Commercial-banking operations have retained what Novantas believes is an outdated, labor-intensive pricing structure that creates friction between bankers and clients.
The inherent problems of a system that has more than 2,000 price points, combined with growing external competition and a shift to digital transactions, means that banks need to consider new pricing approaches.
Novantas estimates that an overhaul of commercial pricing represents a revenue opportunity of nearly $4 billion to banks, but only for institutions that have the foresight to embrace innovative pricing before weaker economics take hold.
DECAY OF THE STATUS QUO
Today’s commercial-pricing structure has evolved from the framework of Regulation Q, the 1933 federal rule that prohibited the payment of interest on commercial deposits. At the time, bank-profitability models relied on the revenue generated by these deposits to offset the costs of transaction activity.
Earnings credit rates (ECR) took hold as interest rates soared in the 1970s and 1980s and banks gradually began adding more transaction fees and services. Pricing schemes became more complex, required more time to manage and negotiated relationship pricing became the rule rather than the exception.
This ever-expanding complexity introduced increased friction within the sales process that continues to exist today. In fact, a typical bank relationship manager (RM) now spends an estimated 225 hours per year on lengthy price negotiations, addressing billing errors, describing the minutia of service line item pricing and evaluating how pricing compares (or more often, doesn’t directly compare) with competitor banks.
The current cost-based pricing structure originally sought to balance bank profitability and market needs within the regulatory limitations imposed by Reg Q. Legislators repealed the rule 10 years ago, but there has been very little change to the status quo.
Indeed, the burdens of this legacy structure remain and are arguably as cumbersome today as ever before, despite the many available alternatives. Essentially, commercial pricing has stagnated Essentially, commercial pricing has stagnated due to inertia even as digital advances create new opportunities for an overhaul.
Corporates and bankers alike feel the pain points associated with commercial banking pricing. In some cases, companies struggle to digest thousands of pages of account analysis each month. A simple goal to consolidate monthly fees paid, compare monthly changes and understand how pricing compares across banks becomes a herculean task for the typical treasury group that operates without intelligent fee-analysis software.
On top of all that, near-zero interest rates and corporate belt-tightening tied to the global pandemic are leading to increased scrutiny over bank fees. Disintermediation by fintech organizations and slow growth in new treasury management fees and services further exacerbate the headwinds faced by commercial banks.
Pain Points
No matter what their size, companies grapple with a tangled web of data about their banking services. Here are some key numbers, based on analysis of more than 10,000 bank statements that were provided by nearly 200 corporates and cover more than 60 banks.
Source: Novantas NDepth bank fee analysis data
Average pages of account analysis statements per month across all bank relationships
Average number of unique service line items used
Unique service line items managed by most banks
Pain Points
No matter what their size, companies grapple with a tangled web of data about their banking services. Here are some key numbers, based on analysis of more than 10,000 bank statements that were provided by nearly 200 corporates and cover more than 60 banks.
Source: Novantas NDepth bank fee analysis data
Average pages of account analysis statements per month across all bank relationships
Average number of unique service line items used
Unique service line items managed by most banks
NEW PRICING STRUCTURES
Novantas has identified at least four promising structures that can re-make commercial pricing – just as they have done in other industries. Simplified package pricing and subscriptions are two that promote a simplified user experience and streamline the sales process to promote deeper advisory-based client interactions. Banks can also consider customized pricing plans that use algorithms or link pricing directly to the value it creates.
Under simplified package pricing, legacy constructs such as ECR can be shelved in favor of direct interest. Complicated and cumbersome service line item pricing can yield to fixed-fee package pricing or all-in product pricing. By collapsing service line items into a single package, banks can shift the perception of “nickel-and-diming” customers into one that offers standard features “free of charge.” With package pricing in place, banks can still selectively offer value-based add-on features like enhanced reporting or industry-specific specialty offerings.
The “banking as a service” concept draws on the pricing model used by many software companies to better reflect value and promote deeper client integration. This model helps shift the relationship dynamics from being purely transactional to one that delivers more value-based analytics, data and advice. Under this model, banks can put themselves in the enviable position of being a transactional, informational, analytical and advisory hub for their clients.
The contingent pricing concept seeks to directly tie pricing to value. Fees are calculated based on measurable real or expected benefits to the client. For example, accelerated receivables can produce a measurable improvement in days-sales-outstanding (DSO), which leads to quantifiable working capital benefits for the client. Or customers can share in the revenue benefits that come with commercial-card performance, such as customer penetration, higher average spend or reduced fraud. This can cement the banker as an advisory partner invested in clients’ success.
Finally, banks can use intelligent algorithmic pricing models to provide unique client-specific pricing that can be used for the entire book of business. This personalized approach to pricing uses vast amounts of client behavior data (channel, customer-service engagement), relationship data (risk, attrition, scoring) and market benchmarks (pricing, penetration to establish optimal, client-level pricing).
CREATIVE PRICING ACROSS INDUSTRIES
Banks have been slow to modernize commercial-pricing structures, but they can embrace new methods by examining how other industries have embraced creative pricing models.
For example:
CREATIVE PRICING ACROSS INDUSTRIES
Banks have been slow to modernize commercial-pricing structures, but they can embrace new methods by examining how other industries have embraced creative pricing models.
For example:
THE ARGUMENT FOR MORE EFFICIENT PRICING
By shrugging off the yoke of the past and adopting modern commercial pricing schemes, banks can introduce structures that more clearly reflect the value of the business for the client. This type of overhaul can simplify sales efforts, promote efficient pricing and profitability and offer a client experience that rivals fintech competitors.
Sales personnel, now freed from the shackles of complex price negotiations, can pivot to truly become advisory partners. Client interactions that were once centered around nitpicking line items can evolve into conversations of how consolidating volumes can improve pricing through economies of scale, how new products benefit their organization and/or advisory discussions on process optimization.
Financial institutions that revamp pricing structures will be well-positioned to benefit as the industry expands beyond its historical domain of transaction execution into the value-added realms of data, analytics and advisory services. Improved pricing schemes will encourage deeper client relationships and supporting technology will unlock additional capacity, empowering a more effective sales force.
Ultimately, these changes will herald a new era in commercial banking as friction in existing pricing schemes is reduced, yielding greater operational efficiencies and a restoration of economic equilibrium.
And in the long run, banks will be compensated for the value delivered and transparency in pricing will effectively restore bankers as collaborative business partners rather than potentially perceived as exploitative vendors.
