In partnership with Earnix, Marketforce surveyed 200 banking executives to better understand how banks' pricing structures will need to evolve in order to compete with new entrants. Discover the key insights in this report.

1. Driving profitability in the
new model bank
As voiced by 200 banking executives

2. - 2
Foreword
One
A broken model
Two
A new approach to customer satisfaction
Three
Countdown to 2020: a customer-centric approach to pricing
Conclusions
3
4
6
8
10
Contents

3. 3 -
Take a blank sheet of paper and invent a bank: it could be many things but it would not look like any of the big
beasts that today dominate Europe’s retail banking industry. Modern banks are shaped and scarred by their past:
sustained by increasingly meagre revenue models, hamstrung by ever tighter regulation, gravely wounded by the
2008 crisis and carrying cumbersome and costly legacy systems. Trust is at an all-time low. Growth remains
elusive. With nimble new entrants, digitally-enabled and brand-savvy, snapping at their heels, today’s big beasts
must adapt – and rapidly.
It is this backdrop of seismic change that prompted Earnix and Marketforce to examine not only how banks perceive
the current threat level but also measure their readiness to tear up the past in order to ensure their future.
Europe’s banks are not a homogeneous population, with clear differences in their recent histories, their maturity
and their visions for 2020. We have identified five distinct classifications in the banking life-cycle:
Late-Stage Maturity
Early-Stage Maturity
Developing
Emerging
Recession-Hit
In all, we surveyed 200 banking executives across Europe, representing both large and small banks with
representation across the product range. Our respondents worked in a wide range of functions, including strategy,
price and risk, operations and technology, and sales, marketing and customer service. The survey was conducted
by Marketforce in March 2015.
Foreword

4. - 4
One
A broken model
Slow growth and high costs have stretched
thin existing revenue models while the capital
requirements of incoming regulation weigh heavily,
piling on costs and limiting innovation.
Within Europe, each market has its own pressure
points: this is a continent of extremes, where some
markets suffer excess liquidity and others struggle
to attract funding. But despite these differences, our
survey finds overwhelming agreement (88 per cent of
respondents) that Basel III will have a negative impact
on the profitability of their bank’s existing product
mix, with almost one third (32 per cent) believing the
impact will be fairly to very negative.
Even though very little of Basel III applies specifically
to retail banks, the combination of increased capital
requirements and liquidity buffers will weigh on the
earning potential of the balance sheet and force banks
torethinkpricingandproductrangeinordertoprotect
margins post 2018. The new liquidity standards – and
the costs associated with meeting them – could well
reshape a bank’s relationship with its customer base,
with as much focus on a customer’s capital efficiency
as their revenue potential. Our respondents are
already mindful of this paradigm shift: 89 per cent
agree that “in five years’ time, pricing of deposit-
based products will more precisely reflect deposit
liquidity and the bank’s capital requirements rather
than the need to build market share.”
Our respondents believe the need to seek out
sustainable margins will force a radical rethink of
pricing models – and this pricing revolution will hit in
the next five years:
agree that “the percentage of
banks’ revenues derived from fees
rather than from interest rates
will have increased significantly
by 2020”
agree that “in five years’ time,
credit card pricing models will
have shifted towards more fees
and commissions payable by
cardholders to offset falling
interchange and net interest
margins”
agree that “in five years’ time,
current (cheque/salary) accounts
will be priced to reflect the true
cost of servicing rather than as
loss leaders”
Like all revolutions, this shift to a fee-based retail
banking industry will be polarising. It is likely some
banks will become mega-scale banking “factories”,
handling largely simple, commoditised but low
margin products, while others will focus on delivering
a bespoke, customised branded service, where
margins will be higher. This emergent polarisation
is evident in our survey: there was a near 50/50 split
among our respondents when asked whether they
agreed that “more and more banks will shift away
from low margin, high volumes in the next two years”.
Yet when we examine our life-cycle groupings, we
see there are clear differences, with Recession-Hit
markets far more ambitious in their thinking. Banks
Powerful forces are reshaping the retail banking industry. New
technology has not only empowered customers to seek out
personalised service and customised deals but also enabled
nimble new entrants to capture market share.
78%
70%
66%

