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Journal of Product and Pricing Lifecycle Management for Financial Institutions

DUBAI

Account managers

Regulators

IN THIS ISSUE: • Feature with IBM: End-to-End Revenue Enhancement • Capco: Realizing Transaction Banking Revenue Growth

16 - 19 Sept 2013


IN THIS ISSUE

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FEATURE: END-TO-E D REVENUE MANAGEMENT I COMMERCIAL BANKI G

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CENTRE STAGE: REALIZI G TRANSACTION BA Kl G REVENUE GROWTH

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PRICI G: THE WHITE KNIGHT FOR WHOLESALE FINA CIAL SERVICES?

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FIXING THE PLUMBI G: COST/I COME, OPERATI G EFFICIENCY AND GETIING STARTED WITH REVENUE LEAKAGE

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PRODUCT CATALOG AND THE FRONTIER FOR I OVATION

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A JOURNEY TO COMPLETE PRODUCT AND PRICI G LIFECYCLE MANAGEME T

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CASE STUDY: SEB

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CASE STUDY: TIER-1 EUROPEA

EXT

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CENTRE STAGE: REALIZING TRANSACTION BANKING REVENUE GROWTH , ,

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and more intact – than their investment banking and capital markets colleagues, corporate and commercial transaction bankers have spent much of the past two years confronting a “perfect storm” of aggressive internal growth targets. For starters, banks contend with brittle, often decades-old operating and technology infrastructure, not to mention intensifying competitive and regulatory threats – all against a backdrop of unprecedented management attention and expectations –

Multi-line commercial banks and bank holding companies (‘BHCs’), which have historically relied—depending on broader market conditions—on either their investment banking or retail banking divisions as a go-to source for balance sheet and income statement growth, are rapidly coming to grips with a transformed likely been irreversibly altered. This is true at the enterprise level, as well as within individual business lines. Meanwhile, shareholders’ growth expectations, while moderated, are as prominent as ever. However, most familiar strategies to grow traditional commercial revenue stalwarts, like liquidity and lending products, are conditional on Net Interest Margin (NIM) recovery – a reality potentially two or more years in the making. In the midst of all of this tumult, wholesale transaction banking continues to be one of the few lines of business that bucks prevailing trends, providing less volatile net income at healthy margins and in the current context, completely respectable Return on Equity (ROE) – which, in many cases, dwarf those produced by the rest of the bank. In many respects, the convergence of the global commercial banking industry on this single realization has been the most underreported story of 2013.

Journal of Product and Pricing Lifecycle Management for Financial Institutions | Sibos edition, Fall 2013

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Decades of underinvestment in core transaction systems,

services now sit squarely in the spotlight. Management attention is at an all-time high and budgets are available very good news – if you’re a transaction banker.

revenue management tools has yielded a current envievery major player in wholesale transaction banking is coming to grips with its own version of massive, systemic, long-term revenue leakage – estimated in the order of tens (and quite often hundreds) of millions of dollars in lost value.

At the same time, for many banks, the spotlight – to which most transaction bankers are wholly unaccustomed – has cast in stark relief underlying operating models and technology infrastructure unable to consistently deliver some of the most basic services corporate treasurers and CFOs would otherwise expect as standard. The illumination has revealed one other critical aspect of this tale that might best be described as double-edged. Decades of underinvestment in core transaction systems, revenue management tools has yielded a current environment in which virtually every major player in wholesale transaction banking is coming to grips with its own version of massive, systemic, long term revenue leakage – estimated in the order of tens (and quite often hundreds) of millions of dollars in lost value. The double-edged nature of this reality stems from the availability of a prize of this magnitude – right there in plain sight. On one hand, for those tasked with recapturing and realizing this value, the goals and targets couldn’t be clearer; on the other, success or failure of efforts to go after the leakage will be relatively easy to measure and highly transparent. Leading these efforts is not for the faint of heart!

