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IAI Actuarial Core Principles · Business Economics · Pricing strategies in the financial services sector

A bank offers a higher savings rate only to customers who maintain a Rs 10 lakh balance and give up easy withdrawal. Compared with a single uniform deposit rate, which outcome is the most likely effect of this segmentation?

The bank can retain rate-sensitive, high-balance depositors while paying less to others, so it captures more consumer surplus than with a single uniform rate. The conditions act as a fence that keeps the segments separate.

  1. AThe bank can serve both rate-sensitive and rate-insensitive depositors, capturing more surplus than with one rateCorrect
  2. BThe bank earns zero profit from all depositors
  3. CAll depositors are made worse off than under a uniform rate
  4. DCompetition is eliminated in the deposit market
  5. Demand for deposits becomes perfectly elastic for all customers

Explanation

Fencing the higher rate with balance and liquidity conditions lets the bank pay more only to those who would otherwise leave, while paying less to others. This captures more surplus than a uniform rate. It does not eliminate competition or guarantee losses for all customers.

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