Bank commissions shall regularly financial performance, breathing a sigh of relief when increased costs less revenues and revenue growth is more or less on target. If this is not the case, questions about performance and management is to maintain a chastened constant control on costs or not aggressive enough sales help. Pricing questions rarely seem to arise, though, although prices will inevitably have a significant impact on revenues. In corporate governance briefing this month, Richard Ketley explores how better prices can contribute to the bottom line.
Although banks compete in what are usually highly regulated markets, there is always room for manoeuvre as far as is concerned, especially when it comes to credit or bundled product offerings. And even a small improvement in average price can have a dramatic impact on the business.
The math is simple.
If prices can be increased without causing a significant reduction in the turnover and costs can be kept constant, accumulate the benefits directly to the bottom line. Although slightly lower volumes in response to higher prices, some variable costs are also likely to decline, then the overall impact is still likely to remain positive. The alternative strategy, to reduce prices, not only results in a reduction in revenue, but also in rising costs, such as increase in volumes.
Competitive banking markets in the Middle East, pressure to reduce, rather than increase prices is often intense. New traders with deep pockets capital are willing to offer huge discounts in order to win market share and regulators are increasingly defining or limiting transaction fees.
But before being pulled into a price war, bankers should be able to answer some basic questions about their markets, as well as the behavior of their customers.
• What role does actually play price chosen by the customer of the Bank, and how it differ between segments?
• We actively defend our customers against predatory pricing without dropping the general price level?
• We know from data on we accepted and rejected credit offers customers that are more sensitive to prices?
• Are the right policies and procedures in place to manage discounts through the network?
• We know the real costs of provision of our services, as these are influenced by the growth in our customer base?
• How to optimize our business when we operate in markets that are more complicated as the payments environment?
• We’ve exploited advances in systems and technologies to effectively channel in order to customize pricing for each customer?
Some banks in the Middle East have formal processes in prices or internal structures, the task of providing credible answers to these questions. It is much easier to accept a version of what is believed to be the market price, offer this to all customers and clamp down on discounted relationship managers.
This is, after all, advise the course of operational efficiency consultants more action.
But there is ample evidence to suggest that banks that invest in fixed price strategies and skills can improve their earnings.
For example, research has shown that family ties and life cycle events play a major role in choosing a bank that offers special prices. Even customers who “defect” because of a special offer you can recapture through proactive direct marketing.
Research has also demonstrated that, in almost all customer segments, less than 20% of the customers are able to select the most convenient option, choosing between a lump sum and a percentage discount. Equally important, many customers will not change a set of “default” options presented on a form, and then by selecting the appropriate default settings can play a key role in optimizing revenue.
In a culture in which individuals expect to be able to negotiate, enabling front line staff offer you a discount can strengthen the emotional bonds between the customer and the Bank, providing the process is properly handled. And to manage the risk involved, banks may use their credit application and data reviews, analytical methods to determine which customers are more likely to be price sensitive or even a higher risk.
Much of what we now know about pricing is based on the emerging science of behavioral economics, which criticises m