Home Equity Lenders Move to Profit-Based Pricing, Survey Says

Mortgage Bankers Association September 14, 2006

A survey from Nomis Solutions, San Bruno, Calif., and BenchMark Consulting International, Atlanta, found 50 percent of home equity lenders are in the process of evaluating price optimization products to allow for profit-based pricing.

The "Home Equity Lending Pricing Practices Survey " of 22 banks included in the survey found that all (100 percent) home equity lenders said there is room for improvement in their current pricing practices. In addition, 73 percent plan to improve their pricing process in the next two years.

"Home equity lenders are beginning to understand the power of profit-based pricing and are interested in using this innovative approach to improve the performance of various products such as HELOCs, HELs and hybrid products. Profit improvements range from 10 percent to 20 percent and lenders uncover valuable insights about what their customers really value as well as a real view of how their product portfolio performs against the competition," said Robert Phillips, co-founder and CTO of Nomis Solutions. "This much more disciplined and analytical approach to pricing allows banks to analyze gaps and opportunities for improvements, perform 'what if' scenarios to test out the impact of various price changes before executing them, and measure results based on how customers responded to a particular price change."

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. According to the survey, lenders recognize that pricing and that pricing processes can be significantly bolstered to better support the corporate goals of profit and market share growth.

"The home equity lending marketplace is going to experience major changes in the next two years, said Brian King, Home Equity Lending practice manager at BenchMark Consulting International. "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."