5. 5 -
operating in these markets, still battling a legacy of
bad debt, are far more ready than their counterparts
in Early-Stage Maturity and Late-Stage Maturity
markets to agree that there will be a significant shift
towards fee-based revenues by 2020 and a growing
move to high volume, low margin business in the next
two years. This could well reflect the need of banks
operating in these markets to migrate from interest-
bearing products to transaction fee structures in
order to reduce their debt exposure.
These findings suggest that these Recession-Hit
radicals and Emerging market players no longer
see the historic evolution of more mature markets
as relevant to their unique post-2008 experience.
Instead, banks in Recession-Hit and Emerging
markets are looking at alternative life-cycle models
with markedly different product pricing and customer
relationship outcomes. Importantly, unencumbered
by the structural, cultural and operational
complexities that now inhibit “successful” banks in
more mature markets, this readiness to think boldly
about the future could create a real opportunity for
Emerging market banks to embrace potent new
technology and radical new business models to chart
their own route to profitability. This bold thinking
will also aid Recession-Hit banks in their ongoing
recovery and reinvention.
Late-Stage Maturity
Early-Stage Maturity
Developing
Emerging
Recession-Hit
0% 100%
Late-Stage Maturity
Early-Stage Maturity
Developing
Emerging
Recession-Hit
0% 100%
To what extent do you agree with the following statement?
The percentage of banks’ revenues derived from fees rather than from interest rates will have increased significantly by 2020
Thinking of the country market in which you personally are based, to what extent do you agree with the following statement?
More and more banks will shift away from low margin, high volume business in the next two years
Agree strongly Agree Disagree Disagree strongly

6. - 6
These arguments will need to be compelling:
customers have never been more informed, more
demanding and more protected with a growing
readiness to use social media to swiftly punish those
organisations that breach ever higher service, value
and ethical standards. Banks, their reputations still
in tatters following a series of mis-selling scandals
and the fall-out from 2008, are aware of the potency
of this newly empowered customer base and are
keen to reposition their brands as “customer-
centric”. As yet, however, much of this work is mere
window-dressing as banks struggle to understand
what customers truly value.
Banks are clear that trust and transparency go hand
in hand. Our respondents agree that transparency
will be key to making a convincing case for fees, with
93 per cent agreeing that “transparent pricing that
customers understand and that treats customers
fairly holds the key to increasing consumer trust in
banks”.
This will be a difficult journey for all parties.
Customers remain wedded to the concept of “free or
bundled banking” while banks will struggle with the
cultural shift required to provide real transparency
about the fairness of their pricing strategies. This is
not just an end to punitive charges or hidden prices.
A pricing model that is truly transparent and fair
requires an understanding of what customers really
value and the trade-offs they will make between
price and value.
This concept isn’t new: budget airlines, for example,
have unbundled the price of an airline ticket, allowing
customers to pay more for luggage, leg room
and snacks while some insurance companies are
pioneering products that allow customers to “pick-
and-mix” the policy features that matter most to
them. This kind of transparency requires the bank
to quantify not just the cost of the service but also
the perceived value added by the service, which is
ultimately a qualitative assessment.
This is a far more sophisticated model than typical
risk-plus-margin pricing. Banks will need a deep
understanding of their customer base and be
ready to define such nuanced concepts as what the
customer expects to be part of the product but won’t
pay for; what doesn’t create value but can destroy
value if absent; what creates unexpected value that
a customer finds themselves willing to pay for; the
importance of customisation and flexibility to an
individual customer and how to price this.
Yet our survey shows banks fall far short of this level
of understanding about their customers, with three-
quarters (75 per cent) agreeing that banks often fail
to understand what customers really value. This
disconnect should ring alarm bells for any prospect
of delivering a new pricing model by 2020. It is clear
there is an urgent need for more granular customer
segmentation in order to deliver products and
services that encourage emotional alignment and
profitable behaviours among the customer base.
Two
A new approach to customer satisfaction
Retail banks may be clear that radical change is needed to protect
margins but this is not a journey they can take alone. Customers
will need to be convinced that the imposition of account fees or
transactional charges will deliver real value for money.

