Based on our observations, we estimate that somewhere between 20% and 25% of community banks have adopted a policy requiring minimum yield or credit spreads for their newly originated commercial loans. The strategy requiring minimum commercial credit spreads may be well-intentioned, but the results for banks may be less than optimal.
Tag: pricing strategy
When was the last time you changed your fees? Most banks, when setting fees on bank products and services start and end by taking a look at what selected competitors are doing. This method, while not a bad start, will almost always result in a suboptimal setting of fees. The reason for this is not only is your bank very difficult to compare to your competition, but your competition is likely doing the same thing. In this article, we look at practical considerations for banks looking to set or revise their current fee structure.
First, let’s get out there that banks need to charge more fees, not less. Generating fees is critical to bank performance. However, as an industry, we need to be sensitive to how we charge fees to incent the right behavior. Remote deposit capture (RDC) fees are a perfect example. Our industry, by charging customers for RDC, inhibits balance building, increases defection, increases operational cost and increases the customer’s reliance on branches – all the opposite of what our goals should be.
Many small and mid-sized businesses hate negotiating with bankers. They find it laborious and often intimidating. This was the thesis when one bank thought they would change the paradigm and offer a “no negotiation, lowest price loan.” The theory was that this bank would produce a term sheet with their lowest price and the customer could either accept it or not. No matter what the case, it was implied that the bank had the incentive to put the lowest price in the market and the customer would not have to be bothered going back and forth in price and term negotiations.
Banks that roll out a premium product should give some thought about what makes the product “premium.” We all have platinum or elite level checking accounts, and some banks go farther and have a premium fee and loan product. Bankers tend to think of a premium bank product as one that has more bells and whistles than your standard product offering. However, as can be seen below in the latest survey on the topic, more attributes is just a small piece of the puzzle.
Show a potential banking customer information, and their brain will quickly try to organize and synthesize the information. The easier the information is to organize, it turns out the more the viewer will like your ad. Our own Dr. Chris Janiszewski from the University of Florida and Dr. Dan King of the University of Singapore developed a theory on the “Fluent Processing of Numbers” and came up with research that tested the position in 2011 (HERE).
In a prior article where we tested “odd digit” account pricing, we showed that conversion rates were almost twice as high when we used a $1.99 price point for a product compared to $2.00 (HERE). We previously also showed the importance for banks to show their pricing easily on their website. We received many comments on these blogs about our use of $12.95 per month pricing versus $12.99 or $13.00.
Most banks completely ignore odd digit pricing. Instead of offering that competitive commercial loan for 5.00%, you offer the loan for 4.99%. Conversely, in a non-competitive situation, instead of offering a 5.20% rate, you offer a 5.23% rate and pick up three basis points per year. However, those banks that do are religious about it and as a result, it ends up increases their product acceptance rate and increasing margin.
Three social scientists, Suk, Lee, and Lichtenstein, walk into a bar… No joke, they do, and they observe patrons for eight weeks and watch how they order off specially designed beer menus. One beer menu has a variety of beers ordered with prices from high to low. The other beer menu has a menu of beers ordered with prices from low to high. Are the results the same? How does it compare to a randomly ordered menu? Does it really matter? And, most importantly, what happens if you did the same test for banking?
We are at the ICBA 2017 Live convention in San Antonio, and there is nothing like a heated banking discussion over dinner with good bankers. We were comparing battle stories and the ever-important concept of loan pricing came up. Our banker friend lamented on the tight pricing in his territory and that his competition was pricing commercial loans 25 to 50bps below Prime.