SOLVING REVENUE LEAKAGE AND FEE TRANSPARENCY WITH IBS RELATIONSHIP VALUE MANAGEMENT

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1 Solving Revenue Leakage and Fee Transparency with IBS Relationship Value Management

Defining Pricing Discipline, Fee Transparency and Revenue Leakage

Pricing discipline ensures charges for banking products and services are set, adhered to, and applied in a consistent manner. Revenue leakage is the loss of banking fees or income from inconsistent practices, lack of attention to detail, and poor pricing controls. Fee transparency is the extent to which bankers and their customers know and understand the charges they receive for financial services and products.

Sound pricing discipline prevents revenue leakage and helps to enhance fee transparency. When banks lack consistent adherence to a pricing structure with clear pricing communication, revenue leakage occurs and price confusion (not transparency) reigns. Savvy bankers realize customers expect to understand how all their banking services are priced. And executives understand that cumulative revenue slippage contributes to bottom line challenges.

Consider the findings of the most recent FIS™ CEO Survey. A majority of executives are focused on revenue and margin growth across their product portfolios driven by interest (loan growth) and non-interest (fee income) revenue. This indicates the importance of optimizing pricing and stopping revenue leakage--and doing so in an efficient manner. The overall findings are indicated in the following table:

A primary goal for any retail organization is to sell the right set of products and services to the right customer at the right time for the right price. Establishing a firm pricing discipline supports this objective by creating a foundation for understanding customers’ perceptions of product value and accurately aligning product prices, placement and availability within customer segments. A disciplined approach applies pricing in a structured, consistent manner across an organization.

Pricing discipline, combined with enabling technology, helps prevent revenue leakage and establishes a building block for fee transparency – both of which are vital objectives for today’s retail bank. This paper reviews the environment surrounding fee transparency and revenue leakage, and explains how IBS Relationship Value Management can help address these challenges by establishing a disciplined approach to pricing through product packaging and pricing automation. A series of case studies follows, each highlighting the results of this technology in action today.

TOP ISSUES FACING CEOs

ISSUE IMPORTANT / VERY IMPORTANT

Growing Loans 93%

Improving Customer Service 88%

Improving Margins 88%

Reducing Non-Interest Expense and Managing Cost 83%

Increasing Non-Interest Income 83%

Increasing Core Deposits and Customer Acquisition 76%

Responding to Compliance Requirements 76%

Implementing New Systems and Technologies 63%

Leveraging Data Analytics for Strategic Decisions 61%

Realigning Delivery Channels 60%

Minimizing Impact of Nontraditional Competitors 54%

Solving Revenue Leakage and Fee Transparency with IBS Relationship Value Management 2

Revenue leakage can occur in all areas of a bank. Both commercial and retail customers could be contributing to loss of income. In a survey conducted by Zafin, it was found that revenue leakage was prevalent across different lines of business. For example, when looking at the cash management line of business, Zafin found revenue leakage of 3 percent – 12 percent in four large global banks . And that is just in one line of business.

On the retail side, consumers weaned on a myriad of free checking products are conditioned for price sensitivity. They have come to expect banking services to be provided at little or no cost due, in part, to the legacy of free checking programs. Over time, these programs have undermined broader bank value propositions as consumers focus primarily on price.

Small business customers still show more of a willingness to pay for services, but their owners are likely influenced by consumer trends. Deloitte affirmed that monthly fees are by far the most significant driver of consumer choice for checking accounts.

Their research went on to point out fee sensitivity for consumers is not limited to checking accounts, but also a factor in mortgage and credit card selection.

To improve revenue and margins, banks must justify their offerings and clarify the fees they charge their customers better. They must fundamentally change their value propositions and correlate pricing to the value in the minds of their customers. Price discounts should be earned, not given and as banks improve their value propositions, they must be clear, fair, and transparent with their pricing.

The FIS PACE survey recently asked consumers to rank key attributes that form their banking relationships. Insight from the 2016 survey indicate that Fairness and Transparency were in the top third of importance for US consumers. Findings from this survey are summarized as follows:

1 REVENUE LEAKAGE FOR CASH MANAGEMENT, ZAFIN WEB SITE, OCTOBER 20162 PRICING INNOVATION IN RETAIL BANKING, DELOITTE, OCTOBER 20163 IBID

Relative Importance of Issues to Bankers in 2016 FIS PACE Index

Anticipates (anticipates my future needs)

Leading-edge products (more innovative products than other banks)

Immediate (systems that respond fast enough for me)

Customized (tailors products to my needs)

Digital payments (digital transaction options)

In-person service (face-to-face personalized service)

Recognition (rewards for my business)

Advice trusted advice to manage money)

Control (helps me gain control over finances)

Aspirations (helps me achieve financial goals important to my life)

Omnichannel (consistent information at points of contact)

