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The real value in relationship-focused pricing decisions

As the non-interest income landscape changes, shifts in consumer and business behavior demand shifts in revenue-generation strategies.

Jul 14, 2022 / Consumer Banking
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Making accurate pricing decisions is a crucial component of profitability for any financial institution. Achieving profitability is about more than driving numbers one direction or another to affect margins – it’s also about creating effective products and delivery mechanisms.

In the aftermath of the Great Recession, NSF fees dropped steadily due to changes in consumer behavior, increased regulation and adoption of online banking and mobile apps designed to help consumers monitor their spending and balances. In recent years, sluggish loan growth and extremely low interest rates have compressed net interest margins. Debit card interchange has replaced some non-interest income, but becomes less impactful as consumer payment choices increase.

Despite changing trends, one thing has become clear: As the non-interest income landscape continues to change, shifts in consumer and business behavior demand shifts in revenue generation strategies. Financial institutions should strongly consider the risk associated with further degradation of NSF and overdraft revenue and its impact on the business.

Tracking shifts in behavior

Checking accounts are becoming good opportunities for accountholder engagement. Transaction data is the new currency. If leveraged successfully, it offers unparalleled insights into the financial needs of each checking accountholder. “Active rate tracking” is currently the biggest predictor of future behavior as consumers increasingly seek out the best interest rates available.

As wealth transfers from one generation to another, it’s imperative that financial institutions invest in attracting, engaging and retaining younger consumers – the ones who are most sensitive to rate changes. Financial institutions with antiquated processes, pricing models and rates may lose ground in this wealth shift.

Banking institutions can use planning and profitability tools to evaluate their deposit pricing models. They may decide to become more competitive on liquid accounts while being less aggressive on term deposits, but they also need the tools to know how to make pricing decisions account by account, based on the profitability of each relationship.

Engagement with a younger demographic means being digital – but not exclusively. Younger accountholders overwhelmingly lean towards digital experiences, but data supports a continued need for face-to-face advisory services.

Pricing and relationship profitability

Profitability is where customer satisfaction and institutional objectives intersect. Both can be achieved through personalization and by offering up the right products to the right segments at the right time. To do so, financial institutions must take various types of risk – interest rate, regulatory, credit and operational – that are key determinates of return.

Three major characteristics make a household unprofitable: low loan balances, aggressive rate shopping and low-activity checking accounts. These accountholders cost financial institutions money without generating non-interest income. However, not all unprofitable accounts look the same. Through data analysis, financial institutions can identify where balance gaps are the highest.

These analyses require important tools, plus the ability to create, maintain and dissect the profitability of complex business relationships. According to a 2021 report by Syntellis Performance Solutions, 59% of financial leaders say they lack a pricing tool that allows them to immediately evaluate how a new account impacts the profitability of an existing relationship. And nearly half of respondents don’t use funds transfer pricing to estimate impacts on profitability.

For insights to be successful applied, they must be closely linked to activity on the front lines. For example:

  • Relationship managers need access to timely information to improve their decision making at the point of interaction with accountholders. Empowered with data, they can ensure the most profitable households are identified and rewarded more quickly and that performance benchmarks align to management goals.
  • Front-line staff can benefit from greater visibility into households so they can prioritize escalation by household merit.
  • Marketing personnel can utilize true profit information to enhance segmentation, identify cross-sell and up-sell opportunities, and align resources with product profitability.
  • Executive committee members need effective tools to measure and manage expectations. By linking executive-level strategy to front-line activities, leadership is better positioned to drive success. Visibility into detailed analyses of service and delivery costs can lead to more objective, merit-based compensation and incentive practices.

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One of the biggest barriers to pricing analytics is a disconnect between the product owner and senior management. Lack of leadership (or leadership sponsorship) leads to reliance on inconsistent facts and figures with limited, confusing or contradictory context. Planning and profitability is more than just calculations and methodologies – it’s a commitment to data.

While no one will ever know what the future holds, it is possible to improve visibility into the future. Financial institutions willing to invest in tools to understand relationships and their contributions to the bottom line will be strongly positioned to make impactful pricing decisions.

Danny Baker is vice president of market strategy at Fiserv