The world's largest banks are too complex and not client-centric enough, concludes a study of the top 200 banks based on tier 1 capital conducted recently by IBM's Institute for Business Value and the Economist Intelligence Unit. They must change their pricing models and make insightful use of customer data to make pricing decisions, to keep customers satisfied, and to remain profitable, the study found.
"Last year, as regulations were changing, we started to look at the cost of banking and what banks need to do to make a profit," says Srini Giridhar, IBM IBV Banking lead, who spoke to us in a recent interview. "One of the major impediments of making a profit is the complexity of how large banks are set up. From our analysis, we think this complexity costs $200 billion dollars across the industry." The fix, he says: simple, smart services. Banks can increase their pre-tax profits by 20% by reducing complexity, Giridhar says.
Almost all (90%) of the bankers said that to be profitable in the future, given regulatory changes occurring, transforming out of the status quo is critical. "It was either major transformation or incremental transformation but by and large, they were rejecting the status quo as a method to go forward," Giridhar says. The top banks have already increased their capital levels substantially to comply with heightened Basel recommendations and are trimming riskier assets (that call for higher capital) from their books. But for every 1% of income from risky assets that banks reduce, they will have to at least double or triple their income from low risk assets to maintain the same level of profit, Giridhar points out.
The survey asked bankers about their pricing models, where they are with pricing today and what they want to improve on for tomorrow, Giridhar says. "In all cases, 65% of bankers that came back to us were in favor of moving away from their current system of pricing," he reports. "All the big banks are saying they need to make pricing more customizable."
However, the study found that lack of client data and poor risk data are handicapping the banks' ability to modernize their pricing models; over 70% of those surveyed said they need better data around risk and client behavior patterns.
"The other side of the pricing equation is what the client is interested in paying for, and some of that comes back to the channel through which the client wants to interact," Giridhar notes. "The banking industry is unique, they know your salary, they know your preferred mode of payments, they have tons of information about the individual, and it's fair for the end user to say, why am I paying an extra $20, what am I paying for in this relationship?" he says. "What do banks need to do to get consumer confidence back up and how are they going to be profitable across these channels? It all comes down to taking data, converting that to information and then insights."
One survey result that Giridhar found surprising was that banks said they are prepared to unbundle pricing models, looking at prices and customer relationships based on the channels customers choose, the products and services they want, and how often they bank. So a customer that made 30 transactions a week, all of them digital, would get a customized, presumably lower price than a customer who uses more expensive channels. "They were much more consumer friendly, much like a cable services company with its cable packages and different offerings," he observes. When asked one-on-one what the biggest impediments are to developing such new pricing schemes, some said the lack of a clear view of client risk, others said current policies and procedures would not let them vary their pricing according to underlying risk.
In one example of a Tier 1 bank's new pricing strategy, Giridhar says, very few transactions are really free; all transactions are priced. Prices will be set by product and by channel (the same product and same terms and conditions, etc., will never be sold in two different channels). The bank will not use the lowest price to attract a client. The bank will focus on lowering cost per channel and letting clients switch between channels. And the bank says it will focus on maximizing customer satisfaction with each channel interaction.