Increased competition and rising costs are forcing private banks globally and in Asia to focus more on profitability and less on volume growth. In an evolving and competitive landscape, innovation will require smart pricing strategies to protect margins, as the effect of pure price adjustment is limited. Maximising profitability all comes down to improving management of individual client conditions through more effective pricing, discounting practices and negotiation approaches.
Examine pricing strategy and organisational structure
Asian banks often neglect to properly manage pricing strategy, as their organisational structures don’t tackle this topic systematically. European institutions typically have dedicated pricing teams to drive group-wide pricing and discounting strategy. However, this is not the case everywhere. Whilst local subsidiaries of large Swiss players have their own pricing teams, regional private banks are mainly just starting to professionalise their pricing.
Every private bank should ask itself whether it is managing pricing in a professional manner. Is the bank using pricing software and refined reports to get the most out of individual client accounts or are discounts simply granted on a trade-by-trade basis? Transparency is crucial for a healthy top-line.
Price for value and clients’ needs
The biggest challenge in pricing is being able to charge according to clients’ needs and value added. Price setting in private banking has been more focused on benchmarks and less on client value. As a clear relationship between services delivered and pricing is the core of monetisation, banks need to clearly communicate the value of services to their clients. Hardly any banks does this well, which leaves considerable room for improvement.
Other global industries tend to perform better at pricing value than banks do. For example, companies in the airline industry only invest in improving quality when customer value is involved. They monetise the value added and communicate it properly.
Shift to relationship discounting
Unstructured discounts are frequently granted by banks without adequately considering overall revenue margins or total client revenues. Inefficient discounting processes and a dominant price-selling culture give rise to substantial revenue leakage. The industry is currently moving away from product-based logic in favour of relationship discounting logic. This requires a high degree of transparency in terms of client profitability, which is compatible with the Treating Customers Fairly regulation centred on providing justifiable discounts based on objective criteria. Banks segment clients into groups according to their size or revenue contribution to better align discount policies with overall strategy. A written confirmation of agreed client discounts and concessions will become standard practice in APAC in the near future.
Moreover, discounting practices vary between markets. When large global banks roll out their pricing strategies in APAC subsidiaries, they need to adapt to the local context if they want their strategy to be effective. Asian clients are typically more focused on trading fees and interest products, whilst recurring fees are more predominant in Europe. These factors have to be considered when launching new discount tools or policies. Private banking clients have more banking relationships in Europe, which makes it easier for them to compare prices.
Improve negotiation capabilities and redesign compensation schemes
Relationship managers’ (RMs) negotiation skills are becoming more essential. As regulations make pricing more transparent and the number of family offices and external asset managers in Asia grows, it has become easier for clients to compare and negotiate fees. Whereas banks have been involving professional negotiators on the buy side for many years, the RM side is not as well managed.
Unlike clients, who often have an entrepreneurial background, RMs’ core capabilities are not focused on negotiation. Banks must support their front office with professional negotiation training to ultimately increase profitability. Price psychology is an important consideration in RM training. The way an RM ‘nudges’ clients during the interaction process has a significant impact on the outcome.
Lastly, compensation structure is relevant for growing profitability. RMs have been encouraged to focus on growth in assets or revenues. There needs to be a clearer link between compensation and profitability, which can be achieved by incorporating more refined compensation schemes.
Price setting with a focus on client value, systematic discount practices and skilful negotiation can make all the difference and ultimately increase a bank’s profitability.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Dr. Silvio Struebi is a partner in Simon-Kucher & Partners and he is part of the Global Banking Practice and heads the company's banking operations in APAC, with a special focus on international private banking and B2B banking.
Silvio has more than ten years of consulting experience and advises a broad array of local and global financial institutions on topics, ranging from monetisation and product management to market-specific implementation of growth strategies. Prior to focusing on the APAC region, Silvio served retail and private banks and asset managers in Switzerland and Europe.