7. 7 -
Too often, however, efforts to deliver “relationship
pricing” have been counter-productive as banks have
launched these initiatives from the comfort zone of
long-established product silos. Rather than pricing
basedonaninsightfulunderstandingofthecustomer,
the result has been flawed product bundling and
clumsy cross-selling that commoditises the offer
and cannibalises margins. And because product
silos create conflicting priorities, technological and
operational complexity and a restricted view of the
customer, the banks’ response to difficult economic
conditions has been to push more product –
regardless of the customer’s needs and aspirations.
Rising costs and diminishing returns mean this is
increasingly unsustainable, and the banks recognise
this. The industry is abuzz with change programmes
designed to build customer-centric organisations
and dismantle the product-centred architecture that
makes it so difficult to gain an enterprise-wide view of
the customer and improve the customer experience.
Banks recognise that their existing product-centric
strategies are counter to their customer-centric
ambitions: almost eight out of ten (78 per cent)
agree that banks’ focus on pushing product lines
is undermining their ability to increase consumer
satisfaction.
Dismantling product silos will be a key step towards
building the customer-centric bank of the future.

8. - 8
Differentiation will be key to attract customers and
protect margins in a low growth world but this can only
happen when banks understand what distinguishing
factors appeal to their target customers.
We asked respondents to rank the following according to
the extent to which they influence pricing strategy
Desire to acquire new customers through
loss leaders 1
Regulation 2
Maintaining margin in a low margin
environment 3
Building relationships with customers 4
A finely calibrated pricing strategy, working in concert
with other customer-centric initiatives, will be key to
winning and retaining customers.
Yet our survey shows that banks continue to think
about price from a defensive position, with most
respondents still wedded to a customer acquisition
strategy based on loss-leading products or
weathering the regulatory onslaught rather than
approaching pricing as a means to fine-tune the
product portfolio to protect profitability or build long-
term profitable relationships with customers.
Indeed, while banks say they understand that a new
approach to understanding the customer will help
deliver pricing success, our survey reveals there is
limited progress in overhauling current models. Only
one quarter of our respondents report extensive
pricing across most or all products based on an
holistic relationship with the individual customer
rather than simply at the product level. For the
majority, 61 per cent, pricing based on an holistic
relationship is limited to pilots or a limited number
of products while a further 14 per cent are not doing
it at all.
This failure to understand the customer means
pricing remains a blunt tool that prevents banks from
finessing their offering to capture higher margin
business. This is certainly understood by our cohort
of banking executives, with almost eight out of ten (79
per cent) agreeing or strongly agreeing that banks’
inability to understand the individual customer’s
price sensitivity undermines their ability to strike the
right balance between margin and volume.
Drilling down through customer data to finely
calibrate product and pricing offers so as to capture
higher margin business will require cutting-edge
delivery of advanced analytics of in-bank and external
data sources, seamless channel offerings and the
operational sophistication to make real-time credit
and pricing decisions tempered to reflect risk, cost to
serve and customer influence and profitability.
The operational, infrastructure and cultural shift
required to deliver this cannot be under-estimated
given the slow start made by many. In part this is a
function of the post-crisis world, with many banks still
in survival mode until lending picks up again. Despite
the funding constraints on innovation, however, there
is confidence that leading banks will be capable of
delivering key features of this customer-focused
profitable pricing approach by 2020.
Three
Countdown to 2020: a customer-centric approach to pricing
Current revenue models are no longer fit-for-purpose, leaving
banks searching for new routes to profitability.

