Linking price and fees for bank products to a customer's profitability sounds simple enough, but guess again. "It's not always the people with the most money in your institution that are the most profitable, it's not even the '80-20 rule,'" says Danny Baker, svp and CTO for IPS-Sendero, a business unit of Fiserv.
IPS-Sendero is among a group of technology firms, including Amdocs, SunTech Business Solutions and Zafin Labs, hoping to catch fire in the nascent business of helping banks bundle products for consumers. Part of that is basing pricing on a customer's profitability, a measure not always determined by the number and value of relationships a customer has with the bank.
Bundling is often used in corporate banking or with the highest of the high-net-worth private banking clients, but robust adoption for most consumer categories has been slow, and very few banks will publicly cop to using relationship-based pricing for consumers.
But that isn't stopping the vendors, which are convinced that "one size fits all" and that generic price reductions for those with large balances aren't adequate measures to gauge a consumer's "real" profitability, nor that favorable pricing is how to massage those relationships.
"It's very sophisticated, every time we do it: [Bankers] are shocked to find out who their best customers are," Baker says, while acknowledging that most of the traction for relationship-based pricing has been on the business side. "There's demand among consumer bankers, but not to the point of writing a check. What we're trying to do is create an environment that will take [relationship pricing] to the masses."
Baker's hope isn't without merit. Celent says relationship-pricing methods are emerging as a central strategy in banking. And while tailored discounts are a mainstay in corporate banking, research suggests retail banks are increasingly emphasizing fee-based businesses. Targeted marketing, segmentation, profitability analysis and loyalty will lead to complex fee schemes for both individual customers and for mass customer segments.
"There's a lot of choice in the banking market now for consumers," says Jacob Jegher, a senior analyst at Celent. "Customers have little loyalty to staying with an institution and they are sensitive to price. Service does play a part, but price is the sensitive issue. What banks can do to get attention in this marketplace is to start pricing products differently."
Technology firms would not identify clients actively using relationship-based pricing, but many acknowledged they were discussing it.
Without identifying them, Celent says one or two national banks will roll out relationship pricing over the next year, and about 50 of the largest 125 banks in the U.S. will have some sort of offering over the next two years-along with three of the seven largest Canadian banks.
One bank that was confirmed, the Royal Bank of Canada, is reportedly offering a multi-product relationship-pricing model that links the waiving of various fees and the reduction of fees based on the number of products a customer holds, rather than the size of balances. RBC declined to make an executive available for an interview, citing the proprietary nature of their strategy.
"There are a handful of banks that are working on this," Jegher says. "And the banks that come out with an offering will be the trendsetters that will change the marketplace. There will be a sea change."
Most of the relationship-based pricing products use some form of customer analytics and other CRM-related methodologies to link across a bank's silos and form an integrated pricing strategy. That strategy then determines which customers are the most "dynamic" in how they use the bank's services, and forms a pricing strategy for that customer that works as a loyalty/relationship-building perk.
Fiserv's platform includes a rules-based pricing engine, workflow tools, statement routing, rules-based aggregation of transaction data and invoice reviews. Planned improvements include SOA development, enhancements to handle high-volume demand, pricing for retail transactions and integration with other Fiserv products in the core banking, CRM and other segments.
Competitors include SunTec, which offers customer-management functionality that supports the definition and maintenance of complex customer and account hierarchies. Amdocs offers pricing modules for fee management, product catalog, order management, and single-account openings; it also offers a pricing engine that performs calculations on interest-based financial products.
And Zafin Labs sells an engine that can price multiple products, using multiple attributes and nested hierarchies. "If you have to maintain competitive differentiators with other banks, you need to be able to offer what the customers uniquely want, and it's important to provide each product set with pricing that captures the unique interest of each customer," says Dinesh Krishnan, a spokesman for Zafin Labs North America.
