaknesses regarding the financing process within the financial institution itself. The evaluation can focus attention on the profits generated by each product offered by the institution, or as a means to evaluate the contribution of each employee involved in the general operation of the organization. It is even possible to use this same basic approach to make comparisons between products or employees.
A common application of funds transfer pricing is to assess the value of a given operating location of a company. In terms of a bank, this would mean looking closely at the contribution that a particular bank branch makes to the overall profitability of the financial institution. If the assessment determines that a particular branch has decreased in the number of clients it serves, is not writing much in the way of loans, or does not represent an acceptable amount of deposits, the decision may be to close the facility and transfer the accounts to a nearby branch that can reasonably accommodate the remaining customers. Doing so helps reduce the bank’s operating expenses and therefore increases its profit margins.
The calculation of funds transfer prices generally involves the establishment of a curve. The curve allows one to trace the relationships between the relevant factors and reveals data that would not otherwise be readily apparent. For example, when looking at bank transactions that involve a maturity rate, the curve might take into account both the yield to maturity and the amount of time remaining to maturity, then compare that figure to the current borrowing needs of a branch in particular. If the curve indicates that the branch cannot generate enough return to justify its continued operation, then it is closed and the assets are transferred to another branch that will demonstrate a more profitable curve, once the transfer is complete.
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