The Rise of Relationship-Based Pricing in Banking

Relationship-based pricing is a growing trend in global banking, offering personalized rates and benefits based on overall customer value. Banks worldwide are adopting this strategy, using advanced technologies like AI, machine learning, and data analytics to analyze customer behavior and offer tailored products. This approach aims to increase customer loyalty and bank profitability. While implementation poses challenges, including data integration and regulatory compliance, it represents a shift towards more personalized, value-driven banking relationships in the digital age.

The rise of Relationship-based Pricing in banking: Rewarding loyalty in the digital age

In an era where personalization is king, banks worldwide are adopting a strategy that's changing the game: relationship-based pricing. This approach is reshaping how financial institutions value and reward their customers. But what exactly is relationship-based pricing, and how is it transforming the banking landscape across the globe? Let's dive in.

What is Relationship-based Pricing?

At its core, relationship-based pricing is a strategy where banks offer different prices or terms to customers based on the overall value of their relationship with the institution. This value isn't just about account balances; it considers factors like:

• The variety of products a customer uses
• Length of the banking relationship
• Transaction history
• Credit score
• Cross-sell potential
• Overall profitability

The goal? To encourage deeper, more loyal customer relationships by offering tangible benefits for consolidating financial activities with one bank.

Global adoption: A tour around the world

United States: Leading the charge

American banks have been at the forefront of relationship-based pricing:

• Bank of America's preferred rewards program offers tiered benefits based on combined account balances. The more you bank with them, the more you gain - from higher interest rates to reduced fees.
• Wells Fargo provides relationship discounts on loans and lines of credit for customers with qualifying balances.

Australia: Embracing personalization

Down Under, banks are leveraging advanced analytics for hyper-personalization:

• Commonwealth Bank uses a Customer Engagement Engine to provide tailored product recommendations and pricing.
• ANZ Bank is developing systems for hyper-personalized relationship-based pricing, aiming to offer uniquely tailored rates and products to each customer.

Singapore: The digital banking hub

Singapore's banks are known for their cutting-edge approach:

• DBS Bank utilizes data analytics to offer personalized product recommendations and pricing, setting a high bar for digital banking experiences.

United Kingdom: A more subtle approach

While not as overt, UK banks are incorporating elements of relationship pricing:

• Nationwide Building Society's Loyalty Saver Account offers higher interest rates to long-standing members.
• Santander's 123 Current Account provides cashback and interest rates that improve the more you use the account.

Emerging Markets: India and China

These massive markets are quickly catching up:

• HDFC Bank in India offers preferential rates and fee waivers based on customer relationship value.
• China Construction Bank uses AI to analyze customer behavior and offer tailored products and pricing.

The digital bank perspective: Monzo's Approach

Digital challenger banks like UK's Monzo are redefining relationship banking for the smartphone era. While not offering traditional relationship-based pricing, Monzo builds customer loyalty through:

• Personalized insights into spending habits
• Tiered accounts (Monzo Plus and Premium) offering more features for a monthly fee
• Credit score-based overdraft pricing
• Partnerships offering rewards and cashback

This approach focuses more on user experience and feature sets rather than explicit pricing benefits, appealing to a younger, tech-savvy demographic.

The future of Relationship-based Pricing

As we look ahead, several trends are likely to shape the future of relationship-based pricing in banking:

• AI and Machine Learning: AI-driven personalized pricing is poised to revolutionize the banking industry, enabling financial institutions to offer highly tailored products and rates based on deep customer insights. This trend will likely lead to increased customer satisfaction and loyalty, while simultaneously optimizing banks' profitability through more strategic, data-informed pricing decisions.
• Open Banking: As financial data becomes more portable, banks may offer relationship benefits based on a holistic view of a customer's finances, even those held at other institutions.
• Ethical Considerations: Banks will need to balance personalization with fairness, ensuring that relationship-based pricing doesn't unfairly disadvantage certain customer segments.
• Regulatory Scrutiny: As these models become more complex, regulators may take a closer look to ensure transparency and prevent discriminatory practices.
• Cross-industry Partnerships: Banks may extend relationship benefits beyond traditional banking products, partnering with retailers, travel companies, or service providers to offer a more comprehensive rewards ecosystem.

