Facing weak market conditions and increased competition, banks are cutting rates they charge customers and spending more on advertising, Simon-Kucher & Partners found in a survey of more than 250 commercial banking executives. But most institutions are not developing segment-specific price structures or building price metrics to reinforce customer loyalty, steps that could give them an edge in profitability. The numbers are painful: Less than 40 percent of the survey participants use structured pricing; less than 50 percent use customer surveys to collect “segment specific information on their pricing positioning,” and around 20 percent “state that their organization has been developed a clear target pries positioning or pricing goals.”
The pricing behavior of most banks is accelerating the commoditization of the financial sector, according to Jens Baumgarten, partner and head of financial services at Simon-Kucher. “They are giving into the pressure, and lowering fees. They don’t have creative pricing policies to emphasize the value of their services.” There is another way: “Smart pricing structures allow banks to differentiate themselves,” Baumgarten notes.
Baumgarten cites several large banks who have turned to smart pricing. Bank of America offers smaller and medium-sized commercial clients “points they can transfer to reduce the price of services” when they use additional BofA products or increase their volume of business. The points program is managed as “behind-the-curtain, negotiated arrangements.” A large European institution has a smart-pricing option available on its website that “enables clients to get discounts base on frequency of use.”
UBS’s "key club" program is only open to Swiss clients. “The idea is again that customers collect points based on their product usage with the bank, which they can then spend on getting better interest rates on CDs/deposits or bonuses on investment funds saving plans.” This frequent-user deal also includes hotel and event offers, and other nonblank treats.
But those institutions are the outliers. Most banks “have not done the ground work, the research that shows where you’re making money, where you’re not making money.” Right now the sector suffers from “huge discounting” unconnected to profitability. Because margins are “dropping so sharply” giving away basis points can seriously hurt profits; and “since profit margins are so thin, even small improvements can have a tremendous impact” on the upside.
Restraint is another element missing from pricing policies of most banks. Just how much additional volume has to be generated to offset the effect of discounting? “In almost all cases banks are underestimating that volume,” says Baumgarten. Banks must persuade relationship managers to refrain from unprofitable discounting, and that means changing the thrust of typical incentive systems. “Many systems are completely focused on volume—building loans and assets—not profitability,” Baumgarten observes. Sometimes there’s a revenue bonus “but that’s very rare.”