SharePricing - A definitive competitive advantage
Price, number 1 reason for the customer to choose a bank: Gartner
Sustaining profitable relationships with customers has now become the biggest challenge for banks. As interest revenues continue to erode, fees now play an integral part in the income of financial companies. Compared to the situation almost a decade ago, when they accounted to only 3% of a bank’s income, fees have come a long way. Now they comprise up to 40% of a bank's revenue. Fee-based revenue is expected to gain more prominence in the retail banking space in the coming years.
However, there is a flip side to it. As banks vie for the maximum market share, customers feel they are being given a raw deal. In spite of all the money being spent by the banks to acquire customers and achieve their delight, the mailboxes of banks are getting flooded with customer complaints pertaining to the charges levied by them for services. In fact, customer dissatisfaction over issues like overcharging and penalty charges give the worst of nightmares to the bankers.
The recent public backlashes against the charges levied by banks in UK, South Africa, Australia, Israel and Czech Republic can be counted as a potent indication of this. As you might be aware, several of the complaints from the agitated customers have led to litigations.
Just to give you a glimpse of the stakes involved, in 2006 alone, claims from customers have soared to as much as 40%. The top 5 UK banks have so far paid GBP 400 million as refunds to customers. The situation has led to governmental interference in some countries. Regulatory bodies like The Office of Fair Trading (UK) and the Competition Commission (South Africa) are conducting investigations and formulating measures to control the charges levied by banks.
No wonder, pricing is fast becoming the ultimate competitive differentiator!
How does pricing go wrong?
The reasons are mainly twofold — wrong (pricing) practices and technological constraints.
Wrong Pricing Practices
Though pricing is the most important function in banking, pricing practices in the industry remain underdeveloped. The major issues plaguing pricing are:
- Rudimentary cost-based pricing: Ideally, the basis of calculating charges should be cost plus profit; but this does not actually happen. A recent survey by Gartner shows that majority of the banks use the market-based pricing model, in which, the bank sets its prices to match those offered by competition. Such banks have been losing their cases in several litigations, just because they cannot justify their charges with respect to the cost incurred.
- Lack of pricing transparency: The complexity of charges, the levels of fees application and the varying terminology used by the banks are enough to flummox even the savviest customer. Consumers find it difficult to comprehend the deluge of information and the various options offered by the banks. Moreover, discrepancies creep into the information gleaned from the bank branch, official literature and the information dispensed by pricing specialists at the bank's head office.
- Lack of customer-centric pricing: On one end, banks make 'one-size-fits-all' pricing policies at the product level and on the other, they fail to test the effect of the prices on consumer behaviour. Many retail banks still ask ''At what price are we ready to sell?'' instead of, ''At what price are the customers willing to buy?''
Technological Constraints
Most of the wrong pricing practices can be attributed to the technological constraints these banks face. They are mainly due to:
- Manual Processes: In spite of the technological advancement, several processes still remain manual or confine to a lesser level of automation in the banks. Pricing is clearly an essential task, but the level of pricing sophistication remains rudimentary. Manual processes are error-prone, which leads to double billing as well as 'unbilling', which in turn, causes overcharging and revenue leakage respectively. In 2004, the UK financial regulator found 36 firms to have made billing mistakes. A major global bank found to their shock, that they were losing tens of millions of dollars every 3 years due to revenue leakage.
- Business Silos: Several banks run business lines as disparate silos, which do not communicate with each other. Customer accounts run across multiple lines of business, and each business or product silo is charged separately. These silos have their own pricing practices, most of which are either manual or hard-coded. The silos restrict banks from having a single view of customer across multiple business lines/products.
The win:win solution
Banks can take various steps to overcome the incorrect pricing issue. Essentially, Relationship-based Pricing (RBP) and Centralized Billing solutions hold the key. They help in the following manner:
- Automate: Automating the pricing and billing process will help banks reduce, if not eliminate, errors. Accuracy can be further enhanced by empowering the system to conduct reviews, duplicate checking, setting a minimum and maximum charge limit, etc. A review process can be used, in which the pricing policies are reviewed by a person other than the creator.
- Centrally manage pricing and billing: By centralizing these functions, banks will be able to standardize and streamline the pricing and billing process across products and business lines. This will ensure that the pricing policies are consistent and transparent from top to bottom; from policy makers through customer service representatives to customers. The customer will know exactly how much they are going to be charged. This also helps the banks to have a single view of the customer across business lines. Banks will be able to put together innovative packages, which include products from different business lines.
- Make pricing dynamic: Banks can price the customers dynamically, based on various attributes like location, segment, usage, time, product, relationship, etc.
- Customer-centric pricing: Banks need to move from the traditional product-centric pricing model to a contemporary customer-centric pricing model. Using RBP solutions, banks can gauge exactly what the customer wants and how much they are willing to pay for a product or service. With a single view of the customer, banks can effect charges based on the overall relationship they have with the customers. Mapping the customer usage pattern can also help the banks in designing products that are tailored to the customers' needs.
- Price Modeling: Using price modeling techniques, banks can study the impact of pricing on customers and revenue. Using the historic customer data, costs drivers, etc., banks can come up with innovative and effective pricing plans for customers. This will also help banks to make price changes on the fly, in response to market trends and competition.
- Simple and better packages: Such packages, if designed based on the services and facilities used by the customers, can easily ensure customer delight. Moreover, banks should offer personally optimal banking solutions, rather than one-size-fits-all products to forge long-term relationships and customer satisfaction. Based on the usage pattern, they can give discounts and suggest package switching to suit the customers' needs. Following these methods, banks can graduate to the role of a trusted advisor to their customers.
Subsequently, it all boils down to one fact: Pricing is undoubtedly the ultimate competitive differentiator for banks focused on future. Like any other competitive differentiator, if done wrong, it ends up as a weakness that can lead to brand erosion, customer attrition, revenue loss and eventually, market share loss; if done right, it is a strength and advantage.