Novantas has been a leader in financial industries pricing strategy for nearly a decade. Our work with the largest in Retail and Small Business banking organizations led to the development of PriceTek, a pricing support system for retail banking.
PriceTek is an ASP (application service provider) service that continously analyzes a bank’s specific customer and prospect balance responses to relative bank pricing. Using these analyses, PriceTek creates predictive models of how future pricing changes will affect balance acquisition, growth, diminishment and attrition.
As a result, bankers can determine the best pricing required to maximize growth – by region, or by product, or by customer segment – and at the same time, maximize net interest margin or fee realization.
Rates-based Deposit Products
Most banks have come to accept pricing as a simple trade-off. For example, increasing deposit rates will result in more customer acquisition, but lower margins, while conversely, lower rates will drive more run-off, but higher margins. While there are some pricing tools in place, most of them simply show how to minimize the damage of this trade-off, by finding the optimum point on the “marginal cost to marginal revenue” equation. However, using PriceTek, the bank can identify where and when to change prices to maximize growth and profitability simultaneously.
PriceTek uses actual, contiuous customer behavior to build models of Demand Elasticity. The system determines the probable balance change resulting from each prospective price move at the individual customer level. It creates a customer-level Price Elasticity of Demand curve, based on the demonstrated experience of groups of similar-behaving customers. PriceTek integrates the resulting Price Elasticity equations into a set of sophisticated modeling tools for use by a Pricing Analysis team.
How does PriceTek help the bank grow and improve margin simultaneously? Banks have used the system to support a broad set of pricing decisions:
- Where should rates be changed? PriceTek measures and reports on which region and product and segment combinations are more elastic than others (and how that elasticity is changing over time) so that the bank can allocate its rate increases where customers are most price sensitive and it will do the most good.
- When should rates be changed? PriceTek measures and reports on the pace of response to pricing changes by region and product so that the bank can accelerate its pricing changes in fast moving markets to beat competition, and change prices at a more measured pace where market response is demonstrably slower
- How much should rates be changed? PriceTek identifies the “zone of indifference” for each product and customer type – the inelastic range of relative pricing where customers are indifferent to relative pricing differences. By pricing at the lower end of these zones, banks can realize 5 to 25 additional basis points of margin without effecting customer demand or balance behavior.
- How much rate negotiation should be permitted by region? PriceTek provides the information for the bank to decide how much discretionary pricing to allow in the field, based on the elasticity of customers in each branch area.
Fee based Deposit Products
Deposit Product Fee revenue has become a larger part of bank income over the years. At the same time many fees are disappearing due to the proliferation of free checking, consumer demands for nuisance waivers, and closer scruitany on NSFs. Getting the fee levels right is essential, particularly since fees cannot be changed as frequently and as discretely as rates.
Most other price modeling systems today simply compare fee schedules and tell the bank whether the fees are higher or lower than competitors. These systems do not account for the different customer usage patterns or the different customer fee elasticity. As a result, many banks are setting fees without understanding how the customer is, or will be, affected.
PriceTek solves this problem by analyzing relative fee pricing from the perspective of the retail and small business customer. The system examines the competitor fee structures available to customers based on their branch location or other channel. PriceTek analyzes how these fee structures actually translate into realized fees, based on actual customer product usage, and compares relative pricing against customer price elasticity.
In this way, the bank can determine which customers are truly affected by any fee pricing decision, as well as determine which competitors in which regions present the biggest threats. Conversely, the bank can determine which customers in which competitors are most vulnerable to capture based on proximity and realized fees.