Smart Use of Pricing Can Help Banks in the Battle for Deposits"Unprecedented turmoil” is among the phrases most commonly used to describe the current state of banking. And, indeed the last few months have seen an historic rate of failures, near-failures, and acquisitions combined with a rapid tightening of credit. Amid all this turmoil, it is easy to forget that the basic business of gathering deposits and making loans is not going to disappear. In fact, as banks look for ways to survive the current environment, more careful management of the core businesses of lending and deposits will have a high priority. In this article, I’ll explain how pricing and profitability management can help bank executives break through the current market conditions and prepare themselves for the future.

Peter Jobst, Managing Director, BenchMark Consulting International Europe stated, “We were very pleased with the results of this survey because it validates that the U.K. market recognises the integral role of price optimization in achieving their objectives and is as engaged as the U.S. and Canadian market in adopting this type of technology."

For a free copy of the survey results please contact Danielle Davidson at danielle.davidson@nomissolutions.com.

One place to start down the path toward relationship pricing may be price optimization, but that could involve a whole new way of thinking. Instead of determining the price at which the bank is willing to sell a product, the goal is to figure out what the customer is willing to pay. Nomis Solutions Inc. of San Bruno, Calif., has developed a methodology that has helped some of its customers get 10 times their return on investment, said Dr. Robert Phillips, Nomis' founder, chief technology officer, and vice president of product management.

A few years ago I was approached about backing a company called Nomis Solutions. The idea behind Nomis was to apply modern price optimization techniques to the financial services sector. Was it a good idea? You bet.

Nomis Solutions, a leader in Profit-based Pricing for banking and finance, announced today the immediate availability of Nomis Price OptimizerT Suite 3.2.

Price optimization -- a term often used interchangeably with profit-based pricing -- is the method of finding the right price for a particular customer by channel, segment, geography, market or product. The key ingredient in price optimization that is absent in other pricing strategies is customer elasticity, the extent to which demand falls as price rises. According to experts, the current state of the economy and of technological advancement has made now the perfect time for price optimization, especially in the lending arena.

Nomis Solutions Inc. has raised an $8 million Series C from investors that are hoping Bob Phillips, one of the company's founders, can affect loan pricing at banks. The round was led by existing investor Bain Capital Ventures, which invested more than its pro rata share.

Nomis Solutions, Inc., a provider of profit-based pricing technology, offered the OCC insight into how its profit-based pricing technology removes subjectivity from the loan-origination process. Nomis's program uses algorithms to determine profit and volume levels based solely on adjusting prices, enabling lenders to decide where to set interest rates in order to meet certain profit or volume goals, said Robert Phillips, founder and chief technology officer of San Bruno, C.A.-based Nomis.

"Price optimization solutions present an outstanding opportunity for lenders, especially to optimize their profits as well as their application pull-through rates while still managing the various risks associate with particular loans or customers. It is important to note that price optimization does not recommend or demand increasing all loan prices or decreasing all deposit prices. Rather, it requires a financial institution to understand customers demand for products and services and their sensitivity to price. Thus, in the case of the loan, it establishes both the price the customer is willing to pay for a loan and the acceptable rate of return for the lender.

"Consumers are beginning to look at their financial institutions (FSIs) for a better deal - one based on the value and longevity of their relationship. Some FSIs are engaged in price optimization, but no one has successfully evolved that technology into the idea of dynamically pricing new products and services based on the customer's profitability. FSIs will need to implement this pricing technique in order to remain competitive, and those that do it first could gain significant market share. The steps to getting there include an enterprise focus on customer centricity, a collaborative technology partner, and development of a pricing center of excellence."

BenchMark Consulting International unveils results of pricing practices survey sponsored by Nomis Solutions that the majority of UPL pricing decisions are based on a limited number of predictive models. Most use a risk-based pricing approach adjusted for competitive rates. 34% consider reaching profit or volume targets to be their greatest challenge in 2007. 83% of participants have plans to improve pricing processes in the next year.

In order to compete effectively, motor finance executives need a good understanding of demand elasticity and how a change in price could impact key performance indicators such as profitability, volume, conversion rates, retention and default. This needs to be viewed along side a dynamically changing mix of manufacturer-led promotions for new cars and a plethora of lending options in the used car sector..

"Price Optimization is often evaluated in the context of building broader customer relationships, and pricing on the basis of that total relationship. But price optimization - and the resulting increase in profits that results - is a good thing in itself, and should be pursued (even tactically at the product or line-of-business [LOB] level) almost regardless of any other future enterprise-wide strategic consideration. Forgone profits cannot be regained: Pilot projects to test the suitability of price optimization in a particular situation should be started as soon as possible."

