Financial Institutions Are in a Pricing ‘Arms Race’

CU360
March 3, 2009 | COMMENTS

The deposit side of retail financial services has seen a pricing "arms race" recently, with more financial institutions applying credit-card-like marketing techniques, according to industry consultant Novantas. These institutions are also continuously refining their ability to apply pricing plans tailored to specific groups, such as local markets, member segments, and product bundles.

Here are some pricing issues financial institutions will work on this year:

1. Financial institutions are pricing on an individual basis. They can do this because of their better understanding of competitive prices, consumer price sensitivity, and overall economics that create more pricing segments.
2. Larger institutions are centralizing analytical functions and decision-making while standardizing processes to reduce the risk of calculation and posting errors.
3. Progressive institutions are using more sophisticated modeling techniques and they're winning the "arms race" in pricing capabilities.
4. Leaders are supporting their sophisticated pricing strategies with considerable investment in technology and staff resources.

Given that continued price competition is likely, as institutions vie for the deposits needed to maintain liquidity, advanced pricing capabilities are essential. The question is how to avoid re-pricing the entire current portfolio in the act of defending against "irrational" rate competition on promotional money market accounts and certificates of deposit.

To avoid out-of-control pricing wars, it's imperative to develop marketing and product development skills with target offers. By targeting price-sensitive consumers with selective offers (off-term maturities or special redemption terms), you can win balances without disturbing overall portfolio pricing.

As senior managers venture into 2009, the winners will evaluate the institution's overall retail deposit pricing strategies and capabilities and make the necessary investments to fill any gaps and assure full competitiveness.

By contrast, financial institutions that rely on modest enhancements around the edges will be disadvantaged in competition with organizations taking a more comprehensive approach. Indeed, performance skews between the leaders and laggards in deposit pricing may well widen during the next few years of intense competition.

Fortunately for proactive financial institutions, there are performance-improvement opportunities at every stage of the pricing-capabilities continuum.