Bundling is a popular marketing strategy. All-inclusive vacations, theatre subscriptions, even pre-fixe menus are based on bundling. Microsoft famously bundled Word, Excel and other programs to launch its Office software.
Bundling tends to benefit the seller. Customers who are unable to gauge actual prices and usage, typically pay a premium. Plus, firms with high fixed costs enjoy higher margins by spreading those costs over a greater number of clients. Banks are often willing to absorb monthly losses in the hopes of turning new customers into profit centers, strengthening relationships or reducing customer churn.
For decades, the concept of free checking drove bank and credit union acquisition campaigns. Consumers got a “free” account, and financial institutions put an assortment of ancillary services in their hands. It worked for all parties, and the cost-benefit tradeoff was what made it feasible. But when Dodd-Frank threw a regulatory wrench into the mix, many institutions discontinued free checking but retained their bundling strategy to cross-sell bill-pay and other similarly sticky products.
Now it may be time to completely reconsider your bundling strategy. Here are three reasons why.
Escalating acquisition and cultivation costs are causing many banks to look closer at bundling. One of the determinants of profitability is the customer’s lifetime at an institution. A five-year or a 20-year lifespan paints a vastly different profitability picture. Once a bank attracts a young, unprofitable customer, for instance, will they stick around long enough to justify the investment? National banks are betting they will, but the jury is still out.
New research shows a broader re-evaluation of bundling is warranted. In a 2012 research paper on the topic, Vineet Kumar and Timothy Derdenger of Harvard Business School and Carnegie Mellon University respectively concluded that bundling is a good strategy but ‘mixed’ bundling is better. Giving consumers the choice of a bundled or a single product increased sales by 20%.
Caught between regulatory statutes and consumers who want control over choice and cost, bundling is losing favor. In 2001, when the Department of Justice said Microsoft’s practice of packing Internet Explorer with its Office software constituted an abuse of monopoly power, it sent shudders throughout industry.
Since then record albums, newspapers and more recently, cable TV packages have disintegrated as consumers opt for single product purchases. Last year HBO ventured beyond cable TV to reach pay-per-use audiences directly. Many more video providers are expected to follow.
Deloitte was an early advocate of unbundling bank services. In its paper Towards Transparency and Freedom of Choice, (2) the consulting firm stated bank revenues could be increased by adding an unbundled option to its bundled pricing structure. Retail bankers seem to agree that segment pricing will be a key to future profits. A survey of retail bank executives conducted by The Economist named segmentation pricing their second highest priority through 2020.
Digital innovation may well be the final straw. Fintech revolutionaries — small, nimble technology start-ups — are increasingly picking off bank products. Dwolla helps merchants accept payments and avoid credit card fees, Primarq offers home equity loans. Non-banks currently accounts for more than 40% of total mortgage originations. Alexander Pease, an analyst at Union Square Ventures created a fascinating chart showing fintech companies and the banking services they want to replace. Indeed, Accenture estimates that competition from non-banks could erode one-third of traditional bank revenues by 2020.
Furthermore, investment firms and 401k offerings have decimated bank IRA accounts and retirement savings programs. Walmart and American Express’s checking-lite product captured more than a million customers in year one. Facebook just launched a free person-to-person domestic remittance service. Banking as we know it could die by a 1000 cuts.
Consumer, competitive and regulatory pressures are encouraging banks to unbundle. Banks, which are generalists by nature, will have difficulty fighting off the onslaught of nonbank specialists which bring innovative technology and no legacy costs. The simplest and less knowledge-intensive areas of banking will remain vulnerable to technology and algorithm-fueled custom services but they will have more difficulty replacing the experience, knowledge and financial acumen which is becoming increasingly rare in a digitalized, standardized world.