Revenues in transaction banking are starting to look less stable, and payment prices are declining. In the first of three in-depth reports, Ben Snowman, Jens Baumgarten and Georg Wübker look at price compression trends in GTS and ask whether there are opportunities to grow revenues through value based pricing
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Transaction banking has offered a stable source of predictable revenues during the recent years of turbulence. However, this is beginning to change. Price compression is a feature of todays transaction banking environment and every source of revenue is under threat. Low interest rates are reducing profits from spreads on cash balances; real time payments are reducing float; payment transaction prices are declining these are all signs of a commoditised service. In order to compete for new and profitable business, new services are also being developed and often given away for free, especially when it comes to self-service digital platforms (online and mobile). Transaction banks need:
- New, innovative means to protect existing levels of income
- To identify and monetise new revenue streams
Strategic price management is an unexplored lever that can deliver both of these objectives. This does not involve re-pricing existing products and services. Using price as a strategic lever requires a systematic approach to redefine the way pricing is conceived, designed and delivered.
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By GlobalDataThere are many approaches to pricing. Most commonly, transaction banks pro-rate the costs of their products based on usage and add a premium. This is cost-plus pricing. While price levels are highly transparent to clients, this approach propagates the commoditisation of services and ultimately leads to the decompression of price levels through complex and lengthy negotiations. This is what we see today. The second approach, often used to sanity check prices is me too pricing where price levels are set according to a market reference point, using competitor intelligence. This approach still leads to the commoditisation of services, albeit more slowly, and does not insulate banks from price level deflation. Value-based pricing, where products and services are designed to support specific client problems and communicated to align with client needs, is the most mature form of pricing. It is also the most sustainable and profitable.
The transition from cost-plus to value-based pricing has wide-reaching implications. Value-based pricing can have a radical impact on many areas of business operations (product, service, sales, IT, risk, compliance etc). In addition, value-based pricing requires a new mind-set and attitude. However, a simple and effective starting point is to develop a new pricing strategy which will form the foundation for the design of new price models. There are seven themes that transaction banks should consider when developing a value based pricing strategy. These are:
Think Solution: Transition from product silos and become a solution provider leverage the value of the entire service offering on a global basis and price based on value delivered to clients.
Think Flexibility: Develop a differentiated pricing model with numerous levers that can be flexed to accommodate different customer types, verticals, needs based segments, volume bands, geographies etc.
Think Transaction PLUS:Become less reliant on transaction fees and float and deliver revenues from other sources (e.g. minimum fees, service fees).
Think Monetise: Extract value from existing services by introducing additional pricing levers such as recurring fees for mandatory service packages. Identify opportunities to monetise services that are currently free.
Think Unique: Become less comparable with competitor offers, while maintaining a transparent/easy to understand pricing structure (e.g. through price bundling/packaging).
Think Relationship: Align deals towards customer needs and values demonstrate the value of partnership.
Think Loyalty: Increase customer commitment/loyalty through smart discounting, contract terms and mixed bundling.
Transforming the transaction bank
Value-based pricing ensures that a suppliers offering is structured and communicated to the market in such a way that the service offering aligns with the high priority needs of existing and prospective customers. By resisting the temptation to structure and sell products and services based on function and offer needs-based solutions, suppliers stand the best chances of:
- Insulating existing revenues
- Boosting income from sub-optimal parts of the portfolio
Beyond the pure economic gains, customer loyalty and advocacy is increased as the supplier/customer relationship becomes more sticky needs based price models inherently drive cross sales of value added services, thereby increasing the value delivered to customers.
Value-based pricing has yet to be fully embraced by the Transaction Banking industry, although there are some examples appearing in the market. From publicly available information, we know that HSBC offers subscription packages for online self-servicing. Equens offers SEPA packages encompassing payments and services. SEB offers channel-specific pricing as does Société Générale. But while many of the transaction banks make a point of communicating the value they offer, the full potential of value-based pricing has not yet reached the market.
Next steps
Designing a value-based pricing strategy is only the first step forward. Once the strategy is set, a new price model needs to be designed which can deliver the functional scope of the solutions to market. Communication of the price model to clients and negotiations while contracting are also essential actions that ensure the price strategy can be realised. These two phases of strategic price management, Price Setting and Price Implementation, are the subjects of two further articles.
Ben Snowman is Director of Financial Services in London, and Jens Baumgarten is Managing Partner of Financial Services in New York, at Simon-Kucher & Partners
