October 20, 2010

The revenue-draining effects of the Card Act and Reg E (which reduce overdraft, interchange and other card-related fees) are spawning new business intelligence products designed to predict and improve profitability, through price optimization. In conversations with SAP and Fiserv at the BAI Retail Delivery conference this week, they shared some of their product plans in this area.

SAP partner Cognilytics has developed predictive modeling software that works with SAP's ERP and banking software and analyzes a bank's sources of income, such as debit interchange fees and loan interest income, and calculates how small changes will affect a bank's overall profitability. "Banks could use this to be proactive about the way they manage pricing," notes Thomas McAllister, senior industry principal at SAP, versus, say, reacting to local competitors' prices.

The pricing analytics tool looks at current and historical customer behavior to predict what customers are willing to pay and the effects of pricing changes on portfolios. "The goal is to understand what the customer behavior has been so you can predict what it will be," says Carl Snyder, industry principal. "Banks are using this to price products specifically, to understand cannibalization and macroeconomic factors, and to predict what will happen up or down."

One regional bank is using the software for deposit pricing. "In the past they were changing prices on a monthly or weekly basis, now it's on a daily basis," reports Falk Rieker, vice president, ISG Solutions North America. "It's a predictive model that folks trust and believe in, it makes pricing easier, it lets them price differently by region, and it helps them understand how economic factors will play into pricing decisions."

The modeling tool can be tuned to help a bank understand the relationship between a customer and profitability, so that a bank can work on attracting the most profitable types of customers.

"This forces best practices discipline on banks, so they can manage better, rather than relying on gut reaction," McAllister says.

Fiserv has been developing a revenue enhancement analytics program that has similar goals.

"Each institution has a different footprint and its customers are different," points out Mary Beth Lawson, who leads this project at Fiserv. "Our goal is to understand what consumers are doing, where they fit on profitability. Pre Reg E you had fee people and balance holders. After Reg E a lot of fee revenue has been sliced away. Banks now have to look at each customer segment and and figure out how to make them profitable."

Fiserv will study the consumer base of a financial institution and offer a customized list of products that would suit those consumers in a profitable way. "For balance holders, the focus is on retention, so a bank might offer more billing options; online bill payment is a great customer retention tool," Lawson says. For customers that are dependent on overdrafts as a financial management tool, Fiserv's SmarterPay program lets bank customize their overdraft fees based on how consumers have repaid overdrafts in the past. For instance, a bank might want to reduce overdraft capabilities for customers on the verge of spiraling out of control.

The Fiserv tool also looks at the financial institution's goals and creates an 18 month roadmap for fees, loyalty programs and such. "Community banks not really competing with each other any more, but with large national banks," Lawson says. "Being able to bring the right products in is important, for instance being able to offer P2P payment instead of driving a customer to PayPal or to a biller's website."

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