Gianluca Corradi, Head of Banking UK, Simon-Kucher & Partners (www.simon-kucher.com) – world’s largest pricing strategists
January 2018 marked the introduction of Open Banking reforms unlocking the door to a frenzy of third-party providers (TPPs) looking to mark their territory on the shifting landscape of banking.
The reforms give customers and businesses control over how their account data is shared with regulated TPPs. It also allows these providers to make payments and analyse transaction history to help remove frictions in the personal and business banking experience.
For example, given you have granted permission, a price comparison website can access your transaction history and based on your spending and saving habits, can generate recommendations for a more appropriate account. Similarly for a SME, the transaction data can be used to speed up an application for a business loan. These customer-facing applications are powered by Application Programming Interfaces (APIs) which integrate with customer data to derive these personalised services set to re-energise the personal banking industry; whether that be peer-to-peer transfers, automated payments, account aggregation and so forth.
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With countless opportunities for revenue growth, it is inevitable that everyone from banks to fintechs to tech giants have entered the race to launch digital initiatives with the hope they can reap the rewards of a more optimised customer journey. That being said, the large majority of these initiatives are currently failing to deliver the anticipated revenue growth.
The inability of banks and fintechs alike to monetise their innovation is eroding away at their bottom line and in effect constraining them from funding future initiatives. There are in particular 5 lessons these organisations can learn from in order to help turn around their track record before the slice of pie available in open banking diminishes. These consist of:
- Product features
- Product offering
- Behavioural mechanisms
- Value selling
This is about knowing what your clients want and identifying the key features that are going to attract them to your products. This can be found primarily through customer research to highlight what customers think of your current products and flag any pain points that you should consider revising. From a customer perspective they want the product to have direction but also innovation. By direction, there must be a clear benefit from using the service however the product must be innovative enough to draw customers in the first place.
An example of such an initiative is the rollout of card-less ATMs by Wells Fargo. They have now equipped over 5,000 of their ATMs with NFC capability which will allow customers to access their accounts using their mobile wallet i.e. without the need for the physical card. Customers can immediately see the benefit of 24/7 (phone battery dependent) access to your accounts without the constraint of a physical card but can also appreciate the innovative concept orchestrating the initiative. This project has also materialised into success with competitors Bank of America and Chase both launching similar ATMs ever since.
This encompasses choosing how features are packaged together and how to differentiate your offerings within the market. This can be done through effective customer segmentation to identify what different customer types value most and help streamline the final packages offered to clients. This will also prevent banks ending up with hyper-fragmented product suites that are difficult to pitch to customers.
Another thing to consider in terms of product offering is collaboration; in particular there are 2 types of collaboration that banks and TPPs could be targeting. One sense of collaboration is between banks and fintechs alike. A bank could leverage its size to attract innovative fintechs to offer their technology on the bank’s platform. Not only does the fintech benefit from the larger customer base, but also the bank has direct access to innovation that is not constrained by the inefficient legacy systems that many older financial institutions are lumbered with. Tech giants can also offer an alternative partnership prospect for third party providers with similar if not even more extensive customer bases to build upon as well as significantly less regulatory constraints. They also have significantly higher average NPS scores (Amazon and Apple score above 60) which further adds to the appeal.
The second way banks and fintechs could collaborate is through companies outside of the finance industry e.g. retail. For example they could offer loyalty schemes that are directly related to individual stores/restaurants. This has already been implemented as of 2018 by London-based fintech firm Flux who offer Monzo and Starling Bank customers a range of digital rewards and cashback offers when shopping at Costa Coffee, Eat, Itsu etc. The pilot-scheme is however still in too early of a phase to truly judge its effectiveness. The key thing for banks and third parties to consider if going down this route however is the quality of partnerships they make. Customer analysis is essential to ensure any alliances are relevant and attractive to the composition of your current and forecasted customer base.
This involves using tried and tested psychological techniques proven to improve customer rates of attraction, conversion and retention. A lot of these stem from behavioural economics and our incessant gravitation towards irrational behaviour and is definitely something that banks and TPPs can capitalise on when marketing their products. An example of such a technique is product ordering. Let’s imagine that a bank offers 2 savings accounts: a basic option and a premium option. Now let’s say that they currently display their basic product first and their premium product second. By simply reversing the order so that the premium option is first would usually cause an expected increase in sales of both accounts. The reason behind this is that instead of the client anchoring their decision on the price of the basic account, they are now anchoring their decision on the value of the premium account. Simple adjustments to product and marketing strategies like this can be cost-efficient but effective in further expanding your customer base.
This is effectively communicating the value of using your product over any competitors. At the heart of this lies a solid, coherent sales team. With the rollout of open banking, it is inevitable that the product suites offered by banks and third parties will become more and more fragmented, simply due to the sheer volume of products on offer. As a result the sales team play a pivotal role in compiling information across all products and personalising their sales approach for a given customer or customer segment. For example an older bracket of customers might be less interested in a gamified feature of the app than a slightly younger customer.
One method solely banks can use to differentiate themselves over smaller TPPs is their high street presence. Banks can offer an unparalleled physical presence to customers who prefer face-to-face encounters or like the option to do so on the chance there are technical issues. By leveraging their extensive branch networks, banks can create space for increased margins as they compete on value rather than price.
Most likely a contributing if not leading cause of failure of recent digital initiatives has been sup-optimal pricing. The heavy investment into research and development to generate innovative ideas and APIs is continually thwarted by the inability of banks and TPPs to correctly monetise their final products. As a result these initiatives are becoming less and less attractive from a feasibility standpoint and in the end consumers are being disserviced by the lack of access to market-shaping innovation. At the same time, incumbents are losing market share as fintechs ramp up their pace of innovation.
The first pricing decision to be made is the trade-off between direct and indirect monetisation. This dictates how the banks will generate revenue in practice. Direct monetisation is when fees are charged for the direct use of the API. For example a bank might charge for API licences which vary on a time or volume basis. As the market for APIs becomes increasingly saturated, you can imagine the rate at which price competition will grow. As a result direct monetisation is rarely the best choice as it promotes undercutting and eventually gives rise to a ‘race to the bottom’ environment.
On the other hand indirect monetisation is where banks for instance charge a commission on business that TPPs gain via the API. As a result the banks are in effect indirectly investing into the 3rd party as their revenue is dependent on their success. This will make them much more selective in the partnerships they sign up to which could increase overall customer experience.
Once you have decided on a direct, indirect or combination of the two pricing strategies, the problem lies in setting specific price levels to in effect monetise this innovation and make it sustainable.
This choice will rest heavily on what type of digital initiative is in question. For example, currently fintechs are making significant headwind in the payments sector. TransferWise and Revolut are chipping away at the market share dominated by high street banks in the UK and similarly in the US, apps such as Venmo and Square’s Cash app are exceeding customer bases of over 30 million each. With payments being a generally low margin industry, firms might decide to set their prices low instead of in line with profit maximisation; the reasoning behind this being the hope that the customers you attract through these low offers then purchase other higher-margin products e.g. loans, mortgages etc.
The main takeaway from this being that there is no single optimal price strategy for the wave of digital initiatives being rolled out across the banking sector. Extensive customer research needs to be conducted to ensure prices fit the expectations of customers as well as remain competitive within the market.