Revamping a bank’s pricing can trigger a revenue boost
By Pieter van den Berg and Deepak Goyal
Growth isn’t a given in banking today. Revenue growth has lagged in the low single digits, at best, in recent years. At the same time, cost and efficiency campaigns at many banks have hit a point of diminishing returns.
However, a few banks large and small are reinventing top-line and bottom-line growth simply through repricing initiatives for their loans and fee services. They are scrutinizing and optimizing their pricing performance—from discounting practices to fee levels and structures, sales incentives and overall governance.
The results can be spectacular. Focused repricing initiatives are a no-cost, low-risk driver of revenue increases—5 to 10 percent on total revenues, net of attrition—that drop straight to the bottom line.
Pricing initiatives offer particular potential for community banks, and they resolve an urgent need to get pricing right; many banks are now pushing to expand product offerings in mobile banking, cash and wealth management, and personal finance. And like other banks, they depend on margins from a full array of incremental business and retail products and fee services—from branch banking to credit cards, mortgages and commercial loans.
Yet this is a largely missed opportunity for banks of all sizes. Instead, counterproductive loan and product discounting anomalies are prevalent. These can be driven by a number of factors, including:
Limited guidelines on price differentiation by client segment. Many banks have just one standard price level based on which the relationship manager has to make an arbitrary decision for what the appropriate discount is for each client, without the support of robust data and tools.
Volume or bundle discounts that continue indefinitely, even if the client has switched away from initially agreed volumes or products.
Omitted charges as a result of waivers, creeping customization or prices that do not factor in all costs.
Aged, unrevised prices, especially for fees, which many banks fail to review and reset on a regular basis for each client.
Adverse incentives for relationship managers, focusing more on revenues than on margins, leading them to win and retain clients “at any price.”
Monitor and enforce price standards and terms where “exception” prices get approved almost automatically and are not being tracked systematically.
Successful repricing can achieve significant impact in the first six to nine months, including 5 to 10 percent overall revenue improvement. But the most remunerative programs are comprehensive ones, requiring strong support from senior management to create an environment that can adapt longstanding relationships, practices and perceptions.
In our experience, the most successful repricing efforts take advantage of three sets of levers:
Price setting—to ensure that the pricing model covers all current costs—such as the increased burden of new regulatory requirements, that pricing structures like bundling and volume brackets maximize value, and that price levels reflect up-to-date market demand.
Price realization—to differentiate and maximize prices by client segment; to guide discounts and fee waivers; to stem billing leakage; and to manage, monitor and maximize post-sale pricing over time. At some banks 50 percent of fee revenues have not been repriced in the previous four years. Improved price realization can pay for itself with immediate revenue impact.
Organization and governance—to build bank pricing capabilities and relationship management tools to support execution in the field, and to provide governance including clear rules and responsibilities on pricing issues and incentives.
Successful repricing initiatives tend to follow a similar path involving several steps.
The first step is a rigorous diagnostic to identify the areas that offer the most potential.
The second step is to design a new pricing strategy, differentiating target prices by client segment, sales volumes and underlying, fully loaded costs.
Next, a pilot-repricing program is initiated to test it with a subset of relationship managers and clients. Managers should be equipped with tools to make the right pricing trade-offs in the field. A successful pilot helps build the expertise and confidence of the client-relationship team.
In the final step, the repricing program is ramped up and rolled out across the bank.
With strong support and attention from the senior management team, a community bank’s investment in repricing can pay sustained and substantial dividends.
Pieter van den Berg (email@example.com) is a partner in the financial institutions practice of The Boston Consulting Group, an international management consulting firm.
Deepak Goyal (firstname.lastname@example.org) is a senior partner in the firm’s financial institutions practice.