Blog By: Arjun Ray Chaudhuri
The world of financial services is changing and banks must be ready to respond to these changes. This is the thinking behind a new Oracle report, “Responding to change – how are banks using information and pricing strategies to boost profitability?” The report explores and explains the results of a recent Oracle and Efma survey and also includes some observations from two Think Tank sessions hosted by Efma and led by Oracle.
Two previous blogs in this series have looked at a couple of inter-related key elements of a response to changes that affect the financial services sector – the effective use of customer information by banks and the increasing potential for using big data to enhance customer engagement and profitability. This blog will focus on another key issue - the importance of powerful pricing strategies.
Trends in pricing strategies
A bank’s approach to pricing can have a significant impact upon its profitability. If a pricing strategy is right, it will enhance the customer experience and will help to boost profits. If it’s wrong, the results for a bank can be disastrous. Pricing has now become even more important, as customer loyalty can no longer be taken for granted.
In the past, customers were sensitive to fees but were also very loyal to their banks and would still tend to buy products from them even if the price was slightly higher than from other banks. Product-based pricing was prevalent throughout the industry. Although this is still the primary strategy adopted by many financial institutions, others have since moved on to risk-based pricing. The results from our survey show this trend.
A few of the more progressive banks have gone even further and now rely on relationship-based pricing. This still takes risk into account but also includes different approaches to rewarding customers for their loyalty to the bank. Banks are also starting to differentiate in terms of the customer experience provided.
This approach is still under debate within the industry. Legacy systems and bank silos are also delaying the adoption of this approach in many areas. Our survey suggests that Western European banks in particular are still reluctant to move over to a relationship-based pricing strategy.
To explore this issue a little further, five in-depth interviews were conducted with five banks from different geographical regions. For example, a respondent from Russia said that his bank was using all three of the key approaches to pricing (product-based, risk-based and relationship-based). However, it’s focusing mostly on relationship-based pricing and intends to try and develop a seamless approach that will enables all of its business lines to access the same information.
Meanwhile, a bank in East Asia, although currently using product-based pricing, is also trying to develop an approached based on the customer relationship. The bank is planning to roll out a special customer value tool to help with this.
In contrast, a financial institution in Central and Eastern Europe is still focusing mainly on a risk-based approach, although an increasing number of banks in the region are now starting to develop a more customer-centric strategy.
Finally, two other banks (based in the Czech Republic and the Middle East) aren’t really using relationship-based pricing at all. One of them has developed some very simple pricing strategies but wants to start moving towards a basic type of relationship pricing. The other bank is still focusing on product-based pricing. However, it again is moving towards a relationship-based approach, as it’s now starting to work on the concept of a model centered around the Customer Lifetime Value.
There is little doubt that price is once more becoming a major factor when customers are deciding upon a bank to use. Relationship-based pricing is the way forward for banks, even though that might mean a major cultural change – including the elimination of silos.
As banks move over towards this approach and start rewarding their customers for their loyalty, this is likely to be reflected in greater success in both acquiring and retaining customers. Banks that fail to grasp the nettle of a progressive pricing strategy might find themselves ‘stung’ in other ways – by a loss of customers and a loss of business.
So, banks can’t afford to be complacent and ‘keep doing things the way we’ve always done them’. Times are changing and banks need to change with them – or risk being overtaken by events.
To read the full report on Responding to
change, please visit
Arjun Ray Chaudhuri is a Senior Principal Product Manager for Oracle Financial Services. He can be reached at arjun.ray.chaudhuri AT oracle.com.