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Banking on the Relationship

Published on 03 Aug 2012

Posted by Darren Negraeff, Marketing Director at Zafin Labs

Sometimes, in order to get where you need to be, you have to know where you’ve been. Banks, like any introspective, navel gazing entities during this economic crisis, are not exempt from needing to recognize the lessons from their past in order to better navigate the future.

Banks traditionally have been reactionary, not proactive, in their approach to pricing. This stems from their silo-based pricing methods, where banks would only respond to competitive offerings when completely necessary. Price and rate setting was influenced largely by supply and demand, which were considered in the context of other banks’ offerings, rather than from the holistic value of a customer from a relationship perspective. This is the “where you’ve been” bit, and it worked fine for its time. But the road ahead isn’t like the road traveled yesterday, nor does pricing work the way it did 10, 5, or even 2 years ago. Today, banks that embrace taking a new customer-centric pricing path know that profitability is the destination and pricing is the journey. Banks can now simulate the effects of transaction volume and complementary products when determining pricing – and by using the right technology, they’ve recognized that a relationship banking strategy is incredibly valuable.

The journey to profitability hasn’t been smooth – especially when public outcry draws attention to a challenge that stands as a roadblock. Take fee-base income; it’s the bedrock of banking revenue, and it’s a subject in the media spotlight. Remember the uproar when banks considered eliminating no-fee checking accounts to cover their loss of debit interchange fees via Dodd-Frank? . It’s hard enough to clear this hurdle to profitability, let alone do it under public scrutiny. So how to avoid making a mountain out of a molehill AND stay out of the spotlight? Have a 360-degree view of the entire customer relationship. Without this, banks can’t waive an account fee in the interest of maintaining an otherwise profitable customer relationship. The journey to profitability demands a customer-centric relationship banking strategy as a guide. And that strategy requires this kind of transparency and flexibility to properly measure and reward customers for their loyalty. It’s only the first step to knowing where you need to go, but it’s a big first step, and having that customer-centric strategy to guide the rest of the journey is crucial.

At its core, what makes a good strategy? Let’s be honest, total customer centricity goes beyond a simple fee waiver system. A bank needs to accurately measure and report on customer behavior in order to better predict what kinds of products and bundles their customers would like, but haven’t demanded...yet. Good strategy requires segmentation, and segmentation requires a truly flexible innovation layer. With simulation functionality, banks can profitably base their pricing and bundling decisions on real data and predictive models rather than looking at what the competition is doing and copying those offers. This is where thoughtful, leading banks forge their own trails. Banks that make innovative technology investments to create dynamic pricing and simulation functionality are also investing in relationships – and ensuring that their strategies lead them to profitability. But banks that choose a solution built only for financial services will find that true relationship banking gets them to their destination sooner.