Pricing Strategies: Calculation Details for All Dividend Methods

CU*BASE gives credit union leaders the ability to model share and certificate products for rate changes using key trial balance information. These models are only part of the story when it comes to product creation and credit union-defined parameters. In discussing pricing strategies and CU*BASE tools, it is helpful to understand what options are available in product configuration:

SEE ALSO: CU*BASE Rate Control (How Rates are Maintained on the CU*BASE System)

Calculation Methods

Simple Daily Accrual
Compound Daily Accrual
Average Daily Balance posted at the end of the period
- NOTE: Click here to see the actual calculations used by each of these methods.

The Average Daily Balance method is the only system not interactively accruing to the General Ledger daily. It pays one rate for the period, and is the best method for products where the dividend rate might change before posting to the member’s account should occur. However, if the savings product is to effectively pay a blended rate, it is best to have the product set to a Daily Accrual method, accumulating to the member the effective rate daily, thus paying multiple rates throughout the period. For example:

Calculation Method	Rates Throughout a Single Month Period
Simple Daily Accrual and Compound Daily Accrual	10 Days @ 3.15%	5 Days @ 3.25%	7 Days @ 3.15%	8 Days @ 3.10%
Average Daily Balance	A single rate of 3.10% specified before paying.

Remember that CU*BASE does not have a weekly payment option for dividend posting. If you wish to have a product where the rate changes weekly or more frequently (e.g., money market investment savings), it is best to use one of the accrual methods.

Minimum Balances to Earn a Dividend

This is a very effective tool to consider. By setting a minimum to earn a dividend, a credit union can offset certain operational costs against low balance accounts (such as statement costs on accounts that have a balance less than $100) by making all or a portion of the balance a non-earning balance.

Remember that this does not mean you do not pay dividends on the first tier: if the member is over the threshold the member earns on every cent of the balance. Example:
- Balances under the minimum of $100.00 earn $0 for the dividend period.
- Balances of $100.01 and up would earn on the entire balance for the dividend period.

When a member’s balance falls below the minimum to earn dividends, CU*BASE uses three different dividend calculation methods (however, current TIS guidelines only favor two of the methods):

1. Method 1 - Option “X”

Used with the daily accrual methods, this calculation code is used to mark an account not to earn a dividend for each single day on which the balance is below the minimum. Therefore, a member may earn dividends for only 22 days in a 31-day month, depending on the member’s banking habits.

2. Method 2 - Option “E”

Used with the Average Daily posting method, this calculator uses the end of the period balance or average to decide if the member should earn a dividend for the entire period. Therefore, the member might not earn a dividend for the entire period if he or she has not maintained an appropriate average balance.

NOTE: Check TIS regulations before using this option with an accrual method. If you state daily dividends it may not be correct to repeal a dividend payment based upon a balance at the end of the period (rollback).

3. Method 3 - Option “D”

Not currently recommended for use. This daily compare method penalizes the member for an entire period if at any time during the period the member’s balance fell below the minimum. This is a carryover from the days of rollback penalties.

Do not confuse minimum balances to earn a dividend with minimum balances to incur a service charge. The two tools are not related and do not need to be used or set up at the same level or time. Minimum Balance Service Charges can be effective and CU*BASE has multiple options for the calculations.

Payment Frequencies

In creating a savings product, the payment frequency is another option used to set the product type apart from other products. Whether the criteria used to set the period is cash flow, compounding expense, or just member expectations, CU*BASE allows the credit union leader to define each product period separately.

Periods which can be used are:

Monthly
Quarterly
Semi-annually
Annually

All of the products calculate using full months. Therefore, a quarter is defined as three full months, whether it is a 90-, 91- or 92-day quarter. The same holds for semi-annual (6 months) and annual (12 months). It is important to consider the member and the need to reconstruct dividend calculations when required. Remember that transaction and balance history retention is not unlimited and products with long-term payment periods may require off-line research to prove the dividend amount for a member’s inquiry.

Determining a Payment Period

Cash Flow - One consideration in determining the payment period for a product is the actual timing of payments based on the credit union’s cash flow.

Compounding - If the credit union is paying on the balance only (daily compounding method considers the member’s accrued balance in its calculation), the credit union may wish to consider the cost of the member dividends being left in the account and compounding over the next period. More importantly, in considering the marketing of products, the APY of a product is enhanced by shortening the payment period—remember to consider Cost versus the Market.