"All lenders surveyed have goals to increase volume and increase margins in 2007," said Brian King, consumer lending practice manager at BenchMark Consulting. "Canadian financial institutions are realizing the value of advanced analytics and price optimization to most effectively price their products to their various customer segments in order to better achieve their business performance goals."

For a free copy of the survey results please contact Danielle Davidson at danielle.davidson@nomissolutions.com.

"Financial institutions are starting to take a lesson from retailers by considering price optimization as a strategy to reward relationships and ultimately grow them. Retail FSIs must build new pricing strategies that incorporate price elasticity of demand, individual relationship value, multiple consumer inputs, and dynamic pricing capabilities. The vendor marketplace is opening up, and there are several software firms that offer tools and consulting to help FSIs get started."

Rozelle says that by moving beyond old-school pricing strategies and adding a multi-dimensional view of what customers will do as prices are increased or decreased, a better view of the overall marketplace emerges. "You can start to focus on a particular component of the pricing matrix, so that a small move in a certain area may have a greater impact than a large move in another area."

"Before, the process was a little bit beyond throwing darts at a wall and trying to guess what the client wants," said Dan Rozelle, a vice president and the sales finance product manager at BB&T Corp. "It was a combination of science and art. "Using automated pricing software brings to the table a more formal process and a more scientific database for analyzing pricing," he said.

"Potential buyers [of a price optimization solution] should examine the source and depth of industry-specific domain expertise, regardless of the probity and historical credibility of the vendor...Bankers must remember that mass-market price optimization solutions are not easily transplanted between industries and must ensure that the vendor has acquired - by whatever means - and retained the commitment and experience to support their specific needs."

Our annual Mortgage Technology list of new vendors spotlights companies that aren't necessarily new but haven't yet received coverage by this publication. As we learn more about the actual business benefits enjoyed by lenders using the products and services of these promising companies, our future stories will share those results with our readers.

Phillips contends that there is no way to gain competitive advantages through cost- or risk-based pricing because the approaches are so widely used. Profit-based pricing, he said, is the next frontier because it enables lenders to consider dealer and customer price sensitivity when making a price recommendation.

As banks find margins becoming tighter as many services become more commoditized, getting to know where a customer's "breaking point" is in terms of pricing can be the difference between maximum profitability, or losing that customer to a competitor. "One of the challenges is there's not an understanding of elasticity of pricing," says Kathleen Khirallah, research director for retail Banking at TowerGroup, which has published a report on profit-based pricing penned by senior analyst Bobbie Britting.

BenchMark's survey identified the factors considered when making pricing decisions, and the growing appetite for a profit-based approach to pricing. Current pricing practices, such as anecdotal-based pricing, which focuses on rules of thumb or assumptions about the business; market-based pricing, which focuses on the competitive landscape; and risk-based pricing, which focuses on the cost of the product, are leaving money on the table because they are not focused on how much value customers place on the bank's home equity lending products, Benchmark said.

Nearly 75% of a sampling of financial institutions plan to improve their pricing of home equity loans within the next two years, according to a study released by BenchMark Consulting and Nomis Solutions.

BenchMark Consulting International's Home Equity Lending Practice Manager, J. Brian King, whose team conducted the survey, said, "I believe that the Home Equity Lending marketplace is going to experience major changes in the next two years.

Leading banks are now starting to investigate innovative ways to differentiate themselves and to strategically squeeze more profits in some areas of the business while maximizing market share in others. While conducting this survey, I was impressed by the number of Home Equity Lending executives that are planning to use pricing more strategically to meet their business goals."

For a free copy of the survey results please contact Danielle Davidson at danielle.davidson@nomissolutions.com.

"As the pendulum swings from the cost cutting, down-sizing and right-sizing of the '90's and early 2000's to price optimization, the internal pricing function will rise to new levels of importance within the organization.

Early adopters of Profit-based Pricing will garner the greatest benefits, others are leaving money on the table."

Walter Cunningham, director at BenchMark Consulting, said, "Auto Finance lenders recognize that pricing can be used as a strategic lever and that pricing processes can be significantly bolstered to better support the corporate goals of profit and market share growth."

For a free copy of the survey results please contact Danielle Davidson at danielle.davidson@nomissolutions.com.

Taken together, Profit-based Pricing technology and changes to the structure of dealer incentives can help solve the pricing problem in motor finance, reverse the decline in penetration and increase profitability.

This article is based on a chapter of the book Pricing and Revenue Optimization, by Robert Phillips. Dr. Phillips contends that profit-based pricing is relatively new to the financial services industry; after explaining its success in other industries, he provides 10 key elements of a successful profit-based loan-pricing model.