Pricing in Payments: loss of hope or new dawn22 January 2013 by Ben Snowman
Much has been said about declining margins across the payments industry. Whether retail, commercial or corporate - and regardless of payment instrument - the industry is facing a squeeze. In the UK, credit card issuance has declined, as has outstanding debt. Current accounts (retail and commercial), which are at the foundation of money transmission, face growing pressures to source new revenue streams in light of regulatory reforms. Revenues for corporate payments are also declining as a result of price compression. A mixture of market forces, regulatory intervention and confidence are all contributing to this decline in profitability. Pricing is an underused lever which can counteract these declines in profit, both in the short term and long term. This is something that the payments industry has yet to embrace fully.
Our research in late 2011 demonstrated that the payments industry failed to price for the value delivered to customers. This means that payments companies were failing to tap into the full willingness to pay for their products and services. Customers would have paid higher prices but, for a number of reasons, payments companies were under selling themselves. In fact, this theme of value based pricing was cited as being the least effective area of pricing 'performance' by respondents from the 60+ participating payments companies.
In the immediate term, revenues can be made by marginally raising price levels for certain product / segment / geography combinations. The level of 'marginality' must be determined through a stringent analytical approach to ensure that any decline in volume is overcompensated for by an uplift in profit. Typically, this approach can boost profits from the optimised portfolio by up to 20%. However, longer term strategic price management can require changes to the overall price model. This starts with the detailed analysis and reconstruction of the customer value proposition which subsequently informs the design of a new price model (grouping of components and price metrics with new price levels). Such strategic price model development tends to takes longer to implement but yields higher revenue gains. Revenues are improved from core services and cross-sales of additional services - payments companies benefit from deeper customer relationships as well as improved profits.
In the case of innovation, it is essential to price for value from the outset - rather than contaminate the profit potential of investment-heavy technologies. Some banks are exploring pricing schemes for mobile payments. In North America, US Bank charges $0.50 for Remote Deposit Capture and GoBank (from Green Dot) is trialling its new mobile banking service and testing price levels. O2, in the UK, charge for payments from their mobile wallet.
Embracing price management can offer substantial profit gains in the short term and long term. We are researching the topic once again and invite payments practitioners to share their views through our 10 minute survey. We seek the 'voice of the industry' so the thoughts of pricing AND non-pricing payments practitioners at all level of seniority counts. Your contribution will remain anonymous (neither your name nor the name of your company will be revealed).
You can access the survey here
Ben Snowman is a director in the banking division in London at Simon-Kucher & Partners, the global strategy, marketing, sales and pricing consultancy.
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