UNLOCK MORE PROFITABLE CUSTOMER RELATIONSHIPS By Matt Helsing SVP & Northwest Regional Manager, PCBB, ICBC Associate Member Finding the right price for a customer’s deposits or loans can be a difficult balance. Relationship pricing involves looking at your customer’s entire relationship of loans, deposits, fee income and other products to determine the customer’s overall profitability and using this information to make strategic decisions on pricing for renewals or new products. This pricing strategy can have a significant effect on both customer relationships and your bank’s overall profitability. Analyzing customer relationship profitability and using those insights for pricing decisions has become a major component of many banks’ plans to increase their profitability by attracting new customers and holding onto the most profitable of their existing ones. As community banks face rising competition from non-traditional banks, such as fintechs and neobanks, which don’t have the same overhead and are able to offer higher interest rates to customers across the board, the importance of getting pricing right is higher than ever. THE BENEFITS OF RELATIONSHIP PRICING Relationship pricing essentially gives financial institutions a tool to determine the potential profitability of customers by providing more attractive loan pricing and deposit rates to the individuals and small businesses that they believe will be most profitable to their bank over the long term. This approach can be beneficial because it ensures the financial institution is balancing its own profits with the customer’s needs. Competitive pricing also makes it easier for financial institutions to attract new customers and enhances the likelihood of being able to cross-sell additional products and services to customers and make their accounts with your bank stickier. At a time when a rising number of customers are gravitating to fintechs and online bank offerings, analyzing the profitability of the full customer relationship and customizing pricing for your most important relationships is a critical component of financial institutions’ abilities to remain competitive. LOAN PRICING When structuring loans for customers, it’s important to consider how the components of a loan — such as term, interest rate, fees, prepay penalties and other similar factors — impact your institution, and how they can be adjusted to make the most profitable deal for your bank, while also pleasing your customers. A comprehensive profitability tool can help you strategize ways to offset the cost of originating and maintaining the loan with the potential profit from the loan. You’ll want to consider the risks associated with the loan as well, such as credit risk and interest rate risk. The pricing may also take into account the deposits a customer has with your bank, or the potential deposits the customer may bring to your institution, along with their loan relationship. 28 | INDEPENDENT REPORT
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