Swiss bank prices are high in absolute terms. While Switzerland’s retail banking market remains relatively isolated from foreign competition, the private banking industry is feeling the pressure from the lower prices offered by its European counterparts. It’s not uncommon to see price differences of up to 50% – and even experienced Swiss bankers are finding it difficult to use the more stable economic, financial and monetary environment to justify this price premium.
In the medium term, Swiss banks will be forced to reduce their list prices – especially as list prices have been systematically and continuously increased over the past few years, thus continuing to widen the price gap with the European competition.
Prices have moved in only one direction in the financial sector over the last decades, which means that the industry has little experience with profitable price cuts. It’s therefore worth taking a look at other industries for examples. How can list prices be reduced without impacting profitability?
The Saas-Fee ski resort’s decision in autumn 2016 to offer their season card for CHF 222 rather than CHF 1,050 garnered widespread media attention – with commentators calling it everything from courageous to foolhardy. At the end of the season, the result was overwhelmingly positive: Saastal Bergbahnen AG increased its revenue by 30% from CHF 22.3 million to CHF 29 million. It sold over 100,000 WinterCard subscriptions and saw a total rise in ski days of approximately 50%. Hotels and restaurants also benefited from this measure (+15% overnight stays), which is difficult to quantify in hard numbers.
Saas-Fee thus offers a prime example of how a price cut can significantly boost revenue. However, this only works if the price cut results in a disproportionate increase in sales volumes. In the above example, a strategically launched and marketed average price cut of around 13% led to a 50% higher utilisation rate (although the cost of season ticket was reduced by 80%, only a small proportion of users originally paid this price - meaning the real average price reduction is much lower).
Can this example be applied in the banking sector? Could a bank increase securities transaction volumes by 50% if it lowered prices by 15%? Or would lowering interest rates by 15% increase mortgage volumes by 50%? Numerous pricing projects at banks, market research and price experiments have shown us that prices in the banking sector are not so elastic. In addition, most banks do not enjoy a unique market position like Saas-Fee. So, if an institution gains significant market share, competitors will lower their prices pretty quickly in response. If this happens, the price cut won't increase industry revenues – it will lead to a price war. Indiscriminate price cuts are therefore out of the question: a more innovative approach is required.
So what measures could be effective in the banking industry?
• Portfolio price optimisation: The automotive industry offers a promising example here. Mercedes-Benz has a tried-and-tested strategy to boost revenue by decreasing prices: it reduces the prices of the premium S-class and E-class models and keeps C-class prices constant. This narrows the difference in price between the E-/S-class and the C-class, enabling an upselling strategy that increases average revenue per vehicle across all series and thus boosts overall revenue. In the investment business, as the self-directed, advisory and discretionary services offer a similar structure to the car manufacturers, banks could lower their prices for advisory mandates and, in particular, discretionary mandates. This would then help to upsell clients from the self-directed offer and have a similar effect, i.e. an increase in revenue despite a decrease in prices. This strategy would work particularly well for banks that still have a significant proportion of their clients in this “non-managed” space. If they follow this approach, we believe that banks should consider repositioning their entry-level discretionary offering to a price point below their advisory mandates. Banks could then advise clients more profitably, as the “production costs” of discretionary mandates are far lower than those of advisory mandates. Clients would benefit from more attractive prices and thus improved performance, which could significantly lower the entry barrier.
• Reduction of discounts: In private banking, it’s common for some clients to pay the list price while others benefit from discounted rates. Interestingly, this discrepancy means that if a bank were to reduce its list price by 10%, it would only need to make up for a revenue decrease of between 4% and 6%. Why? Because clients who already pay less than 90% of the list price would not benefit from the price cut; clients who pay between 90% and 100% would get some benefit from it; and only clients who actually pay the current list price would receive the full 10% reduction. Banks could thus completely offset the lower list price by offering less generous discounts. Here, the break-even between the scope of the list price reduction and the change in concessions (at a constant revenue) would largely depend on the discounting structure at the given institution.
Implementing a stricter and more sophisticated discount management is becoming an increasingly common industry approach anyhow. Profits are on the decline in private banking and banks require a minimum revenue of CHF 15,000 to CHF 20,000 per client to make the relationship profitable. As a result, many institutions are no longer offering any discounts for clients below a given threshold, such as CHF 2 million. Even wealthier clients with assets of between CHF 2 million and CHF 5 million are encountering tighter restrictions. If banks decide to adjust their discount management, it’s important that they are cautious but specific: clear rules, a clear timetable and thorough training for client advisors on how to negotiate prices are essential if the strategy is to be successful.
• Differentiation between new and existing clients: In the telecommunications industry, a price cut usually involves the introduction of new tariffs: new clients benefit from new prices while existing clients are not actively migrated. For this to work, the new products must differ from the existing ones. Private banks could apply this strategy for new digital solutions for discretionary services – as M.M. Warburg and UBS recently did in Germany.
We believe that list prices in the Swiss banking industry have peaked. It will become increasingly difficult to boost revenue by simply raising prices, as any benefits from these rises are being increasingly neutralised by more and higher discounts. We therefore anticipate a clear trend towards list price reductions in the years ahead. To prevent this from impacting revenues, banks need to consider their prices in the context of upselling and cross-selling opportunities rather than in isolation. In other words, the days of traditional price management are over. The key to success lies in a holistic sales and revenue management strategy. Banks that have already implemented this approach have increased their revenues by 20% – 40% in five years – funds that can then go some way towards offsetting the reduction in list prices.