Banks Will Get To Relationship-Based Pricing Through Loyalty Programs

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Forrester Research recently published a report asserting that banks must implement price optimization techniques — dynamically pricing new products and services based on a customer’s profitability — in order to remain competitive. The report claims that successful implementation will require banks to: 1) reorganize to break down internal LOB and channel silos; 2) appoint a customer executive; and 3) develop a center of excellence.

My take: Let me take you back to reality.

1) Don’t hold your breath waiting for banks to reorganize in the near future. There’s no question that banks’ product-centric organizational structures inhibit customer-centric decisions from getting made. But the time, cost, politics, and degree of upheaval required to completely move away from this approach in the short-term — absent cataclysmic factors like impending bankruptcy — means this won’t happen in too many firms too quickly.

2) I’ve said it before: Appointing a chief-fill-in-the-blank-officer doesn’t solve anything. What budget will s/he have? From whose budget will this new one come from? What authority will s/he have to make changes? Are existing LOB and channel execs going to just roll over and play dead? Even if a bank re-organized and appointed a customer executive, existing customer data would still be housed in multiple databases and systems. Implementing relationship-based pricing will still be a nightmare to execute.

3) Banks already have these centers of excellence — they’re called risk management groups. Granted, they usually determine pricing for a single product line or LOB, but the competency already exists. The problem isn’t computing a relationship-based price — it’s dealing with the profit margin concessions one business unit must take because of the relationship a customer has with another LOB.Why should I give this guy a break on a mortgage rate just because he has $5k in a savings account with you?

Banks serious about implementing relationship-based pricing will turn to loyalty programs like the ones many credit card providers and retailers already have in place. The Aite Group believes that financial firms will more than double their spending on non-card reward programs over the next five years.

Loyalty programs — like Citibank and Banco Popular have successfully implemented — accomplish two important objectives. First, they create the technology capabilities required to overcome the customer data issues caused by LOB silos. And second, they give banks a mechanism — think of it as a clearinghouse for transfer costs — to deal with the profit margin concessions that LOBs must make when discounting prices, rates, and fees.

The alternative isn’t reorganizing departments. It’s breaking apart the big banks completely. Letting each business unit maximize its own profitability based on the customers that are best for that unit. Explicit recognition that while Ron Shevlin might be a good customer for the retail bank (because he’s willing to leave $25k parked in a low yield savings account), he’s a lousy customer for the mortgage or credit card LOB.

As long as banks continue to put on their “we’re an integrated, one-stop financial shop” happy face, they’ll to have to overcome the technology and organizational barriers that exist. Loyalty programs are one way to do that.

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