Product design
Designing Financial Products That Age Well
Most financial products are built the same way: a team sets the terms once, at launch, and those terms stay fixed until something forces a revision. Revision usually happens when a rate becomes uncompetitive, a regulator raises a concern, or a customer complains. In between, the product simply runs on the assumptions it was launched with.
Two common approaches, and their downsides
One option is to keep terms fully fixed and revisit them rarely. This is simple to administer, but the product can drift out of step with the economy for years before anyone updates it.
The other option is to make terms fully variable, moving automatically with a market rate or index. This keeps the product current, but it removes certainty for the customer, who no longer knows what they will receive at the end, and it can be harder for an institution to plan around.
A middle path: a governed range
Between these two extremes is a design where the institution defines a range of acceptable terms in advance, rather than a single fixed number, and then selects a specific rate within that range when each product is configured. The customer still receives a clear, fixed maturity amount agreed at purchase. The institution still has a defined, bounded set of choices, approved ahead of time, rather than an open-ended variable.
This does not remove the underlying uncertainty of economic conditions. It means the product’s terms are chosen deliberately, from a range built with those conditions in mind, rather than inherited from whatever assumptions happened to be true on launch day.
What ageing well means for a financial product
A product ages well when the gap between what it promised and what conditions turned out to be does not become a source of regret, for the customer or the institution offering it. That is a design question as much as a pricing question. It is about how and when terms are set, not only what they are set to.
This is the problem FINNAC is built to help institutions think through. See how the model works →
Written by the FINNAC team for general information only. Not financial, legal or investment advice.