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HOW TO REAP

A PRICING WINDFALL
IN RETAIL BANKING
By Ian Wachters, Martin van den Heuvel, Marcin Kotlarek, Santiago Mazón, and
Sumitra Karthikeyan

P ricing goods and services is an


important capability for companies in
every industry worldwide. For today’s
cause of the growing array of local and
global regulations and increased capital re-
quirements.
hard-pressed retail banks, it is a critical
one. Yet few banks mine the full potential At the same time, today’s digitally connect-
of pricing to generate significant revenue ed consumers, empowered by online
and profit. price-comparison data, increasingly expect
transparency and price matching for bank
Retail bank revenue is stagnating in devel- fees, products, and services. Persistent low
oped markets, and growth has downshifted interest rates have reduced margins on
to slow in rapidly developing economies. rate-related products, such as savings ac-
Global revenue crept ahead at a compound counts, and also on payment products, such
annual growth rate of just 2% from 2011 as checking accounts. This has forced banks
through 2013, compared with a 7% CAGR to increase their emphasis on fees—such as
from 2005 through 2008, when the finan- for checking accounts, ATM transactions,
cial crisis took hold. and late payments—and has made pricing
acumen crucial to revenue growth.
The industry’s profitability also remains
well below precrisis levels, and competi- Superior pricing performance offers a po-
tion is intensifying. New players—from tential revenue windfall for banks caught
large international banks to small, low-cost in this cross fire of slow growth, height-
nonbanks and fintech digital platforms— ened competition, price-conscious custom-
are entering markets with aggressive prices ers, and intensifying regulatory change.
and specialized offerings designed to ex- Such prowess, however, requires a dedicat-
tract the most profitable slices of incum- ed initiative to define an optimal pricing
bents’ business. The cost of doing business, strategy; develop pricing structures, levels,
meanwhile, continues to rise, largely be- and practices that fulfill the strategy; and

For more on this topic, go to bcgperspectives.com


build the skills, capabilities, and oversight The Three Layers of Pricing
to sustain those benefits over time. The Enhancing a bank’s pricing performance is
payoff is substantial. Pricing programs can a low-risk, sustainable means of increasing
provide a sustained revenue lift of 5% to top- and bottom-line growth and counter-
15%, all of which goes directly to the bot- ing low return on equity. To unlock this po-
tom line. tential, banks need to address three layers
of pricing: strategy, levers, and enablers.
But this premium for pricing excellence is a (See Exhibit 1.) We find that few retail
mostly missed opportunity. Pricing capabil- banks worldwide adequately address all
ities remain largely underdeveloped in re- three layers of pricing.
tail banking compared with other B2C in-
dustries, such as telecommunications, Strategy is missing in action. Pricing
consumer packaged goods, and airlines. strategy is usually not a priority on the
Few banks have dedicated pricing depart- management agenda of retail banks. Most
ments or programs to establish a pricing banks have not clearly defined how pricing
strategy, assign price-setting responsibilities will support their overall strategy or what
and standards, or fully cultivate advanced goals it should achieve. In the absence of
techniques and tools, as well as talent. strategic bearings and guidance, banks
Only a handful of front-runners scrutinize, have no solid foundation for price setting
measure, and optimize critical activities and enforcement, and they fail to execute
and capabilities such as data mining, cus- pricing coherently.
tomer segmentation, price differentiation,
discounting structures, and sales incentives, The use of available levers is limited.
to name a few. Pricing execution typically takes advantage

Exhibit 1 | Banks Must Address Three Layers of Pricing: Strategy, Levers, and Enablers

Objectives Pricing model Constraints


Overall goals of the pricing The value-capturing logic that Strategic boundaries based
STRATEGY strategy, consistent with determines the basis for setting on such factors as regulations,
business objectives prices—such as the use of fees branding, ethical consider-
versus rates and whether to ations, and internal constraints
allow discounts

Price structures and levels Price differentiation Price realization


Product pricing determined by Segmentation of customers by Control of price leakage
risk and cost economics, price sensitivity, profitability, caused by poorly conceived
LEVERS customers’ perception of value, and business potential in discounts, ineffective
and competition order to differentiate prices promotions, and lax discipline

Organization and governance Processes


Structure, decision rights, and interfaces within All activities involved in setting, approving, and
the bank managing prices

ENABLERS

People Data and tools


Capabilities, training, KPIs, incentives, and recruiting IT, analytics, reports, win/loss data, and market
intelligence, including research on customers
and competition

Source: BCG analysis.

