Winning the Pricing Marathon: Behavioral Economics in Banking

Melina Palmer, applied behavioral economist and CEO of the consultant firm and podcast The Brainy Business, reveals how financial institutions can apply behavioral economics to create customer-centric pricing strategies, reduce friction, and drive long-term loyalty in an increasingly competitive digital landscape.

Melina Palmer, an applied behavioral economist, CEO of consultant firm and podcast The Brainy Business and author of “The Truth About Pricing,” is on a mission to help financial institutions leverage behavioral economics to optimize their pricing strategies in the digital age.

With a background in banking and a deep understanding of consumer psychology, Palmer has seen firsthand how traditional pricing methods based on competitor rates and market studies are no longer sufficient in today’s rapidly evolving landscape.

As consumers face a constant barrage of attractive offers from challengers and disruptors, banks are grappling with “silent attrition” — customers quietly diversifying their business across multiple providers, diluting loyalty, and eroding market share.

Palmer argues that financial institutions must shift their mindset from purely rate-based competition to a more customer-centric approach that considers the psychological factors driving consumer behavior.

In a recent conversation with Jim Marous of The Financial Brand on the Banking Transformed podcast, Palmer shared invaluable insights on how banks can apply the principles of behavioral economics to create more compelling value propositions, optimize their pricing strategies, and foster long-term customer loyalty.

By understanding the subconscious rules and habits that influence decision-making, financial institutions can better align their offerings with the needs and desires of their target audience, ultimately driving digital growth and success in an increasingly competitive market.

Q: Most bankers come from a time when pricing was based on shopping studies. Can you discuss your company and modern pricing strategies to help financial institutions leverage customer insights?

Melina Palmer: Looking at rate sheets and picking a spot close to the middle is what I’ve done in ALCO meetings myself. But today’s consumers face constant bombardment with attractive offers from challengers and disruptors. This leads to “silent attrition” as customers diversify their business across vendors, diluting loyalty.

The first and most important thing is understanding how our brains really work. We like to think we make rational, logical decisions. In reality, the subconscious makes the bulk of our 35,000 daily decisions using rules of thumb, predictability, and habits.

The brain’s rules to decide are the foundation of behavioral economics, which is my work at The Brainy Business. Buying a checking account or toothpaste is based on habitual rules of how we’ve done things and what feels right in the moment. The Truth About Pricing is that it isn’t about price. What happens before the price is way more important.

This is key in commoditized banking. When you embrace being about something bigger that resonates, people will want to stick with you. The rate becomes secondary, just like with brand-loyal iPhone users. You can get that level of loyalty in banking, too.

Q: Do many institutions price sub-optimally by not considering psychology — where they don’t have to have the highest rate but need to reinforce value drivers?

Palmer: Absolutely. Being able to understand what is valued by who you’re speaking to is huge. My original book title was “What Your Buyer Values and Can’t Tell You.”

Typically, a few people like ALCO set prices. But it may feel like you should talk rates first in marketing or branches. I see that from competitors, but it’s just not compelling. Even an awesome rate doesn’t translate to choosing you.

I worked with a credit union on a new rewards checking account. Their billboard said, “Earn up to 1.26% APY on up to $25,000 in balances”. That’s math that makes people tune out.

I got them to reframe it as: “Did your checking account pay you $315 last year?” They have the same numbers but are completely different. It is easy to say no and creates curiosity to learn more. That simple tweak, even if you didn’t set the rate, gives you a lot of control over what people choose.

Q: What common pricing mistakes do you see financial institutions make?

Palmer: The biggest mistake is jumping too quickly into thinking you know the problem and trying to solve it. We’ve been conditioned to believe how we first see a problem is how we must go. But you can find the right answer to the wrong question.

If you don’t spend time really understanding the problem, you build products, add features, and set prices people don’t want, which won’t move the needle.

Especially in banking, you are often not your best customer. The curse of knowledge clouds how you think about the outside user experience. Looking for ways to get out of your own way to find what people want is key.

With a compelling product, people are excited about, it ends up being less about rates and more about the institution or specific offering.

Understanding the Drivers of Consumer Behavior

Q: How do you engage with institutions to understand how consumers view them and how that impacts pricing?

Palmer: It depends on the institution’s size and existing research. They may have regular focus groups or ways they interact with current and potential customers.

But as my book “What Your Customer Wants and Can’t Tell You” suggests, what people say they want isn’t necessarily true. Netflix found showcasing content before signup, which users claimed to want, actually performed worse. What you think you want often differs from reality.

