By Roy W. Urrico
As the volume of transactions at branches plunge and the cost of doing business rises, understanding profitability correctly becomes even more important to each credit union’s survival. Properly analyzing how different contributing factors influence profitability produces more knowledgeable and accurate decision-making, product pricing and other major facets that determine an institution’s precious bottom line.
Measuring profitability is not a new process. However, in the past, profitability models were often bought and left on the shelf because financial institutions either did not know how to implement them effectively or obtaining the necessary data to make them work was too difficult. Today, credit unions understand they need to analyze the data and find out what accountholders, channels and products are profitable.
Funds Transfer Pricing (FTP) is a critical element in the calculation of profitability within a financial institution, points out Ken Levey industry vice president of Financial Institutions at Axiom EPM. Numerous financial institutions focus on attaining precision when calculating the FTP rate, but they overlook the analysis of the resulting calculations. According to Levey, deeper analysis of FTP results leads to improved pricing decisions and allows the credit union to better comprehend and dissect performance. It also provides clearer insight into how these factors contribute to a credit union’s net interest margin.