Irresponsible banking practices were the leading cause of the credit crunch in 2008. This is undisputed. Four years on, we are living in an era where customers despise banks yet cannot exist without their services.
The impending return to a soft economy will only exacerbate this crisis: profit optimization becomes ever more important to the banks, while at the same time their customers are in need of their services and advice more than ever.
There are a number of actions that banks can and need to take in order to ameliorate their reputational low while at the same time profitably growing their business.
Pricing is still an unsolved issue in the industry. Recent regulatory actions, designed to increase transparency and thus improve the industry's public image in the long run, have nevertheless triggered the exact opposite result. Brute-force price adjustments on the part of a few big banks seeking to plug the fee-revenue holes unleashed a tsunami of renewed consumer distrust. After Bank of America reneged on its planned monthly debit card fee, most other banks followed suit and quickly tossed their own fee-adjustment plans. Retail banking products are effectively stuck with compressed margins, as customer-acquisition volumes stagnate under climbing costs.
By recognizing that banks are entitled to a profit and customers should expect good value, there is a responsible way to approach pricing, which we call Fair Value Exchange, where customer needs and bank needs are in equilibrium. The result is a fair return on savings and investments, a fair interest rate on a mortgage or other loan, and fair fees for checking. Fair Value Exchange needs to be the guiding principle in product development and pricing if the industry finally wants to get out of its ongoing image crisis. It is about designing products and services the way customers want them, identifying the optimal price points to meet corporate profitability targets and customer expectations, and communicating very transparently how much is charged and why. Here is how it works in five simple steps:
1. Develop needs-oriented value propositions. In many of our interactions with banking customers, it was clear that banking for them was not about individual products, but rather solutions to everyday financial needs, e.g., making a payment, taking out a short term loan, or financing a home. The answer thus lies in developing simple, integrated solutions that help customers manage their finances and stay in control, as opposed to being forced into a back seat and told what to do by an industry that they hardly trust today.
2. Leverage modern technologies such as mobile devices. They open completely new opportunities to deliver value to your customers and improve the interaction with and among them. These new technologies can help your customers navigate through your offering, make better choices, and not fear that they are going to be cheated if they should make a wrong decision.
3. Align price levels with customers' willingness to pay. If banks are pricing products or services too high, few people will buy them and revenue and profits will be suboptimal. If they are pricing too low, customer demand will be high, but the low per-unit margin will again lead to a suboptimal performance.
The trick is to find a set of prices where banks sell just the right volume of products to the right number of customers to maximize overall revenues or profits. This is the best measure of fair price-setting and therefore the best way to bring Fair Value Exchange to market.
One of my colleagues recently wrote a blog post about personalized cross-sell for financial products, providing an in-depth explanation of how and why banks should use this to effectively market to consumers on an individual basis. It provides an angle on the concept of Fair Value Exchange that I think you will find interesting.
I believe that the correct term to use for future interractions between financial services and consumers is "doing the right thing"!
And DOING THE RIGHT THING, leads me directly to ADVOCACY, as defined by Glen Urban in his book... "Don't Just Relate - Advocate!: A Blueprint for Profit in the Era of Customer Power"