Connected (anytime anywhere access through online/mobile)

Simplicity (easy to understand/use products)

Transparent (easy to understand pricing/terms)

Reliable (follows through on promises)

Fairness (no hidden charges/fees)

Security (protect personal identity)

Safety (trust to protect my money)

0 10 20 30 40 50 60 70 80 90

3 Solving Revenue Leakage and Fee Transparency with IBS Relationship Value Management

Approaching Bank Pricing and Packaging

Bank pricing created in silos by individual lines of business contributes to customer confusion and lack of clarity. Each bank business unit struggles with making their own revenue and margin goals, leading to pricing approaches and campaigns focused by lines of business and not on overall relationships. Instead, they focus on solving their individual revenue challenges. Pricing created in silos, and not integrated into a package of services, can fail to enhance customer clarity and overall demand. Pricing based on the overall relationship, instead of being focused on individual products, helps build a bank’s overall profitability while communicating a stronger value proposition.

Banking services can be bundled and packaged with terms and conditions that are clear to consumers and easily understood. Instead of varying terms and price schedules by product line, a package can offer simplicity for multiple product lines. At the same time, implementing and monitoring these packages should not rely on manual effort. Transparency is not created by inconsistent marketing of multiple bank products, the goal should become overall relationship transparency for the bank.

Any inconsistencies in applying pricing to various levels or tiers in a package of banking services will cause retail customers to doubt the transparency of their bank when it comes to product pricing. Forward-thinking banks now develop relationship product offerings that tie the extent of a customer’s relationship with the bank to the benefits they receive. For example, a customer could receive a fee or interest rate adjustment in exchange for a “deeper” relationship. As a customer opens

additional products, consolidates balances, signs up and uses services, he or she will get more favorable pricing. If they design their offerings correctly, the bank will ensure the value of the customer relationship.

This structure also provides a framework for bankers to reduce discretionary application or waiver of fees and rates. By transparently tying price benefits to a defined level of a relationship tier, bankers can enforce pricing more effectively and consistently. This in turn increases pricing discipline across the bank.

Product packaging and supporting pricing are not just for consumers. Banks need to consider this approach for their small business customers as well. Offering well-crafted packages of banking services to this market helps retain relationships and stop revenue leakage. According to Bain and Company, banks need to devise sustainable combinations of credit and auxiliary products for the small- and mid-size business market. They note these combinations should be integrated into solutions that fit the needs of specific market segments4.

Relationship pricing is criticalAccount pricing in many cases is being replaced by relationship-based pricing. Relationship pricing focuses on a customer’s overall purchases and circumstances, and counters the silo approach of pricing on a product-by-product basis. It enables banks to use customer-centric parameters to determine pricing, such as the level of overall business the customer does with a bank, or the types of services purchased. The key to successful relationship pricing is tracking customer behavior across product types and rewarding activity beneficial to an institution.

4 A Winning SME Model, Bain and Company, March 2016

More Behaviors = More Benefits

Empowering the financial World

Level 1Level 1

Single product or service Low balancesLow utilization

Few transactions

Level 2

Few products and servicesMedium balancesSome utilization

Some transactions

Level 3

Many products and servicesHigh balancesHigh utilization

Many transactions

Level 1

Standard feesStandard rates

Level 2

Discounted feesHigher rates on single account

Level 3

Waived feesHighest rates on many accounts

Qualifiers

Benefits

Solving Revenue Leakage and Fee Transparency with IBS Relationship Value Management 4

Enabling packaging technologySome banks have integrated their systems so that customers and bank staff can obtain a complete view of the customer information to provide rewards for new activity. Leading banks rely on automation to reward activity, reduce manual processes, and increase fee and pricing transparency to consumers. The following graphic depicts how such an automated solution framework that provides transparency with the movement of customers to the appropriate benefit level (package):

The Value of Enabling TechnologyThe ability to offer a set of targeted products and services priced at the relationship level, while effectively and simply communicating tangible value provided to customers, can be provided by enabling technology and automation. One solution helping banks execute their relationship offerings is the IBS Relationship Value Management (IBS RVM) solution from FIS. IBS Relationship Value Management supports dynamic relationship pricing and provides fee transparency with an engaging customer online experience.

IBS Relationship Value Management monitors and evaluates ongoing customer behavior to coordinate and drive dynamic adjustments in benefits across multiple pricing engines or rewards systems based on the holistic value of the overall customer relationship. IBS RVM works on the simple principle of the more banking services a customer uses, the greater the benefits. The types of customer behavior tracked and rewarded include:

● Customer and account attributes

● Products / services owned

● Balances within or across accounts

● Account activity

● Customer interactions

IBS RVM tracks and automatically evaluates customer relationships on an ongoing basis to determine the appropriate level of benefits. This information is available to client-facing staff for sales and service interactions. And more importantly, IBS RVM highlights the value of an entire customer relationship. This is done in a transparent manner that includes the tier level a customer qualifies for, the available benefits for which a customer is eligible, and the accounts actually receiving specific benefits.

