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Funds transfer pricing, often identified as FTP, is a strategy that is utilized to measure each source of funding associated with a particular project or resource. The goal is to determine how much each of these sources are actually contributing to the overall profits generated by the business or other entity. From there, it is possible to ascertain if that particular source is worth maintaining as is, should be reworked in some manner, or abandoned altogether. Thus, funds transfer pricing can be seen as a valuable tool for ensuring the ongoing profitability of an organization.
The concept of funds transfer pricing is most commonly associated with the banking industry. In this setting, FTP aids in identifying and assessing both the strengths and the weaknesses regarding the funding process within the financial institution itself. The evaluation may focus attention on the profits generated by each product offered by the institution, or as a means of evaluating the contribution of each employee involved in the overall operation of the organization. It is even possible to use this same basic approach to make comparisons between products or employees.
One common application of funds transfer pricing is to assess the value of a given operating location of a business. 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 evaluation finds that a particular branch has declined in the number of customers it serves, is not writing much in the way of loans, or does not account for 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 those remaining customers. Doing so helps to reduce operating expenses for the bank, and thus increases its profit margins.
The calculation of funds transfer pricing usually involves the establishment of a curve. The curve makes it possible to plot relationships between relevant factors, and reveals data that may not be readily apparent otherwise. For example, in looking at bank transactions that involve a rate of maturity, the curve may take into consideration both the yield at maturity and the amount of time remaining until maturity, then compare that figure to the current lending needs of a particular branch. If the curve indicates the branch is not able to generate enough return in order to justify its continuing operation, then it is closed and the assets transferred to another branch that will demonstrate a more profitable curve, once the transfer is complete.
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