Elucidating Revenue Leakage In Banking Retail

--By Neha Jha–

Establishing a firm pricing discipline supports selling the right set of products and services at the right time and at the right price.

DEFINING PRICING DISCIPLINE AND REVENUE LEAKAGE 

Pricing discipline ensures that charges for banking products and services are set and applied in a more coherent or consistent manner. Revenue leakage is the loss of banking fees or income from incompatible practices, lack of attention to detail and impoverished pricing controls.

When banks lack consistent obedience to a pricing structure with clear pricing communication, revenue leakage occurs, and pricing confusion arises. Acute bankers realize that customers expect to understand how their banking services are priced. And executives understand that aggregate revenue slippage adds to severe bottom-line challenges. 

Considering the most recent finding of the FIS CEO survey, most executives focused on revenue and margin growth across their product portfolio defined by Interest (Loan) and Non-interest (Fee income) revenues. 

Revenue leakage can occur in all areas of a bank. Both commercial & retail customers could be contributing to the loss of revenue generation. On the retail side, consumers weaned on a variable of free-checking products modified for price sensitivity. They have come to expect banking services to be provided at little or no cost due partly to the legacy of free product and service checking programs. Over time, these programs have impaired broader bank preposition as consumers are primarily centric towards pricing.

To improve revenue and margin, banks must justify their offering against fees charged for products and services. They must fundamentally alter their value proposition and correlate pricing into their customer's minds. Price discounts should be earned, not given, and banks must be clear and transparent with pricing as they improve their value proposition.

The FIS PACE survey recently asked consumers to rank key aspects that define the relationship with the bank. From 2016 survey highlights the top three essential attributes for US customers are:

1) Safety (trust to protect my money)

 2) Security (protect personal identity)

 3) Fairness (No hidden charges/fees) 

ADVANCING BANK PRICING AND PACKAGING

Bank pricing created in the vault by an individual line of business creates confusion and lack of clarity. Each bank united with some of their individual goals towards pricing approach, not for building overall relationships. Pricing created in the vault and not integrated into a package of services can fail to enhance customer clarity and overall demand. Instead of focusing on the individual product, the pricing associated with the overall relationship helps to build a bank's overall profitability. 

Banking services can be summed up with transparent terms and conditions that are clear to consumers and easily interpretable. Instead of varying terms and conditions product-wise, a package can offer simplicity of product lines more coherently. At the same time, implementation and monitoring of these packages solely, not on a manual basis. Transparency is not created by impaired marketing of multiple banks; it should be overall bank transparency.

Any inconsistency in applying pricing to various stages in the packaging of banking products and services will cause retail customers to doubt overall bank transparency. Forward-thinking banks now develop relationship product offerings that tie the extent of a customer relationship with the bank to the benefit they receive. For example, a customer could receive a fee & interest rate alternation in exchange for a "deeper" relationship. As a customer opens further product, consolidates balances, sign up and uses services, he or she gets additional recommendatory pricing. If they construct their offering more correctly, the bank will create or ensure the value of customer relationships.

RELATIONSHIP PRICING IS ANALYTICAL 

Account pricing has many times been replaced by relationship-based pricing. Relationship pricing focuses on customer overall purchases and circumstances and counters the silo approach of the product-by-product basis pricing system. It enables banks to use a customer-centric approach to determine pricing based on the level of business with a customer or the type of business purchased. The key to successful relationship pricing is tracking customer behavior across product types and rewarding activities beneficial to the customer.

A disciplined approach applies pricing in a structured, consistent manner across an organization.