Obstacles to innovation In our experience, several factors impede banks in their efforts to drive revenue growth through the optimization of current offerings and/or by developing new products and revenue streams. Governance constraints Many banks are eager to offer exception-based pricing and product bundles based on relationship value. In such arrangements, customers agree to maintain certain balances, product concentrations or levels of activity in transactions, preferred interest rates or overall invoice discounts. If negotiated with an awareness of the value both the bank and the customer.

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Journal of Product and Pricing Lifecycle Management for Financial Institutions | Sibos edition, Fall 2013


However, for the bank to realize the intended value, execution of the contract is the next negotiation cycle. As a result, many of the customer’s obligations are neither systematically tracked, nor enforced. Compounding the problem is that even when the bank would like to track the requisite activities and balances, it lacks the systems integration needed to do so.

the inability to price based on a 360° view of customers’ total balance and transaction behaviors virtually guarantees underlying contracts go unenforced. Situations

A common example arises when preferred pricing based on a client maintaining an aggregate minimum relationship balance is applied as a matter of course, when in fact, the combined balance is regularly less than the minimum. Why doesn’t the billing process uncover this disconnect and bill appropriately? Because most ances in a client’s many deposit, sweep, investment, custody and payment accounts and most pricing analysts lack the time or the discipline to perform these activities manually every billing period. Organizational barriers Originally organized around geographic region, most banks have evolved into business-functional organizations that are delineated by: Line of business (retail, commercial, wealth); Product set (deposits, lending, services); and sometimes the product verticals. uct silos not only inhibit collaboration, but they often encourage explicitly contradictory product and customer development strategies. Turf wars over who “owns” the customer are common and often lead to even less collaboration and information sharing. Against this backdrop, understanding the value of a customer’s total relationship – much less assigning pricing based on holistic relationship value – can be a daunting exercise, indeed. Data availability As noted above, legacy and core banking systems at most institutions – even Though some institutions have made great strides in extracting, transforming and ability measurement systems and their corresponding data remaining stubbornly discrete. Even in the more ambitious data warehouses, freshness of data and remote access times are often persistent issues. With the coming new regulatory requirements, including Dodd-Frank, RDR and FATCA, data is an even more critical issue for banks to manage with the demand for improved transparency and reporting. Journal of Product and Pricing Lifecycle Management for Financial Institutions | Sibos edition, Fall 2013

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Product and customer management constraints

Unfortunately, many banks lack the core analytical horsepower needed to translate complex raw data into meaningful business insight. Analysts who are simulta-

access to individuals with a subset of these skills. Rather than creatively share resources, the siloed nature of most banks’ product teams, combined with the scarcity of the talent, can lead to analyst hoarding.

and foremost an exercise in complexity management. In negotiated pricing environments, like wealth and wholesale banking, the number of product instances is often extraordinary. Just as extraordinary is the rather lacklustre availability of comprehensive product and pricing data in a single system.

complexity and siloed nature of bank operations. Cobbled-together, exceptionbased pricing schemes and customized products make consolidated billing and

are resolved. Without rules-based billing, the bank is also unable to articulate and communicate the value-added services offered to a client.

Multi-track solution Effectively addressing and resolving each of the above obstacles would potentialfor most banks, direct confrontation of these challenges just is not feasible. Fortunately, neither is it necessary to successfully achieve one revenue growth goal. Consider the following three initiatives in which successful banks have engaged in order to modernize their approach to managing the pace and nature of revenue growth. Together, these solutions are intended to supercharge banks’ ability to design, bundle, price, sell, bill for and manage a complex array of highly targeted, differentiated products and services to their clients. Create an enterprise-wide product catalog; Enhance and/or upgrade invoicing and billing systems. Many institutions are challenged to make progress in these areas. Given today’s imperative, these must become areas of focus and real investment. Progress enable banks to tie new, modular Product and Pricing Lifecycle Management and modeling tools, enhancing existing core enterprise systems. 28

Journal of Product and Pricing Lifecycle Management for Financial Institutions | Sibos edition, Fall 2013


