Pricing for Financial Services

Ravina Kuttikar Goa University

Pricing in Financial Services

Financial services companies are presented with

fresh opportunities for growth and also the challenges of a new competitive landscape.
Excellence in pricing can help financial services

firms manage complex product portfolios and segment customers more effectively while improving both revenue and profitability.

Five key elements of pricing in financial services

Pricing strategy. A first priority is to develop an explicit pricing strategy linked

to the overall marketing strategy. Roles and responsibilities. Financial services firms must clearly define pricing processes, roles and responsibilities to execute optimized pricing throughout the organization. Pricing organization. Strong internal pricing groups are essential to bridge the gap between strategic direction and sales execution. Robust analytics. Analytics enable financial services firms to use hard data to determine the root causes of profit leaks and resolve pricing problems more effectively. Pricing technology. Financial institutions need to get price management out of spreadsheets and off individual desktops, with the goal of letting technology handle an increasing share of the firms predictable and repetitive pricing decisions.

Pricing of Bank
Most of the banks follow Customer Value Pricing over

Traditional Relationship Pricing Customer Value Pricing is an approach to setting prices for individual banking products and services in which those prices are set to maximize the value of the over all customer relationship to the bank rather than being determined independently for each product Three key concept of Customer Value Pricing are: 1. Leveraging an empirical understanding of price sensitivity to determine product discounts, product bundling, and loyalty rewards.

On the basis of accurate product, customer, and household profitability models, CVP suggests discounts or premium pricing only when it is accretive to the overall relationship value. 3. Customer value pricing is an analytic coordination mechanism between product level pricing that works within existing organizational, IT, and operational realities.
2.

Pricing process in a bank:

Step 1 - P&L, product management, and risk

management try to translate those goals (volume, net interest margin and portfolio mix targets) into a pricing strategy, Step 2 - Product management reviews competitor rates to ensure that the proposed pricing strategy is market competitive, Step 3 - The pricing committee discusses and makes changes to pricing recommendations, Step 4 - New prices are posted internally and externally, and Step 5 - The front-line staff negotiates with customers for the final price.

Pricing in wholesale banking

Wholesale banking is the provision of services by

banks to organisations. Through wholesale money markets, they attract cash surpluses from non financial corporations, households (via money market mutual funds),other financial institutions, etc. Wholesale funds are usually raised on a short-term rollover basis with instruments such as largedenomination certificates of deposits, brokered deposits, repurchase agreements, Fed funds, and commercial paper.

Pricing in Retail Banking

Retail banking is when a bank executes

transactions directly with consumers, rather than corporations or other banks. Pricing in Retail banking is often determined by a certain service package.

Pricing in Insurance Sector

The IRR model is used in pricing of insurance

product. The IRR model determines premium rates by comparing the IRR with the opportunity cost of capital. The IRR model concentrates on the capital market, while the prices of insurance contracts are determined in the product market, by the supply of, and demand for, insurance policies.