To promote transparency, customers can access package and benefit information directly through Consumer eBanking from FIS. The following screens from IBS RVM highlight a customer moving up to a higher-level package and educating the customer on what he/she needs to do to reach the next level of a product package.

By providing a compelling and easy-to-use experience, banks can continually reinforce the value of relationship offerings to customers while helping them easily understand pricing and what they need to do to earn more benefits. In fact, the automated package pricing with IBS RVM could offer an alternative to analysis reporting for some small business customers as some find it easier to read and understand.

By providing relationship transparency with IBS Relationship Value Management, banks are able to enforce pricing discipline because it’s very clear why a customer did or did not get a certain rate or fee.

Customer Benefit Summary How Customer Obtains Benefits

5 Solving Revenue Leakage and Fee Transparency with IBS Relationship Value Management

Case Studies

The following case studies show how IBS Relationship Value Management helped to establish pricing discipline in specific financial institutions. This led to fee transparency, preventing revenue leakage and a number of other benefits for the banks leveraging this technology.

Case study: consumer package to attract new customers

The challenge – A community bank was looking to grow its footprint and attract new retail customers in a competitive marketplace with local and national financial services providers.

The RVM solution – The bank realized it could not be all things to all people and decided to focus on providing optimal customer service. The institution supported this strategy with a new type of relationship banking package that lets consumers accumulate points each month by engaging in behaviors that qualify them for different sets of benefits.

Unlike traditional package offerings, the institution attracts new customers by giving them more transparency on pricing and how they earn package benefits. As customers try to accumulate a defined number of points at different benefit levels, they can choose their own qualifiers with assigned point values. They track their package level within their Consumer eBanking solution.

The combined FIS solution works per this example: A customer with a mortgage earns 5 points, having an aggregate deposit balance earns 3 points, while conducting a certain number of debit transactions earns 2 points. If the customer reaches 10 points in a month, they reach a reward level earning fee waivers, interest rate adjustments, and other benefits.

Benefits realized – The bank was able to automatically reward customers with the IBS RVM solution while providing a high degree of pricing discipline and transparency. The automated pricing also helps address regulatory concerns for fair and uniformly applied pricing.

Almost all participating customers (98 percent) are profitable with a very low rate of attrition. The president of the bank leveraged IBS RVM as the foundation of his new approach to relationship banking.

Pricing discipline enabled with IBS Relationship Value Management

technology creates fee transparency and stops revenue leakage while offering a package approach to

banking services. Bank and customer benefits both grow with this consistent

approach to applying the maxim “the more you use, the more you get.”

Mortgage5 Points

AggregateBalances3 Points

DebitTransactions

2 Points

Waived FeesHigher Rates

More Behaviors = More Benefits

Case study: retain and grow small business customers

The challenge – A large regional financial institution decided to retain and acquire small business customers in their market area by increasing their aggregate balances and use of a range of business banking services.

The RVM solution – Working with FIS consultants, the institution created a unique relationship package to directly appeal to its small business customer base. IBS RVM created the structure for the bank to enforce pricing discipline and stops revenue leakage. The bank’s Business Rewards Banking offered small business customers the choice of three packages:

● Silver Checking with 100 items and other services/benefits included for $12 per month

● Gold Checking with 250 items and other services/benefits included for $20 per month

● Platinum Checking with 450 items and other services/benefits included for $36 per month

Fees can be avoided via relationship-based activities. Strong customer relationships are acknowledged (and paid for) via fee waivers based on certain relationship activities such as using remote deposit capture, merchant capture, and payroll services.

Benefits realized – The bank established a clear and transparent reward program with high value small business customers. Their IBS RVM solution also helped to reduce revenue leakage with this customer base.

Solving Revenue Leakage and Fee Transparency with IBS Relationship Value Management 6

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About FISFIS is a global leader in financial services technology, with a focus on retail and institutional banking, payments, asset and wealth management, risk and compliance, consulting and outsourcing solutions. Through the depth and breadth of our solutions portfolio, global capabilities and domain expertise, FIS serves more than 20,000 clients in over 130 countries. Headquartered in Jacksonville, Florida, FIS employs more than 55,000 people worldwide and holds leadership positions in payment processing, financial software and banking solutions. Providing software, services and outsourcing of the technology that empowers the financial world, FIS is a Fortune 500 company and is a member of Standard & Poor’s 500® Index. For more information about FIS, visit www.fisglobal.com

For more information on how IBS Relationship Value Management helps reduce revenue leakage and improve fee transparency, contact your FIS Strategic Account Manager, or call 800.822.6758.