Bank fees have long been a one-size-fits all jacket, but some institutions now offer a custom-tailored experience to differentiate themselves and grab wallet share.
"We've been moving away from a product and line-of-business focused culture to a culture that's more customer centric, and relationship pricing is at the center of that," says Ed Page, svp and business information officer for National City Bank. "By treating a customer on the entirety of his or her relationship with the bank, we're able to deepen the relationship and make it more sticky."
National City Bank is out in front using service oriented architecture (SOA) for relationship-based pricing; the mechanism taps a deep pool of cross-silo customer data, transaction histories, credit risk and other personal tendencies to determine personalized fee structures or price points. Usually that means a loyalty perk in the form of reduced transaction costs in exchange for being a profitable holder of accounts as well as other relationships, such as mortgages, auto loans and wealth management.
The Cleveland-based bank is using these customized fees as an advanced CRM tool to gain a greater percentage of a consumer's business. Among the results since the bank implemented the pricing scheme a little more than a year ago is a 70 percent decline in single-service households.
"This will be the competitive advantage of the future," says Mary Pilecki, a senior analyst at Forrester Research, which sites a recent customer experience study by BAI and Strategic Horizons that suggest consumers would not only be receptive to relationship based pricing, but are indirectly demanding it.
That BAI study found that 52 percent of consumers view the practice of "rewarding" relationships as a "vital" element of customer experience; yet only 12 percent of consumers believe this occurs. "If you can get in first with relationship based pricing, you can get a huge share of wallet," Pilecki says.
National City Bank, which has about 1,400 branches, 36,000 employees and more than $154 billion in assets, evaluates customers based on present and potential profitability and propensity to stay with the bank. After this evaluation, customers are assigned to one of nine buckets called "customer management objectives" (CMOs), which are pushed out to customer-facing staff to drive pricing decisions such as fee waivers and discounts, as well as other sales and service activities across lines of business.
The strategy is enabled by SOA, which allows disparate and legacy operating systems to be integrated. At National City Bank, cross-department data is combined into a single repository for historical information, which is used to generate customer statements and notices, and to guide pricing decisions. The use of SOA also allows other factors to be considered in setting price, such as cost sensitivity and credit risk.
The bank traditionally set pricing at the product level based on geography, and customer-facing staff did not always have access to detailed consumer profitability metrics. National City Bank determined the old approach captured about 22 percent of its customer base's loans, 35 percent of deposits, and less than 10 percent of investable assets.
The new pricing model has helped the bank achieve an 18 percent improvement in the rate of account growth, 30 percent improvement in household return, 56 percent higher credit card spending and 16 percent higher debit card spending. "They were indeed able to grab a large share of wallet, so relationship pricing is absolutely differentiating," says Bart Narter, a senior analyst at Celent.
Narter says other institutions deploying the strategy include Wachovia, which also benefits from a strong customer-centric organizational structure, a key corporate culture ingredient to make relationship pricing work. And Pilecki says RBC is also deploying the strategy. The two banks did not return calls.
While National City Bank's success with relationship pricing might suggest an industry-wide shift in the offing, analysts say adoption has remained tepid. "Tying things together is still a challenge. Some banks have done it a little, but most have a long ways to go," Narter says. "It's still like the mythical banker who says he doesn't treat his customers like a number, but a whole lot of different numbers."
Richard DeLotto, a principal analyst for Gartner, says the holdup is more about banks' "line-of-business"-focused culture than it is about the availability of technology. "Banks have a legacy system attitude," he say.
(c) 2008
