Wholesale Bankers Should Explore “Relationship-Based Pricing” To Improve Profitability

17 July 2008

In the wake of the subprime mortgage crisis, banks are facing substantial profitability declines. US commercial bank net income fell almost 40 percent from Q1 2007 to Q1 2008. New research from TowerGroup notes that current financial pressures underscore the importance of setting prices for new and renewing business that provide banks with sufficient profit, while still sustaining the customer relationship.

Too often, wholesale banking product pricing is either negotiated or market-driven, with little attention paid to profitability. TowerGroup believes that what it terms “relationship-based profitability and pricing” solutions can help a bank ensure that its pricing meets its profitability goals while retaining valuable customers. TowerGroup defines relationship-based profitability as the overall economic return (or loss) arising from a customer’s use of various bank products or services.

Banks face a number of challenges when constructing the “building blocks” that support relationship-based profitability and pricing – which include account and transaction data, product and customer costs, credit quality and risk profiles, loyalty assessments, and profitability and pricing calculations. Without pursuing an approach that builds toward relationship-based profitability, a bank has no assurance that its pricing will adequately compensate it for supplying products and services while providing customers with a price that rewards them for their relationship with the bank.

As banks begin to address this need, best practices are emerging in the areas of model development, customer management, and information management. Ultimately, TowerGroup believes banks that implement relationship-based profitability and pricing will establish the foundation to provide one-to-one marketing for their business customers, improve customer satisfaction, increase retention, and deepen product cross-sell.

The TowerGroup research report titled “Commercial and Small Business Banking in Troubled Times: Using Relationship-Based Pricing for Growth” and a companion report titled “Commercial and Small Business Relationship-Based Profitability and Pricing: Putting it All Together,” are authored by Patricia Hines, research director for the Wholesale Banking practice at TowerGroup.

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