| How to Reap a Pricing Windfall in Retail Banking 2



of just a limited subset of the levers questions: What are our business goals?
available to retail banks. Many banks use For example, do we want to increase profit,
cost-based pricing but often fail to fully volume, or market share? To achieve these
account for all risk and capital costs. Few goals, which products, channels, and cus-
base pricing on the value of their offerings tomer segments should we prioritize, and
to the customer. Pricing still often follows a how can pricing help? How can we trans-
one-price-fits-all approach, with limited late our strategic goals into concrete pric-
differentiation by customer segment or ing objectives? For example, should we use
region. Price “leakage,” or failure to discounts for promotions or to increase loy-
achieve agreed-upon price levels, is com- alty and engagement?
mon because of irrational discounting,
ineffective promotions, or failure to update The pricing model—the second strategic el-
prices when warranted—for example, ement—establishes the value-capturing
when a client’s business status changes or logic by which tactical pricing decisions are
during periods of inflation. made. The following are among the princi-
pal questions to ask:
Enablers are weak or absent. Enablers
form the platform of pricing competence •• Should we charge customers on the
that must be built and sustained across the basis of interest rates or fees? And by
organization. They include processes, what measure—by volume or usage? Or
tracking tools, and employee capabilities. should we charge a flat rate? How do
Many banks have deep gaps to overcome in we capture value over the customer’s
this area—including a shortage of individu- life cycle—up front or over time?
als with pricing expertise, inadequately
structured processes, incentives based •• Should we allow discounting and, if so,
mostly on revenues rather than on price to what levels, for which customers, and
performance, and a lack of tools such as why? Should we differentiate the sales
data dashboards and scenario planning for reps’ mandates on the basis of their
sales teams. Many banks have limited specific capabilities and performance?
reporting on price metrics and no tracking
of win/loss data. As a result, they make •• Should the pricing of each line of
decisions with insufficient facts and in- products be kept independent across
sights. products, or should we price per
customer—through cross-product
pricing and discounts? Should we allow
Capturing the Opportunity for cross-subsidies and to what extent?
Assessing a bank’s activities, capabilities, Or should all products and clients have
and goals in these three overarching layers a minimum threshold of profitability?
provides structure and clarity to the other-
wise complex task of capturing the pricing The third strategic element of pricing—es-
opportunity. tablishing constraints—requires defining
boundaries for price setting from several
Begin with a Strategy perspectives. One involves banking rules
Pricing should be a means to realizing the and regulations: for example, is the bank
bank’s strategic objectives. This requires permitted to charge different prices to new
creating a pricing strategy on the basis of and existing customers? Ethical issues im-
explicit discussion and agreement among pose another set of questions, such as what
senior managers. The strategy should personal information will the bank permit
comprise three elements: overall objec- itself to use in pricing, to determine either
tives, a pricing model, and a set of con- a customer’s credit risk or willingness to
straints. pay? Branding considerations are also im-
portant, including the perception the bank
In establishing the overall objectives, se- wants to create regarding its pricing—pre-
nior managers should ask the following mium, quality, or value—and the extent of

| How to Reap a Pricing Windfall in Retail Banking 3



its reputation for transparency. And finally, tomers place on specific product features,
internal limitations and constraints must including services that are free. For exam-
be understood and recognized—for in- ple, in daily banking products, customers
stance, regarding IT systems and sales force may attach significant value to free ATM
capabilities. withdrawals or a free credit card, which
can compensate for higher monthly fees.
Pull Three Levers to Optimize One retail bank measured in detail the per-
Pricing ceived value of all its product features and
There are three levers that banks must pull prices, then adjusted its offerings to differ-
to capture the full value of pricing: ent customer segments accordingly. That
allowed it to increase monthly fees or raise
•• Optimize price structures and levels on fees for specific features that were less im-
the basis of the value perceived by portant to customers, such as lost-card re-
customers and on competitive dynam- placements. As a result, the bank increased
ics, while taking into full account all revenues in its daily banking products by
product costs and risks. almost 15%.