9. 9 -
It is notable, however, that the measures listed
above involve analysis of readily available customer
data, such as channel usage, attrition scores and
deposit profiles. When it comes to newer sources
of customer data, including the vast reams of
unstructured data posted daily on social media,
there is far less confidence that leading banks will be
able to effectively harvest and analyse this to inform
pricing by 2020:
»» Only 35 per cent expect leading banks to
extensively reward with lower charges customers
who allow the bank freer access to their personal
data. This could well reflect widespread concern
about increasingly stringent data protection
regulations
»» Only three out of ten expect to see leading
banks extensively use pricing strategies based
on the individual customer’s social network and
degree of influence. It seems retail banks have
yet to grasp the potency of social media to build
meaningful customer relationships, and provide
valuable insight into attitudes and behaviours.
There is more confidence when it comes to analysis
of social media data as part of risk-based pricing
models, with 45 per cent expecting leading banks to
make extensive use of this powerful bank of customer
information. Leveraging data about shopping
behaviours, purchasing insights and service attitudes
will provide a far more nuanced and accurate picture
of a customer than credit scores alone.
And when it comes to dismantling the product silos
that have inhibited customer-centric innovation, our
respondents are confident that this will be extensively
implemented within the next five years: 35 per cent
expect leading banks will give customers access to
platforms that integrate current accounts, savings
and all types of loans into a single customer account
within three years, and another 40 per cent expect
this will take place within five years.
There is similar confidence that leading banks will
commonly price based on a holistic relationship
with the individual customer rather than simply at
the product level, with 35 per cent expecting this to
be accomplished within three years and 42 per cent
within five years.
There is an exception to this, however. Banks in the
Developing category are not only more sceptical about
banks shifting away from low margin/high volume
business models in the next two years but also
believe that the shift to a single customer account will
take 10 years, far longer than other market groups.
This caution may result from the distinction between
attitudes of national and international banks in this
market group.
of respondents believe that leading
banks will make significant use of
differential pricing according to the
individual customer’s channel use
83% 75% 74%
expect leading banks to a significant
extent or very extensively be making
real-time pricing decisions
expect pricing savings products based on
customers’ propensity to deposit money
for the long term to become a significant
practice amongst the leading banks

10. - 10
The pressures weighing on the retail banking industry
are likely to force radical change in the years to come.
Some will inevitably fall to the ongoing wave of M&A
activity and the survivors will become increasingly
polarised, between those chasing factory-scale
volumes and those seeking refuge in higher margin
differentiation.
These trends are already evident in the conversations
that Earnix, as a leading provider of integrated
pricing and customer analytics software, is having
with its clients. Banks are keen to design customised
product offerings that foster engagement and brand
loyalty in order to build a customer base that is
resistant to competitive offers and insensitive to
price. Increasingly, leading banks recognise that this
margin-driven strategy will be impossible unless
they harness the power of predictive modelling to
leverage data insight and power innovative, efficient
decision-making across the organisation.
As the battle for competitive edge continues to focus
onthecustomerexperience,pricewillbeakeyleverto
attract and retain target customers. This will require
an in-depth understanding of the customer, forcing
the dismantling of product silos so that organisations
can better understand their needs and sensitivities
across the relationship lifecycle in order to calibrate
a product and pricing model that reflects the “value
exchange” that is at the heart of true relationship
pricing. This will not be an easy journey but it is a
vital one.
Conclusions

11. 11 -
Earnix integrated customer analytics software empowers
financial services companies to achieve optimal business
performance through data science and predictive analytics.
The Earnix analytical solutions drive superior product,
pricing and marketing decisions, while ensuring alignment
with changing market dynamics. Earnix combines predictive
modelling and optimization with real-time connectivity to core
operational systems, bringing the power of analytic-driven
decisions to every customer interaction.
For more information visit www.earnix.com

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© Marketforce Business Media Ltd May 2015
Research devised and conducted by Marketforce