The benefit of The Brainy Business is awareness of case studies and best practices on human behavior from diverse organizations worldwide, beyond banking. I work with large candy companies, tech firms, and varied clients. It’s all about how humans decide and what drives behavior.

Q: What do financial institutions least understand about consumer behavior? Where do we slip up as an industry?

Palmer: Assuming people know or should know the things you know. Humans are busy with competing priorities: kids, jobs, Netflix, and Instagram. It’s nice to think they’ll dutifully read your big brochure, then go to the website and read all the copy. There’s too much friction and assumption. It’s about logical aspects that aren’t as compelling as you think.

Reducing that mental burden and making it as simple as possible is key. We don’t need extra forms, text boxes, or steps. Anything to reduce that burden makes it easier to do business with you.

Look at Amazon’s patented one-click buying back in 1999. Steve Jobs paid $1M just to remove one click from iTunes’ buying process. How much could you remove if you think every extra step is worth $1M? What do you actually need versus hoarding info that might be useful someday?

Get the least you need to communicate and have them enjoy hearing from you. That’s a big win. You can ask another question when they care later. If you don’t know who they are, what’s the point?

Aligning Pricing with Brand Identity

Q: You emphasize confidence in pricing and aligning with brand positioning. How should banking executives incorporate brand identity into pricing?

Palmer: Confidence is key in people buying. If you go in and say, “Well, it’s $10,000, I know that seems like a lot…” You’ve talked them out of it. In contrast, if you say it’s $10,000 matter-of-factly and most people find value in it, you help them feel it’s a safe choice. We’re a herding species — we want to know others like us have been there before when trying something new.

Financial services are stressful for many people. Applying for a loan when you don’t understand credit scores is scary. There’s a cognitive strain which makes us fear-based, rooted in status quo, struggling to decide.

Helping them feel at ease, that it’s a safe space, you’re there to work with them, can make a huge difference. Research shows just imagining a $1500 car repair impacted poor individuals’ cognitive skills, versus no impact imagining a $150 repair for well-off people. The stress swirls in your brain.

Understanding that stress, taking time to help them feel calm, that they have options and you’re there to help — that’s more important than the car loan rate. Investing minutes to help them feel safe and seen means so much more. They’ll remember the institution that cared about them as a whole person. That’s really easy to do.

Behavioral Tactics to Prompt Buying Decisions

Q: Are there psychological tactics that can help consumers make buying decisions?

Palmer: When you ask what matters to them before recommending, it guides them. For a vet client, asking, “Do you care more about coming in the least often or is the price most important?” helps recommend what’s best for them now.

There are many paths with those 35,000 decisions going different ways. Understanding how time matters to people is one. We’re all victims to time discounting, what I call the “I’ll Start Monday” effect. Setting the alarm to run and then hitting snooze.

We think of our future selves like a different person. Saving for retirement doesn’t resonate the same as taking action today. Bringing it to the now can be impactful.

You can align with key times in people’s lives. New Year’s resolutions, looking at debt consolidation. Life events like marriage and considering kids. Milestone birthdays, too. Someone aged 39 is more likely to run their first marathon than 41.

What might they be thinking of as a big life change finishing a decade? Triggering that herding aspect of what others like them do can make a big difference.

Final Thoughts

In this insightful discussion, Melina Palmer shared how financial institutions can leverage behavioral economics to optimize pricing strategies and drive digital growth following several core messages:

  • Shifting from traditional rate-based pricing to a customer-centric approach that considers psychological factors
  • Understanding how subconscious rules and habits drive consumer decisions, not just logic
  • Avoiding assumptions about customer knowledge and reducing friction in the buying process
  • Aligning pricing with brand identity and mission to create a compelling value proposition
  • Leveraging time-based and social proof triggers to prompt action

By applying these principles, banks can create products and pricing that resonate with customers, foster long-term loyalty, and differentiate themselves in an increasingly competitive landscape.

For a longer version of this conversation, listen to “Demystifying Pricing of Banking Services,” an episode of the Banking Transformed podcast with Jim Marous, available here or wherever you get your podcasts. This Q&A has been edited and condensed for clarity.

Justin Estes is an award-winning writer, strategist, and financial marketing expert with expertise in banking, investments, and fintech. His clients include the NYSE, Franklin Templeton, Credit Karma, Citi and, UBS, and his work has appeared in Forbes, Barrons and ThinkAdvisor as well as The Financial Brand.

This article was originally published on . All content © 2024 by The Financial Brand and may not be reproduced by any means without permission.