Commercial and Small Business Banking in Troubled Times: Using Relationship-Based Pricing for Growth

TowerGroup Take-Aways

• Banks are turning to relationship-based profitability and pricing solutions that combine deposit, credit, and fee-based products to evaluate pricing scenarios for new wholesale banking deals.
• Relationship-based pricing enables banks to shift from a product-based approach to a customer-centric strategy, rewarding business customers for total relationship value and loyalty.
• Traditional wholesale banking market-based pricing fails to incorporate the overall value (or cost) of a customer's relationship across the banking enterprise.
• In order to balance profitability and risk when pricing commercial loans, banks need to assess customers' total relationship value along with their credit worthiness.
• Banks must improve product costing to ensure that pricing of wholesale banking products and services meets their profitability targets.

Report Coverage

Banks must thoroughly scrutinize relationship-based pricing for their business customers, especially in challenging economic times. Wholesale bankers are operating in an era of declining profitability, increasing regulatory burdens, and unrelenting competitive pressures. Relationship-based pricing enables banks to shift from a product-based approach to a customer-centric strategy, rewarding business customers for total relationship value and loyalty. Banks are turning to relationship-based pricing solutions that combine deposit, credit, and fee-based products to evaluate new business pricing scenarios that meet their risk and profitability goals. Financial institutions must accurately price new business to maximize profitability while retaining valuable customers.

This TowerGroup Research Note discusses the business issues driving improvements in commercial relationship-based profitability and pricing along with historical pricing approaches, profitability components, and pricing attributes. A forthcoming TowerGroup Research Note will examine implementation challenges, emerging best practices, and third-party solutions for commercial and small business customer relationship-based profitability and pricing (RBPP).

Report Coverage

Background

Summary