Freedom Incorporated must take into consideration the following factors before it can arrive at its own rates, fees, charges, and commissions:
The Reserve Financial institution uses discount rates, reserve requirements, and other monetary policy tools to control the baseline rate below which the banks cannot charge in other to remain profitable.
The discount rate is the rate at which the financial institutions must borrow funds from the reserve institution for onward lending to customers.
Because it is about to enter the market, Freedom Incorporated must use the price penetration strategy by setting rates, commissions, and charges that are slightly above those of the reserve bank but relatively lower than those of other banks so that it can gain traction and patronage quickly.
Care must be taken to consider operating costs. Business economics requires that every business must operate at the point where revenue is in excess of costs. The rates that Freedom Inc. will adopt must meet this requirement.
The reserve requirement is the percentage of its money that a financial institution must bank with the reserve bank. The higher this requirement, the lower the power of the commercial institution to lend to borrowers. When this happens, the cost of banking (that is, rates, charges, commissions, etc) goes up generally. The obverse is also true.
Learn more about rates, reserves, and the reserve financial institution here:
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