Optimizing prices and products in short-term financing: Differentiation and platform for growth

March 09, 2018

Optimizing prices and products

For many corporate customers, credit lines on the checking account are indispensable to making sure they can always fulfill their financial obligations. The market remains extremely competitive. Bank managers should therefore ask themselves how they can use intelligent differentiation and attractive incentives to create an incomparable offering in the area of short-term financing.

Current profit situation putting pressure on corporate banking

In addition to competitors’ own activities, banks’ decreasing revenues from corporate customers mean there is a need for action. In general, banks only generate revenue from interest when customers utilize their lines of credit. Since utilization traditionally lies between 20 and 30 percent, interest revenues are relatively low. Bank managers must therefore ask themselves:

  • What incentives should we apply to increase utilization of credit lines?
  • How can we use a costs-by-cause principle to price the customer value of ‘liquidity’ and generate increased revenue?
  • How can we build a growth platform for corporate customers and reduce comparability with the competition?

Introduce a commitment fee

The objective is to attain cost-by-cause pricing of the customer value of liquidity. Time and again we see many banks offering their customers unutilized lines of credit completely free of charge. However, just providing this service costs the bank money. Introducing a commitment fee on the unused part of the line of credit means all customers share the costs, pricing becomes considerably fairer, and the bank generates considerable added revenue. There are a range of options regarding how the commitment fees can be set up.

Intelligent differentiation provides emergency exits for customers

In exchange for introducing a new price point, interest rates are decreased and differentiated. Based on credit ratings and credit amounts, a structured interest rate table has been developed, to help achieve revenue potential and standardize special conditions. Excellent ratings and high credit lines will therefore mean cheaper interest rates. These attractive conditions help banks to create a growth platform, set incentives for credit utilization, and encourage transfer of credit volumes. The interest levels are calculated and optimized based on customers’ actual usage behavior. The incentive effect of this cheaper interest rate is transparent, clear, and easy to follow. The better the credit rating and the higher the line of credit, the more attractive the interest rate.

Accordingly, the total revenue from a bank’s perspective consists of interest and a commitment fee. The more customers utilize their lines of credit, the lower the costs for this commitment fee. Customers can therefore control the overall costs themselves and get to profit from the advantageous interest rates. From the bank’s perspective, this two-part tariff decreases comparability with the competition.

Implementing the new price model through value communication and digital expertise

During the implementation, it is important to emphasize the value and benefits of the line of credit. The benefit to the customer is very high due to the increased flexibility and financial leeway, as well as the opportunity to pre-finance goods and materials, compensate for seasonal bottlenecks, and take advantage of discounts.

Hence the focus during implementation must be on value communication. Digital tools support this approach during advisory services. In addition to consistent, simplified advisory services, they enable the visualization of arguments and a fun way to simulate conditions. Figure 1 illustrates such a digital sales tool. In the context of the relationship manager’s conversation with the customer, important information such as liquidity requirements, current target interest rates, credit ratings, or competitors’ prices are fed into the sales tool. This visualization also considers behavioral economic effects such as the deal effect.

In concrete terms, this involves demonstrating the deal’s savings to the customer. It generates customer value and has a positive effect on the customer’s perception of the overall offering, enabling a better understanding of what behavior (e.g. transferring credit volume) will improve interest level. This principle of service and service in return is automatically integrated into the digital consulting tool. Relationship managers’ experience with the tool has shown that advisory services thereby become considerably more professional.

Interactive Sales Tool
Figure 1: Interactive Sales Tool

Checklist for implementation success

  • Build a database with real behavior by customers
  • Integrate behavioral economic effects (e.g. the deal effect) when optimizing the price model
  • Produce a differentiated interest rate table paying due consideration to fairness, self-selection, service, and service in return
  • Collate reactions by corporate customers with respect to credit line reductions
  • Focus on customer benefit and employ digital, interactive sales tools
  • Conduct professional training with relationship managers for optimal preparation

Conclusion

An interest rate table depending on credit rating and credit amount provides a cornerstone for attractive growth in short-term financing. Intelligent emergency exits enable banks to introduce the sensitive price point of a commitment fee and sustainably raise commission revenues. Banks can distinguish themselves from the competition with this incomparable offer and take on a pioneering role. Professional implementation including accurate arguments and digital illustration are key to success.