Banks haven’t always made pricing a priority. While analytically-driven pricing can offer outsized returns in both profitability and risk management, many lenders have been daunted by the need for advanced analytics and sophisticated deployment systems. They may no longer have a choice.
A must-have – Greater sophistication in pricing and analytics methodologies and processes
Between impending regulation from the EBA and encroaching competition from forward-thinking lenders and fintechs, banks can no longer afford to drag their feet. The EBA has recently mandated the implementation of pricing that accounts for both fairness to borrowers as well as granular, analytical views on long-term profitability and risk management for the lender. We have written about this in the past, and – though very achievable – it is no simple task. Along with the heat of increased regulations, banks must also contend with agile, techy-savvy competition coming from both fintechs as well as other banks. While this general trend is nothing new, open banking has created a treasure trove of data, accelerating the process rapidly. Those banks who don’t have the infrastructure and know-how to take advantage of this data will be at a clear disadvantage.
The good news is that an early investment in pricing will yield rewards that steadily increase for years to come. There is of course an immediate lift in profitability, as better-understood borrowers respond with increased demand and profitability. But as time goes by, banks will also realize the benefits of more agile responses to competition and more precise measurement of risk reserving requirements. Pricing technology can drive not just profit and demand, but also increased market share and capital available for lending.
An urgency – Advanced pricing
When talking to lenders about pricing, they are quick to acknowledge its power. But when you ask about their own plans, the answers are vague and non-committal. Pressure from the EBA, open banking and tech-forward competitors who are already updating their pricing strategies in real-time over digital channels for instance, have definitely created an urgency for more concrete and immediate plans. As this arms race kicks off in earnest, banks have two choices – get ahead of their competitors and reap increased market share and profitability, or let others lead the charge and struggle to play catch-up.
One of the lessons customers have learned from the pandemic is that they no longer need to travel to a bank branch and push papers back and forth to buy a car, take out a mortgage or simply subscribe to a personal loan and/or credit facility. However, the banks that will win the business of these customers are those who are also able to personalize these digital transactions. While moving money back and forth is a straightforward exchange of data, banks need sophisticated artificial intelligence to personalize offers, offer pre-approved alternatives, and understand relationship-level profitability. And this artificial intelligence requires a dynamic view of the data and the customer. Customers demand more than just digitized banking, they demand personalized banking – delivered digitally.
The more forward-looking knowledge the bank can gather, the better it can support both, its customers and business. As customer demands evolve, it is an urgent priority for lenders to analyze the potential and predict the performance of their portfolio, by constantly updating and monitoring industry trends and borrowers’ behavior through their pricing strategies.
Advance analytics are critical and a key success factor in your pricing methodologies and strategies, to detect good credit before it is too late and optimize your conversion ratio over digital channels, while remaining profitable without compromising on risk.
Open Banking opens the data floodgates
When a new resource becomes available, it represents both an opportunity (for those banks who take advantage of it) and a threat (for those banks who lag behind). Open Banking fits this mold perfectly. The implementation of Open Banking will make customer-level data available to banks with a scale and clarity that was previously unavailable. Banks will have at their fingertips the kind of information that could enable truly customer-centric pricing and personalization. This will be a gold mine for some, but it also kicks off an arms race.
We are already seeing several European banks taking advantage of these opportunities. HSBC and Barclays have introduced apps that aggregate customer accounts across not only products, but also across multiple financial systems. And BBVA’s ‘Open Platform’ leverages APIs to channel third-party offers directly to BBVA customers.
Likewise, Open Banking allows for deep and instantaneous evaluations of credit history. This offers advantages both to the customer (for whom the traditional process is often slow and painful) as well as the lender (who can make quicker assessments and ultimately, sales). Fintechs such as Klarna and Afterpay are leading the way in this use case but can provide a useful blueprint for how banks could also leverage this rapid credit decisioning for a smoother and more personalized customer experience.
Customer-centric product offerings have been a goal for many years, and for good reason. Financial products are a critically important piece of everyday life – mortgages and marriages are two of the biggest commitments a person can make. However, customers face a dizzying array of products to choose from and rely heavily on the recommendations of the experts. The bank that makes the customer feel understood is going to win business and loyalty, while the bank that presents generic offerings to everyone is going to lose both business and relationships. The data provided by Open Banking means that this personalization is now a reality for those who are positioned to take advantage of it, and that we will quickly come to see both winners and losers in the race to relate to customers.
The key to success – An end-to-end platform supporting advanced pricing and analytics methodologies
Moving to greater pricing sophistication is not an option for financial institutions, but mandatory to survive. With Open Banking, the advantage will now come from being able to use this data to own the customer relationship, so the bank can better understand customers’ needs and make more refined credit assessments. In this environment banks will need to ensure they have an integrated and innovative framework supporting pricing and analytics.
Earnix provides the end-to-end platform and technology to support advanced pricing and analytics methodologies in real-time, leveraging AI and machine learning techniques, supporting the teams in their analytical decision making with predictive and prescriptive analytics, enabling the banks to govern and deploy swiftly at any time its avant-garde pricing strategy.
Moreover, Earnix is a fully integrated end-to-end platform that operationalizes sophisticated pricing and analytics methodologies as well as provides full governance, control and traceability across the entire processes (i.e. Data, model, business assumptions etc.), enabling in respect of fair lending and consumer protection requirements for instance, to justify and report to internal and external authorities why this price, at this time, for this customer.
The next question is timing. The short answer is “now before it is too late.” Leading and innovative financial institutions will see and take these requirements and recommendations as an immediate perfect opportunity to revisit their pricing methodologies and processes to, not only and simply comply with authorities, but take a significant competitive edge and leap significant rewards, while others will prefer to wait and watch how their innovative competitors are grasping precious market shares, acquiring good credit quality and presenting strong and reliable financial reports.