•• Differentiate pricing by segmenting Setting price levels should be based on a


customers, even to the individual level quantitative understanding of price elastici-
when warranted, according to such ty. How do volumes change with price lev-
criteria as willingness to pay and value els—overall, by customer segments, and by
to the business. channel? On the basis of this knowledge,
banks can set prices in line with their goals,
•• Improve price realization—that is, understanding that price levels established
achieving the previously established to maximize revenue are different from
price levels and goals—by, for example, those aimed at maximizing profits.
increasing the effectiveness of discounts
and promotions. Particularly for products with thin margins
and a large back book, such as savings, pric-
Optimize price structures and levels. ing decisions on the front book will have a
Banks should start with price structures. big impact on the entire portfolio’s profit-
These must take into account the costs and ability. For example, increasing interest
risks of products, such as payments, with rates to gain revenues from new deposits
many different price components—includ- will simultaneously lower revenues on ex-
ing credit interest, debit interest, monthly isting deposits. In contrast, when pricing for
fees, transaction fees, penalties, overdraft maximum margin, banks should determine
charges, late-payment fees, and service the lowest interest rate that doesn’t moti-
fees. Likewise, loans, investments, and even vate customers to withdraw savings. The
deposits have many price components to price elasticity curve for products such as
consider—for example, a savings interest savings and mortgages is often complex
rate that varies with the deposit volume. and nonlinear. But when well understood
Optimizing price structures requires a deep and used, it can easily lift back-book
and quantitative understanding of the role revenue by 5 to 10 basis points for the port-
that different price components play in the folio.
customer’s value perception. Some services
and fees are crucial for acquiring or Finally, optimizing price structures and lev-
retaining customers and may be priced at els should also be based on competitive dy-
lower margins. Other services and fees do namics. Banks often price their products on
not trigger much customer response and the basis of competitors’ prices, but they
may be optimized to generate more value seldom track competitors’ responses to
for the bank. their own pricing moves. Monitoring those
responses can help decode a competitor’s
To optimize price structures and levels, strategy, allowing the bank to continuously
banks should quantify the value that cus- improve its own decisions.

| How to Reap a Pricing Windfall in Retail Banking 4



Differentiate pricing by segmenting cus- ing customers, lack of monitoring and
tomers on the basis of price sensitivity. insufficient sales-force discipline often lead
Price differentiation is a means of captur- to excessive price leakage. As a result, these
ing untapped margin or volume opportuni- discounts often yield no benefit to the
ties. Banks often segment customers by bank.
their value to the business—using income
or wealth levels, for example—but rarely Leakage also occurs when pricing isn’t up-
by their willingness to pay. However, a dated to reflect changing circumstances—
one-price-fits-all approach fails to attract such as a client’s increased risk profile or a
price-sensitive customers, ignoring a student discount retained by a customer
potential opportunity to build volume. who has graduated—or when services ren-
Conversely, less price-sensitive customers, dered aren’t billed, fees are waived, and
once identified, can be tapped as a margin penalties aren’t charged.
opportunity. (See Exhibit 2.)
Maximizing price realization requires
Banks can deploy a wealth of data to seg- banks to employ both discipline and guid-
ment their customers by their willingness ance in managing the sales force. Discipline
to pay. By data mining historical customer can be achieved partly through time-tested
data—such as previously accepted prices and self-evident practices such as setting,
and promotion responses—or by conduct- monitoring, and enforcing discount rules
ing targeted client research, banks can sta- and partly through incentives. But less ob-
tistically determine the factors that predict vious measures must also be employed.
price sensitivity and use them to set indi- They include sophisticated but simple tools
vidual prices. that instantly equip sales representatives
with an integrated view of each client—
At a number of European banks, individu- such as next negotiating steps, target prices
alized pricing achieved through microseg- and profitability by product, and cross-sales
mentation has increased revenue 10% to needed to balance a discount.
30% in deposits, consumer loans, and credit
cards. Close guidance is crucial—though the need
is often underestimated—when a bank
Improve price realization. Better price commits itself to full price realization. That
realization can be achieved through more goal imposes a change in culture, not just
effective discounts and promotions, and metrics, as the sales team shifts focus from
through billing discipline. While discount- sales volumes to profitability targets. The
ing is a useful tool for attracting or retain- team and the individual reps must learn

Exhibit 2 | Segmenting Customers by Price Sensitivity Can Boost Volume and Margins

FROM ONEPRICEFITSALL... ... TO A PRICE FOR EACH SENSITIVITY LEVEL

Price Price
Untapped Less sensitive customers
margin willing to pay more Increased Customers get the
margin prices they expect

New
Fixed price volume

Sensitive customers Untapped


expecting lower prices volume

– Customer price sensitivity + – Customer price sensitivity +


Source: BCG analysis.

