Pricing In The New Retail Banking Paradigm

White PaperPricing in the new Retail banking paradigm

Table of ContentsIntroduction . 1Financial supermarkets. 1Product bundling. 1Delivery channels. 2Customer centricity . 3Regulatory changes. 4Technology . 4Conclusion. 5Contributed by: Poorvi Daxini, Consulting - BFSI, SunTec

Pricing in the new retail banking paradigmIntroductionThe banking industry, across the globe, is witnessing arenewed focus on retail banking, a trend often attributedto the stability and profitability of retail activities.Moreover, big corporates are circumventing banks toraise money through the debt market and commercialpapers, which are cheaper than bank credit.To make up for this, most banks have devised strategiesto go for retail banking as a major driving force. Risk, inretail banking, is distributed and it is a huge marketwaiting to be explored. Inevitably, the retail bankingindustry will soon emerge as a global arena, since it isheading towards a new landscape with increasing crossborder collaboration, emergence of large-scale financialsuper markets and regulatory changes.Banks now recognize customer experience as the key tomeeting challenges like increasing customer loyalty andslashing customer churn. Consequently, within the retailbanking world, there is a lot of action these days: likecustomer-centric initiatives, increase in fee-basedincome, product bundling and personalized productofferings, increased cross/up selling and also regulatorychanges like Euro payments, SEC rulings ontransparency of billing, KYC, operational risk standards,etc. Some of these trends are detailed below.Financial supermarketsIn an attempt to become a one-stop financial shopoffering all financial solutions, the retail bankingsegment has been evolving, to offer a broad array ofbanking and investment products under one roof.Banking, insurance, mutual funds and brokerageproducts, which were earlier offered by specializedfinancial firms, are now offered under one umbrella.Across the globe, financial institutions are movingtowards universal banking. The philosophy behind thisis that, expanding the customer’s portfolio by sellingmore products to each customer, when accomplishedintelligently, should improve a firm’s top-line andbottom-line. Also, surveys show that many consumers,faced with a growing complexity in financial products,are looking for a reliable financial advisor to guide themthrough the maze of personal finance choices. Othersignificant factors influencing consumers to desire asingle provider include a consolidated statement, easyfund transfers, a clearer presentation of one's financialsituation, and better pricing.Effect on pricingSeveral banks do not directly provide non-traditionalservices like insurance, mutual funds, etc., but theypartner with third-party specialist providers for theseservices. Banks can partner with multiple providers forthe same service. The price charged from the customerfor the service could be complex, based on multipleconditions. For e.g. If the transaction is from provider A,and the SLA with the provider is B, and if customerchooses plan C, then a particular price is applicable. Ora percentage rate is added to the price given by theprovider to arrive at the final price offered to thecustomer.Product bundlingProduct bundling is an intelligent strategy that isbecoming increasingly popular in the banking sector.According to this concept, banks offer multiple financialproducts and services to customers as a package.Bundling is generally recognized as a potentiallyappropriate means to tackle competition, to acquire newcustomers, to cross-sell new services to the existingcustomers and to retain the existing customers, who aregetting increasingly savvy and sophisticated. Bundlinghelps to boost profits substantially by increasing theopportunity to cross-sell. It is also a great method forincreasing the sales volume of products that are not inhigh demand.Bundling is not a new concept in retail banking. It hasbeen existing for more than a decade-and-a-half, but1

