How Relationships Help Banks Revive In Post-Covid Days

Banks worldwide continue to grapple with the business pressures arising on account of the pandemic. According to Bloomberg's 2021 Central Bank Guide, central banks are likely to continue with relaxed policies and lowered interest rates in 2021 in response to the Covid-19 related slowdown. While no European or American bank is expected to increase interest rates, central banks in India, Mexico, China, and Russia are expected to further lower their rates. 

Even before the pandemic, banks were already operating in a complex market characterized by increasing competition from fintech and technology giants, eroding customer loyalty, and increasingly stringent regulatory frameworks. Now, they must also contend with lowered interest rates and the possibility of loan defaults, reduced lending, and significantly lowered payment transaction volumes, thanks to the pandemic. Between 2020 and 2024 they are expected to lose $1.5 trillion to $4.7 trillion in cumulative revenues. As their revenues and profitability take a hit, banks must fast-rack their digital transformation efforts and take a second look at their pricing strategies to maximize revenue generation. 

Most traditional banks followed a flat pricing structure, or at best leveraged simple customer clusters like geography as a basis for their pricing strategies. But the uberization of services has left no sector untouched, banking included. No longer content to be relegated to the periphery of the banking system, modern customers expect a far greater degree of personalization when pricing. And they are not afraid to shift loyalties if their expectations are not met. At this juncture, when the macro environment is fraught with risks, banks must focus on a customer-centric revamp of their pricing approaches. Effective pricing of services is directly proportional to top-line growth, and research shows that even a 10 per cent increase in price can increase profits by 25 per cent.  

Data holds the key to effective pricing

Despite the challenges facing traditional banks, they still have a few key advantages. After decades of operations, most traditional banks now have an incredibly vast and deep repository of customer data. This is an invaluable asset for banks trying to move to more customer-centric models. Customer data forms the basis for smarter and more effective pricing strategies. 

Relationship-based pricing models put the customer at the heart of the business. By analyzing data across touchpoints, these models provide a holistic insight into the customer relationship and a deeper understanding of customer engagement across the system. This then forms the basis of a value-driven, focused, and customer-centric pricing strategy. 

For example, a bank can base its pricing on a combination of different parameters such as the overall business relationship, the type of services available, and even ancillary services that may prove beneficial to the customer. A centralized relationship-based pricing framework also helps financial institutions navigate internal organizational hurdles such as product or information silos. It can also help identify and develop new innovative products and revenue streams and optimize the true profit potential of their digital channels.

Cementing customer relationships

Traditional banks still enjoy significant customer trust. And an effective relationship-based pricing strategy can help banks build on this to drive greater loyalty and satisfaction. After all, the cost of acquiring a new customer is far greater than the cost of retaining an existing one. A greater understanding of customer engagement and behavior will help banks create focused bundling options, hyper-personalised offers, and value-added services. They can reward customers for loyalty with attractive offers and even offer prices proportional to the customer's potential to generate revenue. An effective relationship-based system must even be able to automatically detect a change in the customer lifecycle stage or commitment level and re-price the transactions as per established rules. Customer loyalty and retention are crucial to survival, and even growth in the current market context and relationship-based pricing models are essential for driving greater loyalty. 

The technology foundation for relationship-based pricing

Of course, such pricing strategies need a solid technology foundation to be implemented. If banks are to leverage their data to refine their pricing approaches fully, then they must consider adopting advanced data analytics platforms, and artificial intelligence powered solutions. 

Legacy banking core infrastructure cannot support such cutting-edge technology. And modernizing the core is not only time and cost-intensive but also risky given the vast amount of sensitive data it holds and the stringent regulatory environment that banks operate within. 

Banks can consider deploying middle layer platforms that can sit on top of their legacy cores and support advanced analytics platforms, as well as products that can automate pricing processes. With effective pricing solutions, banks can create contextual strategies and models, improve governance, and enhance revenue generation. By automating pricing processes, such solutions can help drive better agility and manageability and ensure seamless auditing. 

The current financial market situation is not as dire as it was during the recession of 2008. But it is still serious enough for the banking sector to consider alternative and more effective revenue generation models. Now is the time to make the transition to a technology-powered customer-centric business model. While most traditional banks have already embarked on their digital transformation journeys, they must now speed up technology adoption to enable relationship-based pricing strategies. A greater connection with customers via hyper-personalized offerings and deeper customer loyalty are the keys to a faster recovery in the post Covid-19 era. 

The author is CEO and Founder of Suntec Business Solutions