Technology driving Relationship-based Pricing

The implementation of relationship-based pricing isn't just a matter of policy—it requires sophisticated technological infrastructure. Let's explore how various banking platforms and tech products are enabling this pricing strategy:

Core Banking Systems

Modern core banking systems are the foundation for relationship-based pricing:

• Temenos T24 Transact: This system offers a customer-centric approach, allowing banks to create a single customer view across all products and channels. It includes a product builder that enables the creation of relationship-based products and pricing structures.
• FIS Profile: FIS's core banking solution provides real-time customer data processing and analytics, enabling banks to implement dynamic pricing based on customer relationships.

Customer Relationship Management (CRM) Systems

CRM systems play a crucial role in understanding and leveraging customer relationships:

• Salesforce Financial Services Cloud: This platform provides a 360-degree view of customer relationships, enabling banks to segment customers and offer personalized pricing and products.
• Microsoft Dynamics 365 for Financial Services: Offers AI-driven insights and recommendations, helping banks identify opportunities for relationship-based offerings.

Data Analytics and AI Platforms

Advanced analytics and AI are key to processing vast amounts of customer data:

• IBM Watson: Many banks use IBM's AI platform to analyze customer behavior and predict needs, informing relationship-based pricing decisions.
• SAS Customer Intelligence 360: This analytics platform helps banks create detailed customer profiles and segment their user base for targeted pricing strategies.

Price Optimization Software

Specialized software helps banks fine-tune their pricing strategies:

• Zafin's Pricing: A dedicated pricing engine that allows banks to create and manage complex, relationship-based pricing rules across products and services.
• Oracle Financial Services Analytical Applications: Offers tools for price optimization that take into account customer relationships and profitability.
• SunTec's Xelerate platform: Enables contextual, relationship-based pricing by integrating customer data across silos and dynamically calculating fees based on multiple usage parameters.

Open Banking Platforms

Open banking is enabling a more holistic view of customer finances:

• Plaid: While not directly involved in pricing, Plaid's ability to securely connect bank accounts to fintech apps is enabling banks to gain a more complete picture of customer finances, informing relationship-based decisions.
• Tink: This European open banking platform provides account aggregation services, allowing banks to offer relationship-based pricing based on a customer's complete financial picture.

Customer Data Platforms (CDPs)

CDPs help banks unify customer data from various sources:

• Adobe Experience Platform: Allows banks to create unified customer profiles, which can be used to inform relationship-based pricing decisions.
• Segment: Helps banks collect, unify, and activate customer data across channels, supporting more sophisticated relationship-based strategies.

Blockchain Technology

While still emerging, blockchain has potential in relationship-based pricing:

• R3 Corda: This blockchain platform for financial services can enable smart contracts that automatically adjust pricing based on predefined relationship criteria.

Implementation, challenges and considerations

While these technologies offer powerful capabilities, implementing relationship-based pricing is not without challenges:

• Data Integration: Banks often struggle with siloed data across different systems. Integrating these data sources is crucial for a comprehensive view of customer relationships.
• Real-time Processing: To offer truly dynamic pricing, banks need systems capable of processing vast amounts of data in real-time.
• Regulatory Compliance: Banks must ensure their pricing models comply with regulations around fairness and non-discrimination.
• Customer Privacy: With the increasing use of customer data, banks must navigate privacy concerns and regulations like GDPR.
• System Flexibility: As customer needs and market conditions change, pricing systems need to be flexible adapt quickly.

Coforge’s View

We believe, in this digital age, Relationship-based pricing is an imperative and not an option; it's a fundamental shift in how banks view and value their customers. From the United States to Singapore, Australia to the UK, financial institutions are finding innovative ways to reward loyalty and encourage deeper banking relationships.

The implementation of relationship-based pricing represents a convergence of banking strategy and cutting-edge technology. From core banking systems to AI-driven analytics platforms, these technologies are enabling banks to create more personalized, value-driven relationships with their customers.

As these technologies continue enough to evolve, we can expect relationship-based pricing models to become even more sophisticated, offering greater personalization and value to customers while helping banks build stronger, more profitable relationships. The future of banking lies not just in the products offered, but in the intelligent, technology-driven ways in which those products are priced and presented to each unique customer.

The message is clear: in modern banking, it's not just about the products you use, but the relationship you build. As this trend continues to grow globally, savvy consumers would do well to consider not just individual product offerings, but the overall value proposition of their banking relationship.