Pricing in the new retail banking paradigmthere is a shift in focus now, as a result of which, it hasgained popularity. Earlier, banks were mostly concernedwith increasing the effectiveness of the use of its corebanking products like current accounts and dailytransaction-based activities. In the last few years, thepriority has shifted to actively improving productpenetration into the existing customer base, increasingsales by attracting new customers, innovating theproduct offerings, and lastly but most importantly,retaining and enhancing customer relationships andbasing price reductions on the total volume and/ordesired use of services. A derivative benefit of bundlingis the reduction in costs of selling and servicing tocustomers.!A customer, who avails a current or savings account,payment service and telephone service, will gethigher interest rate on current account. Strategy:expand customer’s product portfolio!If a customer satisfies two of the four requirements –a current a/c, save a certain amount every month toa savings a/c, savings greater than a limit, loansgreater than a limit – then he gets several discountedfree services. Strategy: give customers a choice ofbundles, thereby retaining customers!A bundle with lower monthly recurring fee, if acustomer uses self service as compared to a bundle,wherein the customer approaches the bank branch.Strategy: encourage customer’s self service, so thatthe bank can allocate resources to other moreprofitable functions!If the total relationship of a customer and his familyis greater than a limit and regular income is greaterthan a limit, then better interest rate, discount onpayments services and free subscription to amagazine. Strategy: encourage not just the customer,but his family also to use the bank’s services,thereby increasing customer loyalty!A bundle with discounted services, wherein apersonal contact is included as part of the bundle.Strategy: reduce customer uncertainty andcounteract any switching possibilityEffect on pricingProduct bundling is basically a pricing strategy, whereprice of products/services in a bundle are morecompetitive than their segregated prices or some freeservices are offered along with certain products.Different bundling and pricing strategies are used togain different benefits.Some examples of retail product bundles being offeredby banks:!!If a customer maintains a defined amount of savingsand has taken a defined amount of loan, thendiscounts are offered on interest rates, auto loans,free phone banking, counseling once-a-year, etc.Here again, there can be a tiered approach i.e. whenbalances/loan amounts increase, more discounts andadditional free services are provided. Strategy: crossproduct discountingSegment-specific bundle, for e.g. student bundleoffered to students of a particular age group, wherethe interest rates offered on savings account arehigher if phone banking is used, higher interest ratesif money is held in current account for the wholemonth, free debit card and heavily discounted checkservices. Strategy: acquire new customersDelivery channelsTo stay ahead in the competitive banking arena,successful banks are investing in channel solutions thatprovide differentiating services on customers’ demand.After the success saga of the ATM, internet and callcenter, the retail banking industry still has many newdelivery channels to explore and exploit. The mobilephone is already being touted as the next big trend inthe coming years; interactive TV (iTV) too will be apotential channel.2

Pricing in the new retail banking paradigmCustomer centricityATMs are here to stay and the internet has becomealmost a necessity as a channel. Partnerships and jointventures between banks and telecom companies enablecustomers to make card-less interactive micro paymentsvia the mobile phone. Retail banks are also carefullyconsidering the new iTV delivery channel. Surveyspredict that, in Europe, iTV households will exceedinternet households very soon. iTV will help banksreach out to a much larger customer market.While e-channels are attested to be indispensable, theretail banking industry is making giant strides in thedevelopment of banking infrastructure with the abilityto deliver banking services through other businesspartners. For e.g. banks with a small branchinfrastructure, are tying up with a network of thousandsof motor dealers, who initiate loans for cars at the pointof sale. This business-to-business-to-consumer approachprovides the bank with the benefits of both market reachthrough distribution and brand extension. Around theworld, post offices, retailers and niche financial servicessuppliers represent the next opportunity for growth forthe established banking institutions.Multi-channel strategies clearly enable bankingorganizations to extend their reach and increase theircontact with multi-platform customers.Effect on pricingBanks encourage product/channel usage by price. Theypromote one delivery channel (say internet) overanother (say branch), if the cost of servicing throughthat channel is lesser. Retail banking organizations canactively drive customers to the preferred channel bymeans of price variance.In case of non-financial partners like post-offices, motordealers, retailers, etc., the prices of services dependupon several parameters like location, contract,infrastructure costs, etc.Market consolidation, steadily burgeoning retailbanking portfolio, increasing levels of commoditization,and fierce competition have changed the face of retailbanking from a plain vanilla product-centric approachto a customer-centric delivery model.Commercial banking has long been based on customerrelationships, but today retail banks also recognize theimportance of an effective customer relationshipstrategy, and the need to become more customer-centricto ensure long-term success.Financial institutions have begun to recognize thesignificance of customer retention on their bottom-line.They are devising strategies to reward customers forcontinued loyalty and offering them services in linewith their value proposition, in order to sustainprofitable relationships. Personalized services andprices hold the key to gaining customer mind share.Success is easily measured by their level of clientretention and repeat business.Effect on pricingAs an offshoot to customer-centricity, banks now turn torelationship-based dynamic pricing, which advocatesthat each customer is unique, and deserves to be treateddifferently. In relationship-based pricing, the price of aproduct or service, or a bundle of products and servicesis based on the value of an individual client'srelationship with the bank.The value of a relationship can be measured in manyways, including the duration of the relationship, thecurrent or potential profitability from the client to thebank, and the importance of the client to other keyproduct areas of the bank. Dynamic pricing is thechange effected in pricing schemes in real-time,depending upon several parameters. The changes aremade either by the relationship manager orautomatically.3