Banks need to question their current discount processes in order to optimize their pricing and increase their margins. Clever software provides the transparency needed for efficient profitability management and enables banks to build and strengthen their client relationships.
The industry clearly has a problem: Banks’ gross margins have fallen sharply in recent years. On average, margins have decreased by between 10 and 20 percent. In reaction to this troubling development, universal and private banks have been examining and optimizing their pricing strategies. They have focused in particular on list prices in order to compensate for narrowing margins.
Admittedly, these pricing measures have had rapid, positive effects. However, the sustainability of these actions remains highly uncertain. The constant price increases of recent years seem to have reached the limit of what clients are able to tolerate. We are observing that ever more clients are emphatically demanding substantial discounts on rising list prices - especially in the private banking sector.
These new pricing measures are having a considerable impact on many relationship managers’ day-to-day business, as they have to conduct time-consuming negotiations with their clients on a regular basis. Moreover, the current situation is exacerbated by the fact that only a few banks have systematically adapted their discount management processes. In some cases, banks have shown an incredible amount of creativity in developing unconventional but unsustainable measures to retain clients who have been bothered by the list price increases.
Banks face a serious lack of structure, transparency, and control in discount management
Although universal banks and leading private banks have professional pricing teams that have been working actively on strategy and pricing issues in recent years, there remains much to be done in regard to discount management.
The discount policy of some private financial institutions is so complex and chaotic that no one is able to understand and follow it properly. This is coupled with a critical lack of effective monitoring tools, which would allow management to ensure adherence to the guidelines. Obviously, even the best rules are useless if they are constantly being broken.
There are several severe implications of guidelines not being followed: First, it limits the potential benefit of systematic management and causes costs to rise. Second, the likelihood that future regulatory requirements, such as FinIA or MiFID II, will be violated increases. While the current discount practices are not dramatically different from the previous pricing practices, there is a stark contrast between the new requirement for transparency in asset management mandates and the existing non-transparent discount practices, resulting in a situation where clients receive unequal treatment. In the near future, acceptance of this difference in treatment could come to an end.
Good discount management brings legal certainty and higher margins
The introduction of clearly structured discount and pricing guidelines as well as functioning control mechanisms will not only ensure legal certainty, first and foremost, they will make it possible to tap the significant margin potential of discount management.
The figures are clear-cut: Currently, 20 to 30 percent of clients of private financial institutions benefit from relatively generous discounts. At the same time, some banks struggle to enforce more than half of their list prices.
Professional, effective profitability management can only be achieved with transparent processes. Discount and pricing processes must be systematically assessed using key performance indicators. Along with clearly defined list prices, it is essential to establish clear and stringent discount rules.
Digitization allows greater transparency, factual accuracy, and security
The pricing specialists Simon-Kucher & Partners have developed “Price Pro”, an intranet tool that simplifies the discount management process considerably. This tool maps the client as a whole and allows users to make detailed analyses of the entire business relationship. Instead of offering purely product-related discounts, as is currently the case, Price Pro makes it possible to set a general discount policy, taking into account all aspects of the relationship.
Cross-product simulations provide bankers and managers with information on how different discount models will affect a client’s key figures – and ultimately, the bank revenues. The simulation results allow the bank to set clear objectives and limits, such as a target ROA for each client or a red line for the total discount granted that must not be crossed.
In addition, the software offers a peer pricing system that can be installed on the client side. Using internal comparisons, it is possible to identify the most important drivers of profitability, spot deviations from the norm, and determine where there is untapped potential for increasing profitability. Furthermore, the comprehensive data analysis provides client advisors with valuable fact-based arguments for (discount) negotiations with the client.
To ensure maximum security against manipulation and a consistent workflow throughout the decision-making process, the user interface of the tool is completely standardized. This means that client advisors cannot enter free text, they can only select from the options defined in the dropdown menu. The system is currently being used at five banks, representing a total of approximately 2,500 users.
More efficient profitability management strengthens the client relationship
Transparency over each client relationship creates space for sustainable development. Unprofitable clients can be detected, new ones correctly placed right from the start, and complex existing client relationships analyzed and readjusted. New up- and cross-selling opportunities are found via the data analysis and the improved general overview. Relationship managers can then offer supplementary offers in line with the client’s specific needs and individual product portfolio.
This innovation is highly beneficial for the client, as it provides greater transparency. The modern client is familiar with CRM systems, which are now used in almost every industry. Clients particularly appreciate that their personal representative is informed instantaneously about their previous interactions and the current overall status of the business relationship. Managing profitability more efficiently strengthens client loyalty and deepens the trust they have in the existing business relationship.