In Part III of Game Changer we worked with our colleagues at BCG to show how several companies successfully switched pricing games in response to shifts in customer behavior or other market forces. The retail banking sector presents a special case in this regard, because banks have traditionally played several pricing games simultaneously, a factor which contributed to the siloed nature of their offerings.
As Cesar Torres and Claudius Neufeldt describe in this week’s guest newsletter contribution, that’s one reason why, of any sector, retail banking may have the most to gain from switching to a different pricing game.
Changing the Pricing Game in Retail Banking
Players in the retail banking sector enjoyed several advantages for decades: high barriers to entry, several similar and sophisticated competitors, and the ability to optimize their business because of customer inertia. The ubiquitous checking account served as the anchor for a land-and-expand strategy that took customers to different “islands” within the bank, each with its own infrastructure and pricing game.
But as newcomers such as neobanks and specialized FinTech companies seized the opportunities offered by digitalization, those advantages have eroded, forcing banks to act urgently. In an extensive report published in mid-January, several of our colleagues highlighted the imperative for banks to “defend primary banking relationships with a holistic, digital offering.” The operative words are “holistic” and “digital” as banks transform themselves from financial shopping malls with physical branches into segment-specific one-stop shops with a seamless online customer experience.
Developing a holistic digital offering demands a rethink of a bank’s pricing strategy, which starts with the three fundamental questions from Game Changer:
- How do you create and share value?
- What pricing game do you want to play?
- What pricing model best fits your value creation strategy?
Answering those questions will be no easy task for retail banks. The strategies that once yielded reliable income streams are now constraints on their progress and profits leaving the banks with:
- Siloed products: Weak links across disparate products – and competing interests and objectives – constrain a bank’s ability to unlock the full potential of customer relationships. Savings accounts and their modern high-yield versions followed the Uniform Game; credit cards followed the Choice Game; brokerage services played the Cost Game; mortgage lending followed the Dynamic Game; wealth management played the Custom Game.
- Savvy customers: Customers know they can shop around and create a best-in-breed solution by cherry-picking from different banks. The banks facilitate this behavior by keeping their products siloed with separate games. Put another way, customers have overcome their inertia, and once in motion, they will stay in motion until banks give them a strong incentive to stop and stick around.
- Legacy price models: The price model for banks relies on fees, which are usually not a strong match for sharing the value of innovations or incentivizing customers. Fees are also under close regulatory scrutiny, as authorities attempt to limit overdraft fees and bank interchange fees in the US.
The best opportunity for retail banks – in terms of defense and offense – lies in playing only the Choice Game instead of maintaining siloed products with different games. The Choice Game relies on behavioral economics to help their customers self-select from a well-structured lineup of offerings. How prices compare to each other matters far more than the individual prices.
Making the transition to the Choice Game
The high-level answer to the first strategic pricing question – the source of value – is how well the bank guides and incentivizes customers to manage their money optimally. This means they will need to examine how they create and share value for different customer segments.
Imagine a package for seniors that offers a fee-free proposition combining savings, checking, and brokerage with a conservative strategy as well as rewards that promote financial health instead of excessive spending. The financial health would depend on factors such as short-term debt, insurance, property investments, savings targets, and monthly expenses. That is one example of a holistic approach tailored to a specific segment. Depending on the segment, opportunities exist to build a price model around a combination of fees, interest, and rewards.
We have six recommendations for banks as they make their transition to the Choice Game.
- Define and prioritize target segments: These should reflect diverse customer needs, the potential for value creation and sharing, potential lifetime value (LTV), and existing loyalty.
- Define a coherent and relationship-based offer lineup: Design a simple, balanced, and clearly fenced portfolio for the target segments while also providing paths for revenue expansion.
- Anchor prices to segment-specific value perceptions: Involve the product team when defining the offer structure, which could be good-better-best or a base offering with customized or personalized add-ons. The offer structure should also include reward/loyalty programs that foster financial health.
- Help customers navigate choices: Use behavioral science to guide customer choice and incorporate insights – such as the compromise effect – into the portfolio design. This can foster proactive communication and recommendations to help customers stay engaged and self-select.
- Ensure a transparent and fair pricing model: This means a consistent structure across product offer lineups and no hidden fees. The relationship-based approach should keep the choices simple and fair.
- Explore adjacencies: Banks will still have numerous cross-selling opportunities: insurance, healthcare, and family plans that can make assets under management stickier and mitigate switching behavior. Banks can also offer tools to simulate the effects of potential hardships and develop plans for them.
Changing to the Choice Game represents a profound mindset shift. Success relies not only on pricing model changes, but significant adjustments to product portfolio, including realigning systems to seamlessly support the new go-to-market strategy. The bank needs to communicate the revised value proposition internally and externally and focus on comprehensive training for all front-end personnel to ensure a smooth customer transition and continued loyalty. In their report last month, our colleagues estimated that bolder strategies can unlock at least $7 trillion in value for the banking sector as a whole. It is worthwhile for retail banks to unlock some of that value for themselves.
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