The Art of Pricing: Growing Loans and Deposits by Optimizing Rates

Every consumer wants lower interest rates on loans and higher interest rates on deposits. But just how much wiggle room does your bank or credit union have with pricing? By using segmentation and optimization, financial institutions can strike the ideal balance between offering customers attractive rates and realizing their own goals for growth and profitability.

Does your bank or credit union have a tried-and-true formula for pricing that it has used for years? Does it rely on basic inputs like loan-to-value and debt-to-income ratios? It may be time to rethink pricing and its impact on business results.

Just as the financial services industry isn’t the same as it was just a few years (or months) ago, your pricing models shouldn’t be either.

To stay competitive in today’s dynamic market, your pricing team should look beyond the typical statistical models and risk-based pricing inputs.

A more holistic approach to setting rates on loans and deposits will allow you to increase business from existing customers and attract more of the types of customers you want.

Rethinking How to Price Loans and Deposits

Savvy financial institutions around the world are experimenting with unconventional inputs to create pricing models that allow them to stand out in their market and appeal to the customers they want to serve.

Here are just a few examples:

● In the United States, a midsize credit union rewards long-term customers with more favorable loan and deposit pricing. Customer loyalty creates value for the credit union, and giving special rates to these individuals strengthens the overall relationship.

● In Europe, a large retail bank calculates a relationship score by evaluating assets and liabilities across multiple customer accounts (retail, wealth, business, etc.). The resulting “value score” is used as a pricing attribute when they’re creating a rate sheet. We’ve also seen these scores used to impact fee waivers and cash back rewards.

● In the U.K., a large commercial bank incorporates climate data into how it prices loans secured by real estate. So, for example, if a property is located in a floodplain, the loan would be priced to reflect the increased risk of operating a business in that location.

By moving away from one-size-fits-all pricing models, these financial institutions are capturing business that works well for them at a price they — and their customers — find attractive.

And that’s the key to long-term survival for any business.

Taking Your Pricing Strategy from Boring to Exciting

Here’s how to get from boring pricing to something more exciting and relevant for customers.

First, you’ll need to align key departments across your bank or credit union so everyone’s on the same page. Pricing is always a team effort.

Beyond the core pricing, risk, and analytics teams, it’s important to involve compliance and legal, for sure, but probably marketing too. If the pricing is meant to land a certain type of customer and the marketing team is spending time elsewhere, this needs to be resolved so you’re getting the highest possible return on your investment.

Next, you’ll want to be sure the data you have — or will add — is maintained in a central location and accessible to all departments so new pricing strategies can be suggested and explored.

Each team should have its own view of this data and be able to test new ideas. For example, if your pricing team wants to target an offer to long-term loyal customers, you’ll want to have a strategy for determining who they are and how to position the offer so it meets everyone’s goals.

Read more about pricing strategies:

Asking the Right Questions in the Data Analysis

Once the organization is aligned around this approach, you can start to delve deeper into your data to develop very customized pricing for different people while still meeting all regulatory guidelines.

The type of granular pricing segmentation I’m describing will let you respond to competitive offers and win more business. For example, if a competitor is offering a discounted rate or a special promotion, analyze the data for your bank or credit union to see how that would work for your customers. Put together what-if scenarios for testing and — if they test favorably and your legal and compliance teams agree — adjust your pricing model accordingly.

With pricing optimization, it’s possible to get very granular about offering the right price to the right person and probing for improved outcomes. For example, you can determine which customers are your best prospects for a lower loan rate and test the idea.

The intent is to build a stable, healthy relationship with a customer, so they become long-term loyal customers. You get there by giving discounts to the right people.

Don’t be afraid to think outside the box in your data inputs to attract the customers you are targeting and to measure the success (or failure) of each campaign. Relationship value of the customer and the market share your institution has in a particular area are a few measures of success outside of the usual suspects.

Read more about strategies for growing deposits:

Using Pricing to Move the Needle on Business Goals

Of course, you also need to keep the overall business goals of the bank or credit union in mind as you’re defining your pricing strategy.

The goal could be to create new products, for example. Many mortgage lenders in the U.S. and Canada are developing special-purpose credit programs to help homebuyers who have low or moderate incomes. The lenders are working with regulators to make sure that these are safe financial products.

Intelligent pricing models can make these loans work for financial institutions, homebuyers and regulators. More data accumulates as the institutions promote the products and measure the results — which, in turn, informs the effort to further refine and differentiate pricing.

As business goals change, the pricing strategy does too. Typically, if the goal is to grow your loan portfolio, you lower interest rates to boost loan volume, but if the goal is to increase profits, you set the rates a little higher to increase margins while taking a hit on loan volume. The same principles also apply to deposits, just in the inverse with higher interest rates boosting volume in that case.

But in making these changes to loan and deposit rates, how do you strike the ideal balance between ensuring customer satisfaction and achieving your desired ROI? Utilizing optimization and segmentation, you can target customers with attractive rates and realize whatever business goals you’ve set.

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Staying Flexible

It’s important to remember that pricing models should not be stagnant. The frequency for reviewing and finetuning the model is up to each financial institution and should be determined based on what works for them. There are minor tweaks that can be done often, whether that’s real-time, monthly or quarterly. This ensures that the model is providing value continuously, without having to revisit the entire strategy.

The idea is to have a flexible pricing model that can be updated as business needs and economic conditions change. The pricing, compliance and marketing teams at your bank or credit union will appreciate having access to the data and technology they need to ensure the institution is competitive right now and remains profitable in the future.

About the author:

John Shortt is vice president of professional services for Nomis Solutions. Previously, he was manager in the data and analytics teams at PwC Canada and PwC Ireland.

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