The digital age has changed the battlefield for banks. They face disruption from FinTechs and tech heavyweights like Amazon, who is entering the financial services field. This emphasizes the issues around banks’ aging infrastructure. All of these problems must be navigated while ensuring continued profitability. As boardrooms focus on employing digital innovation to their advantage, crucial questions around how to stay profitable are being abandoned – in particular, the fundamentals of product pricing.
Product pricing is an area many banks are ignoring at their peril. Today, a majority of banks are still working on a ‘cost plus’ approach when deciding the price of their banking products while also keeping an eye on competitors’ pricing. The result is that a great many offerings look quite unidimensional from a customer point of view, as there is hardly any innovation. The age of generalized offers are over – customers want individualized offers that cater to their specific needs. Banks need to shift from a product-centric mindset to a customer-centric one to stay relevant in today’s digital landscape.
Changing the Perspective
Research has repeatedly found that, regardless of geography, the price is one of the biggest reasons why customers shift their loyalty from bank to bank. For all the work going into digital transformation and shop-front improvements, this highlights how product pricing remains a core concern for customers. With this in mind, there are many steps banks can take to alter their pricing strategies and improve the customer experience as a result.
Change segmentation criteria: Today, many banks use geographic segmentation to divide up customers and tailor offerings. However, there are far more logical clusters to use including interests, identification, and financial situation. Products have to be rethought and redesigned based on customer demand analysis from these profiles, and pricing dynamically applied depending on factors such as usage and price sensitivity. Doing so requires banks to deploy machine learning based analytics.
Continuous profile updates: Banks need to ensure that customer profiles are regularly re-evaluated to accommodate changing circumstances to maximize lifetime value. A customer onboarded with a particular product and pricing might work now, but several years later her situation could be entirely different requiring different products.
Continuous augmentation of the customer profile is necessary and allows banks to understand their customer’s life stage, preferences, and social interactions. This data can be used to draw out meaningful insights that radically improve the type of pricing and product offers made available.
Loyalty oriented pricing: How often do we see new customer bonuses get ignored by loyal users? If product design and pricing are targeted toward retaining customers – as it should be – then banks need to ensure their prices reward loyalty. Banks must proactively send relevant offers and loyalty points to customers to keep them engaged year after year. These offers act as a powerful incentive to stay with a brand and also provide an opportunity to upsell new services.
Dynamic pricing: When it comes to product pricing, traditional banks often are bound by the fact they operate within low margin and regulatory constraints. This means it’s even more important to price dynamically so that net profitability is maintained. Customers aren’t always attracted to low pricing or discounts and many factors impact this decision. These include demand, availability of similar level of service in the market, and urgency of the service, which banks need to be aware of and able to adjust accordingly.
New offerings: By partnering with third-party service providers, banks can include unique services into their product offerings, such as a mortgage loan in partnership with another firm that provides small financing options (e.g., for smaller purchases such as furniture). Traditional banks may argue they already offer such financing options through credit cards, but by positioning themselves as a conduit to all of a customer’s financial needs, the bank becomes a part of their customer’s lives – going above and beyond the usual bank/consumer relationship.
Preparing for the Shift
In the future, analytics tools and a solid pricing strategy will drive banks profitability. Pricing cannot sit within one department. It will become the collective responsibility of everyone from marketing and sales to product management to customer service. It needs to become instilled as a core part of organizational culture.
The above steps represent a substantial shift in the way banks think about pricing, and there are many commercial, off-the-shelf solutions available in the market today to help make that transition. Banks have a range of options to suit them because there is no one-size-fits-all solution. By devising a strong pricing strategy and reviewing the offerings of firms like Zafin, Nomis, and Suntec, each bank will be able to find a vendor that meets their needs.
The article was originally published on Global Banking and Finance and is reposted here with permission.