| How to Reap a Pricing Windfall in Retail Banking 5



that every discount is counterbalanced by full value from each transaction and inter-
an additional cross-sale or by a larger or action—as well as to deepen the customer
longer customer commitment. A successful relationship.
transition requires constant reinforcement
through training, coaching, oversight, and Data and tools also require attention.
team discussions. Banks have a wealth of untapped customer
information that can be exploited for val-
Optimizing price realization is an opportu- ue-based pricing. They should unlock and
nity at every bank, and with every product, mine this data for insights on critical fac-
that provides the sales force discretion to tors like price elasticity, business potential,
discount. Revenue increases of 5% to 10% and buying propensity. In addition, banks
are typical for price realization efforts. One should access and use information they of-
Benelux bank increased revenue by nearly ten do not capture, such as win/loss and
25% in its consumer lending portfolio competitor-pricing data. To bring this en-
through a combination of sales force guid- hanced intelligence and these better pric-
ance, tools, and steering. ing models into the field, they should de-
sign simple and flexible tools.
Sustain Value with Enablers
Banks often approach pricing improvement Banks must improve their pricing perfor-
as a one-off exercise, after which the im- mance management and processes through
pact dilutes over time. To sustain the value better tracking and enhanced mechanisms
created, banks should address their people for coordinating and steering all personnel
capabilities and their processes, gover- involved in pricing. This requires clear and
nance, and tools—including their IT re- frequent dashboards on metrics and incen-
sources. tives that are directly linked to perfor-
mance.
A governance structure that allows for fact-
based cross-functional decision making is a Finally, banks must establish clear man-
crucial element of any pricing capability in dates within predefined boundaries so that
retail banking today. Traditionally, pricing decisions can be made quickly and at the
was cost-plus, with decisions made in right level. Achieving this requires getting
asset-and-liability-management, finance, information on competitive pricing, price
and risk departments. Now banks must sensitivity, and what-if scenarios to deci-
also factor in the value perspective—that sion makers in a timely manner. Then, de-
is, the customer’s perception of value and cision implementation processes must be
willingness to pay; this change has given fast and accurate to avoid leakage.
marketing, customer intelligence, and sales
a seat at the pricing table. There is there-
fore no single “right” home for pricing re- How to Get Started
sponsibilities and decisions. Today, respon- Pricing is a fundamental go-to-market com-
sibility should usually reside in a pricing mercial capability, along with sales, mar-
council—often comprising senior manage- keting, and branding. Properly executed, it
ment—supported by a pricing team that can generate a significant windfall. Pricing
provides dashboards, what-if scenarios, and is increasingly on the radar of senior man-
other information for decision making. agement as banks revisit their business
models and strategies to address regulatory
To make the step from cost-plus to value change, rising competition, and disruptive
pricing, banks need to train their people. new business models. They should start to-
Teams must be educated in quantitative day, before their competitors and the in-
and qualitative customer-research tech- dustry as a whole have made advances in
niques, as well as data analytics, to unveil pricing sophistication.
customers’ perception of value. Banks
should also invest in frontline-staff aware- However, banks should not treat pricing
ness and sales capabilities to extract the improvement as an isolated, do-it-all-at-

| How to Reap a Pricing Windfall in Retail Banking 6



once exercise—achieved, for example, by by improving adherence to agreed-upon
simply buying a pricing tool. To advance in price structures. It is also wise to focus on
pricing is a longer-term commitment re- one product first. In our experience, both
quiring senior management commitment checking-account fees and consumer loans
and a multiyear plan. It mandates a bank- are good choices, providing a solid learning
wide approach that addresses all three opportunity while delivering impact at the
pricing layers—setting strategic objectives, same time. Quick and visible gains build
applying levers to realize impact, and confidence in the broader pricing effort
building enablers. and provide funding to cover the full pric-
ing journey.
As a first step, we often recommend that
banks address the lever of price realization

About the Authors


Ian Wachters is a partner and managing director in the Amsterdam office of The Boston Consulting
Group. You may contact him by e-mail at wachters.ian@bcg.com.

Martin van den Heuvel is a principal in the firm’s Amsterdam office. You may contact him by e-mail at
vandenheuvel.martin@bcg.com.

Marcin Kotlarek is a partner and managing director in BCG’s Warsaw office. You may contact him by
e-mail at kotlarek.marcin@bcg.com.

Santiago Mazón is a partner and managing director in the firm’s Madrid office. You may contact him by
e-mail at mazon.santiago@bcg.com.

Sumitra Karthikeyan is a partner and managing director in BCG’s New York office. You may contact her
by e-mail at karthikeyan.sumitra@bcg.com.

The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advi-
sor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all
regions to identify their highest-value opportunities, address their most critical challenges, and transform
their enterprises. Our customized approach combines deep in­sight into the dynamics of companies and
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achieve sustainable compet­itive advantage, build more capable organizations, and secure lasting results.
Founded in 1963, BCG is a private company with 82 offices in 46 countries. For more information, please
visit bcg.com.

© The Boston Consulting Group, Inc. 2016.


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