Since the start of the recession, consumers and businesses have progressively lost confidence in the U.S. banking industry. A nationally representative survey of 1,155 consumers fielded in February 2009 by Raddon Financial Group (RFG), found a lack of consumer interest in banking with the Big Four (Bank of America, Chase, Citibank and Wells Fargo). Twelve percent of respondents said they were "not very likely" or "not at all likely" to remain customers. For institutions competing against the Big Four, 12 percent represents seven million households that may be looking for a new institution.

Furthermore, JD Power & Associates 2009 Retail Banking Satisfaction Study found that only 35 percent of customers were highly committed to their retail bank in 2009. For competing institutions, that means 65 percent of customers were not.

So what can banks do to keep customers? Relational pricing.

Relationship service charging is a very powerful tool for financial institutions that sell commodity products such as deposits, loans, investments and insurance. Financial organizations will often state that its key differentiators are location and relationship. Relationship consists of many dynamics, including trust, community affinity, ease of use and pricing of products. And it is this relationship that many banks leverage to grow and retain a profitable customer base.

Unfortunately, most financial institutions have been limited to designing pricing around very narrow and predefined choices provided by their core transactional systems. This has left institutions with limited capabilities to differentiate themselves from competitors that have similar, limited choices. When we asked our clients what changes they would make, given the opportunity, to their service charge techniques, responses vary widely. Financial institutions want to be unique in how they define relationships and price products.

Ideally, relational pricing provides a rules-based service charge management system that uses the power of the relational database structure. It is a set of functions that allows a financial institution to customize the way it calculates service charges based on relationships between account transactions, balances and other aspects of relationships.

For instance, a bank can use any field within the database to perform a calculation on or compare against to determine service charges. A package can be created to waive service charges on a product or an account level based on date of birth. For example, if an institution waives monthly service charges on account owned by a minor, by using relational pricing, the system can calculate the age of the minor and waive the charges until the minor's eighteenth birthday. Upon turning 18, relational pricing will automatically begin charging the account.

A package can also be created to waive service charges on a product or an account level based on an activity. For example, an institution may wave monthly service charges on an account as long as there is a direct deposit transaction. With relational pricing, the system can identify if an ACH credit occurs each month. As long as a credit is received each month, the service charge is waived. If the credit is not received during a particular month, the service charge is automatically applied.

Service charge packages could be assigned at an account level if the bank chooses; therefore, every account could have a customized service charge routine. Banks would create their own rules for both service charging and reversing service charges, and those rules would be grouped together into packages that can be applied to an entire product or to individual accounts. The rules and packages are maintained within the database so they can easily be applied to various products and/or accounts. And a rule can use even the most nominal pieces of information in the database such as a date, account balance, relationship or a particular product.

For banks, relational pricing provides the flexibility needed to serve a wide variety of customers with made-to-order products and services. As a result, customized pricing improves customer service. Take a long-term customer with high account activity levels. Since the customer has more involvement with the bank, the bank can provide that customer lower service charges. The customer is less likely to switch to another institution, as those service charges are likely to be higher elsewhere. Conversely, as non-customers look to switch financial institutions, relational pricing can be a huge selling point for banks capable of customization.

Another example of how banks can use relational pricing is by offering rebates for customers when they use their ATM/Debit card when shopping at predefined local vendors. Customers with larger combined deposit balances receive larger per item rebates. This type of example might increase consumer card usage while simultaneously building relationships with local commercial vendors-a strategy to not only better serve existing clients for retention purposes, but also gain new ones.

Competition is fierce with many consumers looking to switch banks. Excellent customer service is needed now more than ever to help retain and grow customers, and banks need to look beyond traditional strategies and incorporate relational pricing to customize service charges. By doing so, institutions can not only better retain existing customers, but also have an opportunity to capitalize on the households potentially looking for a new financial provider.


Louis Hernandez, Jr. is chairman and CEO of Open Solutions Inc.

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