Pricing In The New Retail Banking Paradigm

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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

Pricing in the new retail banking paradigmSome examples of relationship-based pricing:!!!!If a customer maintains a certain average monthlybalance across several accounts, he earns certainprivileges like ‘x’ free transactions per monthIf the number of transactions done by the entirecustomer relationship (i.e. all accounts and branches)exceeds a threshold, offer discounted price on futuretransactions for the same or different productsIf a customer does not comply with the agreed SLAsof balances or volumes, automatically increase priceIf the value of cross-border payments reaches avalue, offer 10% discount on the feesRegulatory changesIntensified regulatory measures have dominated theboardroom agendas of banks for the last few years.Here’s a list of some of them:!!!!Basel-II is driving institutions to take a far moredetailed look at the operational and portfolio risksthey carry and to report accordinglyAnti-money Laundering legislation and KYC aredemanding a level of customer intimacy, once seenas aspirational rather than practicalThe Sarbanes-Oxley Act stipulates that companiesmust establish a financial accounting framework thatcan generate recurrent financial reports, which inturn, are facilely verifiable with traceable source datathat must be maintained for a stipulated period oftimeThe objective of Single Euro Payments Area (SEPA)is to create a Euro area in which all payments aredomestic, where the current differentiation betweennational and cross-border payments no longer existsAs a result, banks price a product or service as the costplus economic capital plus profit. The SEPA directivewill cause a price change of payments products, sincenow the price for both domestic and cross-borderpayments would become standard. Also, SEPA hasmade it mandatory for corporates to use IBAN and BICnumbers in payment messages, following the standardsof IPC. If this is not followed, banks are allowed tocharge their customers ‘repair charges’. This requiresconditional pricing, where the customer is charged apenalty if certain conditions are not met.TechnologyThe cornerstone of a successful consumer bankingstrategy is to have a technology platform that can alloweasy implementation of all the above pricing strategies.An ideal solution is to have a pricing solution with thefollowing features:!!!!!!!!Effect on pricingSome of these regulations have an impact on pricing. Fore.g. one of the Basel-II requirements is that economiccapital has to be allocated for all business activities.!!Ability to do relationship-based pricing. To allowthis, the solution must be capable of maintainingmultiple levels of customer hierarchy, so that it canoffer pricing based on the entire hierarchy ofrelationshipUser-friendly GUI to create product bundles on theflyRules-based; where pricing can be conditional andbased on multiple parameters and attributesPrice modeler and ‘what-if’ analysis tools to runsimulated pricing plans and analyze trendsDynamic fee plan configuration across products,channels, customer groupsAbility to compute profitability at micro-transactionlevel and roll it up to sub-product, product, servicecategory and business unitTransparent clearing and settlement processCentralized; so that it can do pricing across differentbusiness units and offer a single view of thecustomerExtremely flexible and configurable to cater to localtaxes, regulations, trendsMulti-currency, multi-language system4

Pricing in the new retail banking paradigmConclusionAll the trends and their impacts lead to the conclusion that in today’s changing market conditions, pricing — already themost common criteria consumers use while selecting a financial institution — will become increasingly important as atool to attract new customers and strengthen the existing relationships. A competitive and precise pricing strategy willbe the key determinant in successfully implementing a value strategy.Banks that commit to developing a sophisticated pricing solution with dynamic relationship bases, analytical, rulesbased pricing and product bundling abilities will have a distinct advantage. While their peers struggle to respond tocomplicated pricing challenges, they will have the insights and organizational conditions necessary to grow revenuesand profits faster than competitors – and also the new entrants knocking loudly on the door.5

About SunTecSunTec Business Solutions, the first CMM Level 5 transaction billing company, is a leading provider of transaction valuemanagement solutions for the telecom and financial services industries. We leverage our extensive domain experience, acquiredsince inception in 1990, to successfully deliver timely and cost-effective solutions. Our concept of Relationship-based Pricing has beenendorsed by industry leaders and innovators across the globe. Our product offerings, the TBMS-T Suite for telecom and the TBMS-FSuite for financial services, provide comprehensive solutions to our customers for measuring and monitoring transaction value andenable tighter control on their profitability. SunTec has a global presence with offices in US, UK, Germany, Singapore, Thailand andIndia.Our clientele include:Financial Services: HSBC GroupLloyds TSBING BankICICI BankTelecom: ComcastBSNL@HomeBakrie TelecomBahrain TelecomCable Onevisit us at or e-mail us at info@suntecgroup.comUSATel : 1 609 520 8223Fax: 1 609 520 8331IndiaTrivandrumTel : 91 471 3918300Fax: 91 471 2433578UKTel : 44 20 7517 3670Fax: 44 20 7537 3098SingaporeTel : 65 6866 3291Fax: 65 6829 2138GermanyTel : 49 69 274015 831Fax: 49 69 274015 111ThailandTel : 66 2 343 1676Fax: 66 2 343 1818BangaloreTel : 91 80 41523780Fax: 91 80 41521511New DelhiTel : 91 11 41436080Fax: 91 11 41437899COPYRIGHT 2007 SunTec Business Solutions Pvt. Ltd.All rights reserved. No part of this document may be reproduced, stored in a retrieval system, adopted or transmitted in any form or by any means (electronic, mechanical, photographic,graphic, optic recording or otherwise), translated into any language or computer language, without the prior written permission of SunTec Business Solutions Pvt. Ltd.SunTec Business Solutions Pvt. Ltd. takes no responsibilities for the contents hereof and shall not be responsible for any loss or damage caused to the user by the direct or indirect use ofthis document. Furthermore, SunTec Business solutions reserves the right to alter, modify or otherwise change in any manner the content hereof, without obligation to notify any person ofsuch revision or changes.

banking world, there is a lot of action these days: like customer-centric initiatives, increase in fee-based income, product bundling and personalized product offerings, increased cross/up selling .

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