In today’s increasingly competitive market, banks are trying to attract new customers by turning to price dumping policies or offering attractive incentives. But is a purely price-driven strategy for winning new customers the key to success? Our international project experience has taught us that only banks that tailor their offerings to customers’ needs and successfully communicate value can achieve sustainable growth.
Myth 1: Price dumping policies for current accounts are a path to growth
With increased competition from open-banking platforms following the EU’s adoption of its second Payment Services Directive (PSD2), commentators believe banks will no longer be able to earn money from current accounts. This view is strengthened by the observation that many online banks are competing with free accounts as part of their offering. Moreover, it is believed that bank customers are deemed to be so price sensitive regarding current accounts that charging any fee whatsoever would apparently make them switch to another provider.
However, closer inspection of the banking sector tells a different story. Although it is becoming easier to switch banks and change account types, customers aren’t particularly enthusiastic about banking products and are, therefore, resistant to the idea of switching. For example, in the Austrian banking market, around 10 percent of customers say they are considering switching providers, but only two percent are actually likely to do so. The chances of acquiring new customers are actually quite limited, and customer growth is often well below expectations.
Resorting to price dumping to attract customers just isn’t effective. For example, if a bank lowers by 10 percent the price of a product that has a gross margin of 20 percent, it would need to sell twice as many units to maintain stable profit levels. Permanently capturing such a large share of the already limited “bank switcher” segment is very unrealistic. This is especially true for branch-based banks, as they can’t keep up with online banks in the race to offer the lowest prices simply due to their cost structure. If they try, there is usually a huge red minus at the bottom of their business case.
With the rather low profit expectations from current accounts, many banks are trying to shift their revenue streams by indirectly monetizing accounts through the cross-selling of other banking products. However, banks rarely succeed in making up for the lack of income from current accounts with this approach because they don’t have the targeted sales measures required to persuade customers to purchase other banking products.
Myth 2: “Bait offers” can help make gains in profitable market share
Branch banks are increasingly using attractive “bait offers,” such as cash incentives, to win over new customers in the fiercely competitive market. However, this form of customer advertising predominantly attracts “bargain hunters,” who often move on after receiving their premiums or incentives. What remains are many unused accounts that incur administrative costs and, in the worst case scenario, generate no revenue and build no meaningful customer relationships.
For online banks that started attracting new customers via bait offers, it is not uncommon for 15 percent of their current accounts to be dormant or even 40 percent of their securities accounts to have no customer activity at all. Bait offers aren’t sustainable because they don’t actually help banks win market share from major players. Instead, they end up generating additional unprofitable market volume.
An alternative approach involves luring customers with inexpensive showcase products and then selling them higher-quality products through targeted upselling. However, this strategy is usually unsuccessful, as banks often fail to encourage enough customers to purchase their revenue-generating products. Banks typically lack clearly differentiated product offerings with upselling paths that are easily understood by customers. The financial institutions must understand the needs and value of different customers groups in order to properly tailor their product range to match the willingness to pay of various customer segments. Successfully communicating value helps customers fully grasp the benefits of the services banks provide and supports the process of approaching new customers by means of value-selling sales tools like product finders.
Myth 3: Banking products are commodities and should be free
“What costs nothing is worth nothing!” This German proverb perfectly captures how pricing can affect consumer behavior on many levels. Why should this be any different when choosing banking products? Consumers often see financial products, particularly current accounts, as commodities.
However, there are even significant differences in how customers perceive commodities in terms of value and willingness to pay. Take the example of water, the most basic commodity. While most people drink tap water that costs less than one cent per liter, some consumers are willing to pay up to 10,000 times that amount. How can something be sold at such a high price when customers can basically have it for free
The key to success for this example: Package the water in an appealing bottle, and list its special characteristics on the label, such as the fact that it is sourced from crystal-clear Norwegian glaciers. This way, the supplier is no longer selling the commodity, but rather an exclusive lifestyle and experience. This strategy not only works for water, it can also be applied to almost all commodities – and even banking products.
Profitable customer growth is possible through services, not price
Despite a more competitive market, the arrival of PSD2, and increasingly simple mechanisms to switch banks or accounts, customers are still resistant to switching, making the market for “bank switchers” very limited. The question remains whether a clear focus on growth is beneficial and, moreover, whether a price-driven growth strategy is the key to success in winning new customers. The latter implies that bank customers are fundamentally very price sensitive. However, our experience shows that customers’ price sensitivity is, in fact, very low, especially if a bank doesn’t have any free accounts in their offering. These banks succeed in attracting and retaining their customers through features other than price, such as consulting services, transparency, or user experience.
In order to acquire new customers, banks must focus on the value-added services and features they provide, not on price. They must tailor their offering to customers’ needs and successfully communicate value to achieve sustainable growth, regardless of the market conditions.