Bobbie Britting and Kathleen Khirallah, TowerGroup Research
"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 risk associated 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."
83% of Lenders have plans to improve pricing in the next year
34% of Lenders consider reaching profit or volume targets to be their greatest challenge in 2007
BenchMark Consulting International
Survey Results: Pricing Practices in Personal Lending, Participants: 5 largest Canadian commerical banks, March 2007
Personal Lending Situation Analysis
As a bank executive responsible for personal lending, you’ve probably encountered some of the following challenges:
- Your Q3 volume is 20% below plan: Should you change your pricing? If so, what is the appropriate change in APR to make up volume without dropping yield?
- Your biggest competitor drops rates by 25 basis points: How do you respond and how will your price move impact volumes and yield?
- Your capture rates for some customer segments are lower than expected: Should you lower rates for those customer segments? If so, what rate change would improve your results?
- Personal bankruptcies and Individual Voluntary Arrangements in the third quarter of 2006 are up 55% on the same period last year: How do you increase your margins to offset the impact on your lending portfolios?
Personal lenders plan to improve the way they answer these questions. Innovative banks are using Profit-based Pricing to set APR and fees that maximize profits while maintaining or increasing volume.
Why is Profit-Based Pricing a Better Approach?
Innovative lenders are adopting a Profit-based Pricing approach to significantly increase profits, obtain valuable customer insight, and gain a competitive advantage. They have implemented Profit-Based Pricing solutions in 12 weeks, realized 10-20% profit improvements within three months, and have achieved a 10X return on investment (ROI) within a year of use.
Nomis Solutions developed the Nomis Price Optimizer™ for Personal Lending specifically for the unique needs of Consumer Lenders, which enables you to attain the next frontier in pricing: Profit-based Pricing. Nomis Price Optimizer helps maximize profits, while maintaining market share and revenues. Through the strategic use of customer data, the software allows you to optimize pricing by product and customer segment, across hundreds, thousands, or hundreds of thousands of pricing cells. The solution provides an understanding of how specific customer segments value your lending products and the optimal rate and price that should be offered.
The Nomis Price Optimizer for Personal Lending enables you to:
- Better Tailor Prices and Maximize Profitability: Leveraging lost quote data, the solution provides a better understanding of consumer price sensitivity. By incorporating business goals, the solution increases profits while maintaining volume and credit quality. Accounting for adverse selection enables the solution to understand the critical interactions between pricing and risk.
- Enhance Customer Loyalty and Boost Lifetime Profitability: Taking multi-product information into account enables a full relationship view when determining price recommendations. Managing the impact of price-driven attrition, early settlement, and default ensures that profit improvements are sustainable over time.
- Better Track and Control Pricing Decisions: Providing an integrated view of the entire pricing process provides the ability to monitor performance, analyze gaps and opportunities for improvement, and learn how the market responds to new rates and prices. Having a record of all pricing decisions and the factors that influenced price enables you to better meet regulatory requirements.
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