Member Expectations - How do members view a product? A checking account is a short-term daily product, a savings account is more stable, and a Christmas Club account is almost always an annual account. The way a member views the product may affect the need to pay dividends more frequently. A money market or investor’s account is often based on daily cost of funds and therefore is promoted more as a short-term product floating effectively with the marketplace.

Process Type

The Process Type code is a tool which controls share products as either fixed or variable rate products. At the current time, CU*BASE is not processing any variable rate savings products. Both certificate and loan products do use variable rate processing. If your credit union is interested in a variable rate product for savings accounts, contact a CU*BASE representative.

Split Rates and Plateau Dividend Methods

CU*BASE allows the credit union leader to configure savings and checking products to pay using a balance-tiered (level) system. There are two options:

Option 1 - Plateau Tiered Rates (Blended Rates on One Balance) (The balance is dependent on the calculation method. For average daily, the balance is the average for the dividend period. For simple and compound daily this is the current balance at end of day.)

This is a method where multiple rates are paid at once giving the member a blended overall return. For example: Fred Smith’s balance is $17,300. Based on the following configuration, he would be paid using a calculation where each tier is calculated by level or tier:

(Base Rate * Range * Days) + (Tier One Rate * Range * Days) + etc...

*Rate Identifier*	*Rate Paid*	*From Balance*	*To Balance*	*Balance*Range
Base Rate	0.00%	0.00	250.00	250.00
Tier One	3.00%	250.01	1,000.00	750.00
Tier Two	3.15%	1,000.01	5,000.00	4,000.00
Tier Three	3.25%	5,000.01	15,000.00	10,000.00
Tier Four	3.50%	15,000.01	999,999.99	Balance minus Tier 3

Top Range ($17,300 - $15,000)	=	$2,300 at rate of 3.50%
Tier Three Range	=	$10,000 at a rate of 3.25%
Tier Two Range	=	$4,000 at a rate of 3.15%
Tier One Range	=	$750 at a rate of 3.00%
Base Range	=	$250 at a rate of 0.00%
TOTAL	=	Fred Smith’s Total Dividend Earned

See Dividend Calculation Methods Used by CU*BASE for details about how the actual dividend is calculated. Keep in mind the calculation is slightly different for accrual products than the ADB method. If it is an accrual process, the system calculates the daily per diem using one day as the daily multiple. If it is the average daily balance process, no daily accrual is calculated; rather, once the average balance is determined at the end of the period, that amount is used to determine which rate(s) to pay.

Unlike the minimum balance to earn a dividend (where once the member is above the threshold, the member is paid for the entire balance), using plateau dividend processing allows the credit union to avoid paying dividends on a selected balance amount.

CU*TIP: That’s one of the reasons the plateau method is required if using the Qualified Dividends feature, to pay dividends for qualified members but only on a portion of the overall balance, limiting the expense. Amounts above a certain balance can be paid a minimal rate or even no rate. For example, you might pay 2% on balances between $500 and $10,000, then 0% for anything above $10,000 – but only for members who meet the qualification requirements to get dividends in the first place.

Option 2 - Straight Split Rate Method (Non-Plateau)

In this case, the system calculates the dividend using one rate based on the balance and its appropriate tier. Therefore, this is a single rate paid on an entire balance. In the example above, Fred Smith with his balance of $17,300 would earn the highest rate of 3.50% on the entirebalance.

Most credit unions that pay tiered dividends use the straight split (non-plateau) method, in most cases for the simple reason that a plateau method makes it trickier to explain to a member how the dividend amount was calculated.

CU*BASE Automated Rate Changes

What was your share rate on June 15, 1999? June 15, 2000? Who actually posts a rate change? When does it happen? At beginning of day or end of day? Which employee is responsible for the rate change verification?

The CU*BASE Rate Maintenance feature lets you manage the rates for your share and certificate products automatically. A day or two in advance of the day on which the change should take effect, simply enter the new rate and its effective date. From the same screen you can verify the last time the rate was changed, display the rate change history of any current credit union share or certificate product, or calculate an effective APY versus the nominal rate. During daily processing on the effective date, the rate will automatically be changed as scheduled.

CU-defined Rate ToleranceRanges allow you to define an upper and lower range of “reasonable” rates to be used for all share products, all certificate products, and all loan products. This prevents someone from accidentally changing your money market dividend rate to 84.000% when they actually intended 8.400%.

Combine this with CU*BASE Rate Forecasting tools and today’s credit union leader can take rate management from a confusing, frustrating pencil and calculator exercise to an automated art form.

SEE ALSO: Rate Change Forecasting Tools (1, 2, 3)