Dynamic Pricing May Be the Key to Customer Retention: Bank of the West

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Bank of the West says it has set itself apart from larger California-based competitors by providing better service and strengthening customer relationships. Now it wants to take things a step further.

Starting early next year the San Francisco unit of BNP Paribas will be one of a few banks using new dynamic pricing technology to create more variety among standard products like deposit accounts. By using the technology, Bank of the West hopes to retain its most profitable customers and acquire new ones who will stay with the bank longer and develop deep ties to the institution.

"In a mainframe world, if I want to create a new product or package for customers today, I am hurt by the lengthy development process, the business requirements, the testing and the need for IT to do regression analyses," says Alexandra Roddy, senior vice president of strategy and delivery for Bank of the West.

To get around this problem, Bank of the West will use a modular product called miRevenue from Zafin Labs in Palo Alto, Calif. Its miPricing module will attach to Bank of the West's core using a middleware layer that will ultimately let the bank's marketers improve visibility of customer activity across product silos, Roddy says.

Dynamic pricing involves offering goods at a price that changes according to factors like demand, customer type, or even the weather. It is best known in the travel industry and has been popularized on websites like Travelocity and Expedia.com, where flight pricing can differ second by second, based on market demand.

For bankers, adopting the model poses challenges — including regulatory prohibitions against wide discrepancies in prices for basic products. Banks are nevertheless finding ways to apply complex pricing dynamics.

"The key for deposits and loans is going down to more granular levels of demand," says Daryl Demos, a partner at the bank consultancy Novantas.

A good example of dynamic pricing in the financial services world involves offers presented to the average CD shopper, who almost always wants the best rate. Dynamic pricing could help banks retain such customers while offering relatively low rates by offering other incentives or attractive packages. That might involve combining the lower CD rate with same-day access to funds when they are deposited, or free foreign ATM access, Demos says.

Novantas has its own dynamic pricing product called Pricetek, which is used by eight of the top ten banks, Demos says. The product is based on "nonlinear elasticity models" that can forecast demand based on changes to rates. It lets banks examine a wide range of portfolio information, including deposits by tiers and by region, to create price and product distinctions, Demos says.

Bank of the West chose Zafin because of its ability to analyze customer attributes, such as recent use of products, balances, geography and demographics, to create rates, fees and service benefits, Roddy says.

The Zafin product will let Bank of the West quickly create packages much the same way cable companies create product bundles for their customers, Roddy says.

One of the goals is to provide better products and services to the customers who already have deep ties with the bank, or who have recently brought the bank a deeper share of wallet, Roddy says. It will also nudge pricing in the direction of more traditional retail environments, where if you are a frequent shopper at a large retailer like Macy's you might get gift wrapping for free, Roddy says.

"That fluidity in more traditional retail environments is not a part of banking, and this helps us move in that direction," Roddy says.

Robert Phillips, the founder of Nomis Solutions and a professor and the director of the Center for Pricing and Revenue Management at Columbia Business School, said in an interview from late last year that pricing in financial services should be no different from most consumer industries.

Nomis, like Pricetek, also provides a dynamic pricing engine for bank portfolios, which Phillips says can increase operating profits between 10% and 12%. (The product is called Nomis Price Optimizer.) "Different customers weigh different features, some will pay higher prices because they value the brand or they value the convenience or the other services that come along with it … and some will shop until the cows come home to get the best price," Phillips says.

Banks should be investing in customer pricing the way they've invested in risk, branches and their brand strategies, Phillips says.

Dynamic pricing is actually related to investments most banks have already made in customer relationship management platforms, experts say.

"Banks have bought great new CRM solutions, but they've forgotten they have to get all the information to all the customer touch points at the same time with consistency," says Christine Pratt, a senior analyst at Aite Group.

That is likely to change in an era of constrained revenue brought on by regulations such as those in the Dodd-Frank Act and the Durbin amendment to the financial reform law, Pratt says, and banks will look for more creative revenue opportunities.

Certainly some of the newest banks have built dynamic pricing into the core of their business models. Movenbank of New York, which has yet to open for business, has said it plans to offer more fluid pricing through a data analytics system it has created called CRED. CRED purports to establish pricing for products and services based on the capacity of customers to refer others to the bank through their standing on social networks.

Similarly, Bank of the West plans to reward its best customers with better pricing and better products.

This will "enable us to do a better job of providing features and services and pricing benefits to customers with significant relationships with us," Roddy says.

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