Chief Investment Officer
Commercial Loan Automation
We are caught yet again in the usual quandary: grow the business but without compromising pricing discipline. Slowly but surely the drive for growth takes over, and we start chipping at our pricing while cutting costs to make up for the lost revenue. Is there another way out of this vicious circle?
Here are a few thoughts.
- Monitor exceptions in % and absolute dollars. Target maximum pricing discounts by line-of-business both in absolute dollars and as a % of total revenues of that LOB.
- Pay more attention to less price sensitive fees. Not all fees were created equal. Scrub your nuisance fees and less price sensitive products more often and more vigorously.
- Permanent waivers. Scrub all permanent waivers by LOB twice a year.
- Refunds. Target maximum fee refunds by LOB just like you do today for NSF fees and other retail fees.
- Price up the cost of manual processes and paper-intensive services. Some customers prefer manual or paper-intensive processes. This is their prerogative. However, we should charge for the value-add created as well as the incremental costs associated with the service. Not ALL these customers are high-value clients of the bank, despite what our people say. And even if they are, it’s only fair to charge for incremental work.
- Charge for all customized and value-add items, creating new price points. Similarly, some of our alleged best customers require customized services from us. This is especially true for commercial banking, wealth management and treasury management. There is no reason why we should not create a price list with new price points for highly customized services.
- Price by market. Not all markets are the same, even if they are geographically close. Especially when you have isolated geographies, it makes great sense to price loans up in the high rate markets and deposits up in the low rate markets.
- Tie incentives to pricing. It is amazing how effective incentives are in instilling pricing discipline among sales forces. Give the RM, TM sales person or wealth advisor a piece of the revenue created by beating a benchmark and they are far more likely to right for it.
- Identify rate exceptions by originator (RM, TM sales person, etc.). Some are better than others. Reward them, and discipline those who routinely take advantage of pricing leniency. Remind everyone that our job is not to transfer wealth from shareholders to customers through pricing breaks.
- Price more for all items controllable by the client. Customized work, or situations where the client opts for bank service instead of self-service, should be priced up to reflect the value. If the customer wishes to avoid the extra charge they can simply self-serve or opt for the automated, less costly service.
- Count as a sale any situation where exception pricing shifts to regular price. This will encourage your sales people to move exception-priced customers to market-priced ones. Again, giving them a stake in the customer profitability through direct personal benefit for improved pricing works.
- Use mystery shoppers to ascertain competitor pricing vs. rely on sales force. Knowing where the competition price is critical. Spend some resources on getting a good handle on the marketplace before you decide what your own pricing point is relative to the rest.
- Establish a one-year mandatory maximum on exception pricing. Exception pricing, much like permanent waivers, tends to become eternal. Limiting exceptions to one year allows the sales person to snag the deal, but also expects the RM to show the client the value-added provided by the bank such that pricing will become less of a motivator in the future.
- Control the exception pricing process. Have a senior manager authorize the exception and create limits around these exceptions to build more discipline on using these precious basis points to attract and retain customers.
- Normalize pricing during acquisitions, don’t grandfather. This is a tough one, but it’s often better to bite the bullet earlier rather than later. Circumstances vary, but using this as a guiding principle will save you much future agony.
Pricing discipline is almost an oxymoron. No matter how rigorous your pricing model is, ultimately price is almost always determined by the marketplace. These tips and others will help you manage more actively one-time decisions that become perennials, and ultimately grow your margin and fee income over time.