Despite talk about market synergies, the latest bank megamergers are justified largely through consolidation, cost control, and economies of scale.
And though near-term paybacks are essential, these deals do little to promote institutional growth, retention, and brand - and almost nothing to improve local effectiveness in marketing and sales.
As institutions grow in size and complexity, it becomes increasingly difficult to balance the central control necessary to achieve broad objectives with the local responsiveness necessary to succeed as a customer-focused institution. This contention affects many areas, but few as starkly as product pricing.
Centralists cite the need for a highly skilled analytics team and a single database to compete effectively and optimize profitability. Regionalists reply that empowering the field is necessary for customer retention and revenue growth. Reconciling these conflicting views is one of the great management challenges facing bankers. Progressive banks increasingly appreciate that achieving revenue growth through mergers is a balancing act, requiring both centralized skills and customer-facing knowledge.
Pricing Puzzle
At some level, most large financial institutions already recognize the need to price regionally. The evidence is all around.
Early last year the market price on money market deposit accounts ranged from 1.20% to 1.37% in Michigan, while the range in neighboring Illinois was only 0.86% to 0.97%. In Massachusetts, two-year CD rates fell 10 basis points in the same quarter in which they climbed 45 basis points in Rhode Island. For institutions operating in these regions, there clearly was no single price that would make them competitive and profitable.
Yet it is difficult to handle regional disparities in a systematic way. Leftover practices from simpler days, differing management philosophies, and merger distractions get in the way. Little wonder that patchwork systems abound. As a result, many large institutions routinely forfeit significant revenues, because offers are misaligned with markets.
What can be done about pricing? We have found that successful institutions integrate local market understanding with a central analytical capability. To support this arrangement, they have developed some key practices.
Understanding competitors. Insights about competitors are clearly important, yet many institutions make some common mistakes. They limit the analysis to a few well-known national banks, ignoring local competitors. They fail to understand competitors from the customer viewpoint. They compare their prices with broad averages, blending rates from all sorts of banks - large and small, rural and urban, discount and full-service - to produce a meaningless composite figure.
In contrast, some banks acquire comprehensive rate data by market. They then determine a meaningful reference price for each type of bank.
Analyzing elasticity. Different customer segments respond to prices differently. Most customers are indifferent to small variations, and some are insensitive to even large ones. Understanding these attitudes creates enormous opportunities.
These sensitivities, or elasticities, vary widely by product, region, and price structure (rate, fees, or minimum balances). Leading banks refine their understanding of customer demand through data analysis, proprietary studies, and third-party multibank surveys.
Assessing markets. Leading banks analyze the underlying dynamics of local markets, and they understand the impact of macro-economic factors on deposit and loan demand. Our work with bank clients demonstrates that as much as 40% of a bank's deposit performance is a function of these macro-economic factors.
Fluctuations in home sales, employment, consumer confidence, and gross state domestic product raise or lower the tide for all banks in an area. In evaluating a branch's performance, the best banks understand that driving growth is very different from simply being in a high-growth region.
At one bank, for example, money market deposit accounts were growing 15% a year at branches in one state but only 8% in another. The 15% growth, however, was in a high-growth, low-competition state in which the bank actually lagged the market. Meanwhile, the bank was actually exceeding market norms at the branches where accounts were growing 8%.
Division of Labor
With acres of work to be done on each region served by a bank holding company, and as the required analytics become more complex, it makes sense to centralize the pricing planning and analytical function. And it is absolutely essential to support it with high-caliber staff and information systems.
At the same time, it is vital to incorporate local information, variations, and insights into the pricing process, and to recognize that each region offers a unique pricing challenge and opportunity.
What about final say-so - should decisions be made regionally or centrally? While a number of arrangements might work, we advocate a balanced approach.
A central group should develop pricing strategies by region, with explicit local management input, using local data on customers and competitors. Local managers should be responsible for executing the strategy in a way that achieves the growth and profitability targets.
As competitors' initiatives create threats and opportunities, a bank's central management should work with local managers to determine the response. Most importantly, we believe there should be shared accountability for achieving growth and profitability goals.
This arrangement tightly binds the local and central factions. Also, by fostering a common understanding of local data and market conditions, it creates an effective and balanced approach to pricing at the local level.
