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  • @fintechna 3:36 am on June 16, 2018 Permalink | Reply
    Tags: , , , Pricing, ,   

    How well does your bank’s pricing strategy fit the digital economy? 

     

    17 percent of US banking revenue now comes from truly banking relationships

    Modern metal starting blocks for sprinting—complete with offset footrests—first appeared at the 1948 London Olympics. This innovation both reinforced the benefit of a crouching start position and also signaled the end of athletes digging holes for their toes in the dirt to get a solid foundation to push off of. It demonstrated that when something truly new comes along, it can make the old ways immediately obsolescent.

    How well does your bank’s pricing strategy fit the digital economy? fintech
    Read the report

    After years of hype, but little real change, we are now seeing the truly new arrive in US banking, and it is beginning to make the old business model look obsolete. Accenture research shows that 17 percent of US banking revenue now comes from truly digital banking relationships and that number is increasing quickly.

    In response, most incumbent US will likely default to trying to be a better version of themselves and adopt a digital relationship management business model that seeks to be most things to most customers, and relies on a mix of fees and balance sheet spreads for income. As digital advice and increased efficiency squeeze fees, more attention is going to focus on net interest margin, particularly in a rising rate environment, where there will be increased competition for both assets and liabilities. As we enter this transition it begs the question, “How does your fit the digital ?”

    It’s a question more than 80 banking executives in North America explored through dialogue and demonstrations at the recent Banking Growth Forum 2018 jointly hosted by Accenture and our partner, Nomis Solutions. We concluded that a product orientation when it comes to pricing will no longer drive success in the world of truly digital economy. Instead, building and delivering a true digital relationship manager strategy will mean a level of pricing sophistication that is challenging for most banks.

    How well does your bank’s pricing strategy fit the digital economy? fintech
    Source: Accenture

    The fact is that many banks are culturally and organisationally tethered to product-based pricing, as it fits easily with banks’ traditional internal organisation and allows effective aggregate balance sheet management. Yet, it is also limited when it comes to optimising margins and truly differentiating the customer proposition—two key elements of running a successful digital relationship manager business model.

    Even in setting simple cross-sell pricing, banks need to utilise a customer profit view to target the retention of their most profitable customers. And while cross-selling usually gives customers some choices like product packages or a rewards wrapper, it is still based on selling products. True relationship pricing on the other hand requires sophisticated lifetime value analysis to shape decisions, drawing on vast stores of customer and transaction data to offer the right product at the right price through the customer’s preferred channel. Rather than products sold, it hinges on promises delivered, backed by accountability, transparency and explainability—a notion that typically runs contrary to the traditional organisational structures of banks.

    As industry change accelerates, banks will need to offer something genuinely new in their pricing. Those that will thrive will enhance their existing capabilities to advance along the pricing and offer management maturity journey—pivoting from a product focus to a real-time, intelligent, customer-relevant, promise-centered approach. That will be a strong foundation on which banks will be able to sprint forward and remain competitive.

    For more on this topic, I invite you to read our report, Ready, Set, Next: A Guide for Banks in Advancing to In-The-Moment Pricing

     

    The post How well does your bank’s pricing strategy fit the digital economy? appeared first on Accenture Banking Blog.

    Accenture Banking Blog

     
  • @fintechna 12:18 am on January 27, 2018 Permalink | Reply
    Tags: , , , , , , , Letting, Pricing, Prowess, , ,   

    Digital Is Letting Goldman Bring Its Wholesale Pricing Prowess to Retail Banking [VIDEO] 

    EXCLUSIVE—  When Sachs &; Co. launched its Marcus bank in late 2016, the conventional wisdom was the investment bank wanted to expand into . But, apparently, that&;s not the whole story. Marcus, it seems, is an asset play, Goldman&8217;s CEO implied yesterday. “It’s not just the way people are communicating prices, the [&;]
    Bank Innovation

     
  • @fintechna 4:54 am on May 9, 2016 Permalink | Reply
    Tags: , , , , Pricing   

    Dynamic Pricing in Alternative Lending & P2P Lending 

    Dynamic Pricing in Alternative Lending & P2P Lending fintech

    in the market may be driven by the potential for relationship pricing in conjunction with traditional banking partnerships.

    As a follow-up to our article, “A Business Case for Dynamic Pricing in Banking,” there is a great deal of discussion regarding the role of dynamic pricing in lending and how it may be applied in the alternative lending market. Lending is steeped in risk and every nuance of a lending product is crafted to mitigate that risk. Is dynamic pricing even possible in the alt-lending market?

    With the obvious heavy hitters like Lending ClubKabbageProsper, and OnDeck garnering the lion’s share of attention, there are still approximately 1,300 companies in the US offering services to about 1% of the overall market – one projected to be upwards of USD$ 350 million by 2025. That leaves the 6,500+ traditional American bank providers fighting for the remaining 99%. Where’s the competition, you ask?

    In the ’ view, that 1% constitutes the “unbankable” or “undesirable” loans. But there is strong evidence that it’s not the retail consumer with bad or no credit history that the alt lenders are going after, but the small/medium enterprise (SME) business customer pool that is the primary, and most profitable, target.

    Be it consumer or SME, what makes alt lenders attractive to customers comes down to pricing.

