Banks need to bundle and price right for profit

Having just come back from meeting with banks in Asia, the case for dynamic charging as a driver of customer profitability is clear.

In a post-recessionary market, once-overlooked profit opportunities will no longer be taken for granted.  Capitalizing on the revenue potential of Product Management is one area increasingly under the microscope.  Doug Zone, chief technology officer of MetraTech Corp., argues that the time has come to exploit the potential of service bundling and dynamic pricing.

On the Road to Profitable Product Management
It appears clear that banks in Asia have weathered the global financial storms of the past twenty four months better than their European and American counterparts have.  But that notwithstanding, the fact remains that there has been a sea change in the industry globally and the issue of service profitability has become a focal point. Certainly any discussion with regional banks and banks in Europe today makes it clear that pricing and bundling is now seen as a key driver of profits.  Going back only a few years, this wasn’t the case.  Then, buoyant economics and the focus on growth via M&A made a deep inspection of margins unnecessary:
•    In commercial banking, amazing margins on select products overshadowed the more limited margins of the remainder.  The difference was so great that in many cases, if services for the remainder remained entirely un-invoiced even unintentionally, there was no great consternation. Commercial contracts were that profitable that many ignored the rest.
•    In retail banking, although deposits could be quickly invested in seemingly high yield vehicles especially in the UK, dependence on those deposits began to slacken in time. Loans began to take precedence, especially in real estate, demanding reasonable interest rates and with continually rising prices: for a time, this amounted to low risk. 

In the financial boom years of the early 2000’s, there were already business cases for dynamic charging (customer-centric pricing / bundling and revenue management). However, at the time, there was little imperative to act even though it was clear that more revenue could be captured this way.  Nevertheless, it was obvious that the market for retail and commercial financial services was becoming more competitive despite the fact that the business case for investment in dynamic charging was overwhelmed by the perceived need for investments directly related to the financial boom.

Moreover, the fact that charging had become tied to core product platforms – in which any changes are never taken lightly – made the business cases more difficult to build.  In general, with the seemingly clear skies of strong margins overhead (and masking revenue management issues into the bargain), IT and product teams were aligned in their priorities.

The storm of recession may now be beginning to pass, but the landscape left behind has inexorably changed. The old profit sources are gone.  Margin on commercial services – the need to attract retail customers and to get these same customers to use high value services – is now paramount.  In Asia, a clear need to re-activate margins in core commercial and retail services is taken as read. On the retail side, product teams are seeking to retain their most profitable customers to get them to spend both more and more freely -  getting a larger “Share of Wallet”.  On the commercial side, product teams are looking to ensure that services once “thrown in” as an afterthought are now charged correctly, consistently and intuitively.

In both cases, the lack of dynamic charging (billing, pricing and bundling) has been identified as a barrier keeping banks from re-invigorating profits in core services. In discussions with IT teams, there is clear agreement that the business case for investment in charging is no longer considered secondary. While IT projects designed to drive out costs in legacy architectures will obviously dominate, investment in customer-centric charging capability is a must.

Though the need is clear, the current situation, where each product line has its own internally integrated charging capability, presents a challenge to both product and IT teams.  For the consumer teams, bundling – the ability to increase perceived value (“1+1=3”) – is not technically possible if pricing is not centralized. Moreover, even where bundling is not called for, dynamically changing pricing is difficult to achieve as there is great reticence on the part of IT to take the risky move of modifying core software just to effect what might be a “short term” price. This feeling is greatly magnified as pricing and loyalty schemes become more creative and have greater potential to disrupt the smooth operation of the core product.

For commercial customers, the fact that charging is distributed across core systems is even more problematic.  It is difficult to verify that all the services bundled in large commercial contracts are charged correctly. Often charging is managed on unified spreadsheets. Unfortunately, the information on exactly what services are being used by commercial customers never makes it to these spreadsheets. Disconcertingly, in some cases discussed outside of Asia, the information is never even gathered.  The core systems know that services are being used but there is no mechanism is in place to associate the service to the commercial contract under which it belongs.

Speaking to IT and product teams in Asia, it is obvious that a consensus has been reached on a way forward.  And it is quite simple.  The scope of charging must be redefined dimensions:
•    First and foremost, it must become customer centric.  For retail services, pricing and bundling allow banks innovate and to tailor solutions that fit their client base.  Bundling must encompass different products – allowing for cross selling - using attractive pricing or loyalty schemes in one product to incentivize the take up of other, higher margin services. For commercial services, unified charging and invoicing on customer contract terms – not individual product lines – is a must to assuring revenue for all services are charged.
•    Second, and equally imperative, charging must become dynamic. The reluctance to invest in marketing-led initiatives in pricing, loyalty and bundling due to the sensitivity of core systems to continual change requests has to be addressed by moving charging outside of core platforms and into a new function: charging executed as a unified customer-centric business process. Only by disentangling charging from core systems will it become dynamic.