Don't Fool Yourself: Banks Need Better Pricing

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Sometimes, sound bites turn into gospel. And there’s one sound bite from a recent presentation given by Ray Davis of Umqua that needs some clarification. 

In an article titled Why Banks Need Better Value Propositions, Not Better Pricing, Mary Wisniewski at Bank Innovation does a good job capturing some of Davis’ more salient points, which include:

“Bank products are a commodity,” said Davis. “You can’t differentiate yourself with bank products.” Identifying product delivery as its key value instead, Umpqua decided to help distinguish its brand by sustaining the relevancy of its branches to consumers.

Mr. Davis also made some silly points (OK, maybe just one) like this:

“We don’t have branches. We have stores,” said Davis. “In stores, you browse, shop around and buy things.”

Why is this silly? Because you can’t browse through financial products like you can browse through books at Barnes & Noble. And some financial products you can’t actually buy, you have to apply for.

But Mr. Davis said something else, which Bank Innovation (and others) picked up on as one of the key points of the presentation:

“You must have a value proposition that lets you compete,” Davis said. “If you think margins are down now – wait. In today’s environment, if the only way you are competing is by price, you are dying. You need a better value proposition.”

Mr. Davis is spot on — but the interpretation of this comment is getting twisted.

Mr. Davis did not say “banks need better value propositions, not better pricing.” He simply said “if you’re only competing on prices, you’re dying.”

My take: Banks and credit unions need better pricing — much better pricing. 

The current approach to pricing financial products is disjointed and based more on “what can we get” than “what value do we provide and what is that value worth to consumers.”

To think that “banks need a better value proposition, not better pricing” is to seriously underestimate the role that pricing plays in demonstrating and communicating a value proposition.

If bank and credit union execs come away from Mr. Davis’ speech with the idea that they have to fix their value proposition — and not their pricing — their efforts will go the way of all those empty, useless annual strategic planning exercises that produce no tangible changes in the organization. 

Not to sound alarmist, but this is a pretty good time for banks (and credit unions, who often deceive even themselves into thinking that they don’t charge fees) to fix their pricing. 

Instead of taking a more holistic approach to pricing when the online channel — and the new services it helped create — emerged, the banking industry continued to deceive itself into thinking that “free checking” was some kind of magnet products that would bring in other products that generated revenue. It didn’t.

Now the mobile channel is emerging, and with it, new services are emerging. If the same-old, same-old approach to pricing persists, the industry will be in an even worse place.

The fundamental problem here is the disconnect between strategy and pricing. Few financial institutions have a clearly defined, commonly understood strategy. Without that, how could a firm figure out how to price its products and services?

But fixing “strategy” in a large organization — bank or otherwise — is no easy task, especially for a functional manager in the marketing department. Even a well respected CMO may have little influence over the corporate strategy process.

So what should marketing do? Use pricing as a catalyst. Design alternative (i.e. radically new) approaches to pricing products and services that forces the organization to see that migrating to a new pricing structure requires new approaches to marketing and retail delivery and organizational structure. 

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