    In the consumer market, peer-to-peer lenders like European based Zopa and Funding Circle offer investors (depositors) interest rates typically between 5-6%, attractive to those offered 2-3% traditional bank returns. Granted, borrowers face much higher interest rates (6-33%) than traditional unsecured loan rates from traditional banks (average cap of 16%).

    The market sets the price (as do the Central Banks). And no lender is in this for charity – they want a marginal return that covers operational costs, liquidity coverage requirements, and profit. How individual lenders, alt or not, manage their appetite for risk determines a portion of those margins. So, does risk lend itself to dynamic pricing?

    Can we Dynamically Price a Single Product?

    How elastic is single product price? We’ve asked this question in our previous post, and concluded that relationship pricing is difficult in singularity, but a competitive differentiator and a smart strategy when offerings are bundled. Questioning how the lending market may adapt to adopt dynamic pricing leads us to believe that alt-lenders will slowly start behaving more and more like traditional banks to take advantage of a pseudo-dynamic pricing strategy.

    Before we rationalize this assumption, let’s look at two pricing strategies that we predict will play a role in the lending market.

    Abandoning Strict Cohort Analysis Pricing: This method of pricing to market segmentation usually means lumping potential customers into a single risk assessment category based on FICO or credit scores. This is the primary factor that determines the price of unsecured risk. Including other factors like age, education, employment and salary history, geography, and potential lifetime earnings, as well as potential repeat lending business to assess risk is a nod to relationship pricing (and lifetime customer value to the lender) that paints a unique profile for each potential customer. With big data and behavioral analytics, the straight jacket of strict cohort pricing loosens up, and pricing inches closer to reflecting the lender/lendee relationship value.

    Alt-Lending/Bank Partnerships: While not a pricing option per se, a partnership is a risk mitigation strategy and customer service tactic by banks. It is also a way for banks to bolster their offerings, but the end result is more pricing flexibility. A recent partnership announcement between Regions Bank and alt lender Fundation underscore the advantage to banks:

    “This unique agreement….allows Regions Bank to expand loan-product offerings and method of delivery for small businesses while also cultivating long-term revenue and loan-growth opportunities.”

    RBS and Funding Circle have a similar program, something that Santander and Funding Circle did first, back in 2014.

    A referral requirement in the UK has pushed banks and alt lenders into partnership, but the US market could see a similar push towards alliances.

    Relationship pricing in this partnership context is possible when the customer’s portfolio from both the bank and the alt lender is taken into consideration when the risk pricing/rate is offered. This is especially true if a current bank customer is referred to an alt lender – because the bank doesn’t have appetite for that risk that customer poses – but has some assets at the bank the alt lender could consider collateral. We don’t see it now, but we could.

    If It Walks Like a Duck, and Talks Like a Duck …

    Let’s return to our assumption that alt-lenders will start to resemble traditional banks by offering non-lending products. While they may not accept deposits in the same way as a traditional banks, there is still a strong resemblance.

    SoFi, primarily known for its student loan refinancing, accepts cash “providers” and pays them a higher yield rate (up to 6.5% as opposed to the typical 0.03% banks pay out) for managing those loans to borrowers. It can be argued that “providers” are in fact depositors, just depositors who aren’t insured by the FDIC or subject to regulations imposed by the Federal Reserve or Office of the Comptroller of the Currency. They can call it one thing, but the subtext is “super risky deposit”.

    Zopa calls their product “savings”, but it’s the same principle. Deposit money that is in turn loaned out, and get paid a higher rate on those “savings”. It’s essentially a higher risk deposit not backed by the UK government’s Financial Services Compensation Scheme.

    Payments is a natural next step … isn’t a credit/debit type product issued by alt lenders just on the horizon? Alt lenders could easily provide a card or app that draws on those ‘savings’ or taps into the line of credit. This is because loans are not inherently sticky products, and “underbanked” and “undesirable” lending customers even less so. Because of the high risk, they’re not attractive to banks, so there’s no incentive to encourage loyalty, let alone cultivate customer lifetime value.

    But when an alt lender can provide savings and payments, as well as credit, the stickiness factor increases, and individual customer profitability margins can increase. Relationship pricing for even a small bundle of products is now viable. Nuanced pricing of loan rates could easily be tied to volume of payment product transactions, add in periodic reviews of the volume of payments and make the interest rate adjustable, dependent upon payment volume. The more the customer uses the payment product to dip into “savings”, the better the loan or savings rate.

    While this isn’t relationship pricing in strictest sense of the word, it can be dynamic.

    Of course once multiple product offerings become the de facto norm (or there’s even a whiff of it becoming a trend), regulatory scrutiny follows. What a new regulatory framework looks like is anyone’s guess, and we’re not exactly clairvoyant. But we do like to read the tea leaves.

    Alt-Lenders Expanding Their Reach

    Risk priced products are nearly impossible to price dynamically or in context of the customer relationship when offered as a stand-alone product. The current alt-lending market can’t adopt this pricing strategy. However, it can inch closer to dynamic pricing by approaching cohort analysis differently. And new bank/alt-lender partnerships crack open the door to more nuanced risk pricing.

    Our prediction is that alt lenders will start to offer new, non-lending products. If so, then the door to dynamic pricing swings ever wider and we will see bundled offerings that can be relationship priced.

    FiniCulture

     
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