TowerGroup: Wholesale Bankers Should Explore ”Relationship-Based Pricing” to Improve Profitability

NEEDHAM, Mass.–(EMWNews)–In the wake of the subprime mortgage crisis, banks are facing

substantial profitability declines. US commercial bank net income fell

almost 40 percent from Q1 2007 to Q1 2008 . New research from TowerGroup

notes that current financial pressures underscore the importance of

setting prices for new and renewing business that provide banks with

sufficient profit, while still sustaining the customer relationship.

Too often, wholesale banking product pricing is either negotiated or

market-driven, with little attention paid to profitability. TowerGroup

believes that what it terms “relationship-based

profitability and pricing” solutions can help

a bank ensure that its pricing meets its profitability goals while

retaining valuable customers. TowerGroup defines relationship-based

profitability as the overall economic return (or loss) arising from a

customer’s use of various bank products or

services.

Banks face a number of challenges when constructing the “building

blocks” that support relationship-based

profitability and pricing – which include

account and transaction data, product and customer costs, credit quality

and risk profiles, loyalty assessments, and profitability and pricing

calculations. Without pursuing an approach that builds toward

relationship-based profitability, a bank has no assurance that its

pricing will adequately compensate it for supplying products and

services while providing customers with a price that rewards them for

their relationship with the bank.

As banks begin to address this need, best practices are emerging in the

areas of model development, customer management, and information

management. Ultimately, TowerGroup believes banks that implement

relationship-based profitability and pricing will establish the

foundation to provide one-to-one marketing for their business customers,

improve customer satisfaction, increase retention, and deepen product

cross-sell.

The TowerGroup research report titled “Commercial

and Small Business Banking in Troubled Times: Using Relationship-Based

Pricing for Growth” and a companion report

titled “Commercial and Small Business

Relationship-Based Profitability and Pricing: Putting it All Together,”

are authored by Patricia

Hines, research director for the Wholesale

Banking practice at TowerGroup.

To request a copy of the research reports or to arrange an interview

with Hines, please contact Thea Linscott at +1.917.595.3061 or [email protected].

Those interested in subscribing to a TowerGroup research service may

call +1.781.292.5200 or email [email protected].

Sign up for the bi-weekly newsletter, TowerGroup News, to stay informed

on the latest research and events. To learn more, visit: http://ui.constantcontact.com/d.jsp?m=1101074606706&p=oi.

About TowerGroup: TowerGroup is the leading research and advisory

services firm focused exclusively on the financial services industry. A

respected source for trusted information and advice, TowerGroup brings

many of the world’s leading financial

institutions, technology companies, and professional services firms a

deeper understanding of the business and technology issues impacting

their organizations. Headquartered near Boston in Needham,

Massachusetts, and with offices in North America and Europe, TowerGroup

serves a global client base. Visit www.towergroup.com

for more information.

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