Common product catalog The product catalog serves as a global, single-source repository of all bank offerverticals. For wealth managers, this would include all advisory, discretionary, brokerage, securities and structured products, FX, etc. The catalog translates data from legacy transaction, asset management and accounting systems to structured details on each product variant, including functional components, pricing architecture, list and effective prices, client pricing eligibility and charge/waiver history, billing frequency and calendar and bundling rules. Strategic pricing and the pricing engine Construction of the product catalog inherently allows for enhanced transparency into actual on-the-ground pricing activities. Econometric analysis of historical relationships between price and performance can serve as a foundation for consideration of the group’s formal pricing strategy, which should address a range of issues, including: How important is price as part of the bank’s value proposition? How do customers perceive the bank’s current price position? How does that perception vary across existing customers and segments? Are there other segments along which attitudes and perceptions of price are likely to vary? What is our intended price position relative to key competitors? prices? How much discretion do we intend to provide to the front line? potential changes in pricing structures and levels? Which pricing principles should inform our day-to-day pricing decisions? How do the answers to these questions vary from product to product or market to market? Direct, in-market customer research can be highly effective at extending or refreshing insights derived from analyses of trailing data and for proving insights into customers’ attitudes that historical data doesn’t contain. In short order, strategy yields to pricing principles, which yield to tactical price setting and management. This is where a robust pricing engine is essential. The pricing engine determines the extent to which a Relationship Manager can discount straints, loyalty, demand elasticity and other factors. It can then override standard be compensated.

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In an ideal system, if a proposed deviation from pricing deploy loyalty programs, incenting customers to .

management that need to approve the exception-based pricing. The tool documents each step of this process. Simulation capability also allows the bank to model different scenarios based on different combinations of product pricing, income based on that pricing and balances – including potential decline or growth factors to demonstrate able, they can then also deploy loyalty programs, incent-

Together, the product catalog and pricing engine also en-

relationship bundling scenarios. Using direct feeds from actual volume and revenue data on enterprise systems, bank managers can use analytics tools to conduct ad-hoc or scheduled pricing simulations that help them understand customers’ price sensitivity and elasticity on an individual, group or segment level, and determine whether exception-based pricing and other investments in the client relationship are warranted. Banks can also simulate broader pricing strategies based on assets under management, transaction volume tiers, balances, fees and costs by product lines, sets and/or groups. And, they can even use these tools in client consultations. Enhanced billing and invoicing With a pricing engine and product catalog in place, a proper invoicing system simply reacts to the customerproved and governed, automatically generating complete invoices as directed by the product and pricing systems. The invoicing system should meet the requirements of multi-hierarchy companies or ultra-high net worth/family one location and/or statements sent to others, with tailored cost breakouts, as requested. Also, as new pricing is implemented, the tailored billing the savings on the client bill. The Relationship Manager can then advise the client that the charges have been eliminated. The bank may elect to extend the promotion for an additional period of time or decide to implement fees agreed upon by the client. 30

Journal of Product and Pricing Lifecycle Management for Financial Institutions | Sibos edition, Fall 2013


improved customer experience, relationships and loyalty. And, the ability to offer tailored, exception-based pricing can improve bank returns, provide high value to clients and facilitate growth and market share gains – and, in the end, also enable differentiation in an economy of plenty.

pabilities exist in their current billing engines. We are aware of several banks who generated measurable, sustained double-digit growth in realized revenue – with trols on current billing platforms and processes.

Where to begin? relationship pricing and product innovation have never been greater and the potential starting points for this kind of transformation are myriad. Of course, starting too ambitiously is just as risky as starting too incrementally. Thinking about the potential for a phased evolution may help banks sequence and prioritize their efforts. In today’s market context, for example, numerous banks have chosen to start their transformation with a rapid-cycle operations and technology assessment of their current billing and invoicing process. The results of stemming often massive revenue leakage through incremental enhancements to billing override controls, better contract enforcement discipline and more transparent auditing processes are typically visible almost immediately. tion is often substantial. Not only do the immediate results validate the effectiveness of the approach, but they also can be leveraged as a funding source for subsequent investment in an enhanced billing platform, a global product catalog and a more strategic pricing engine. Alternatively, if a bank is more sensitive to revenue leakage in new deals and/or renewals, it can begin with a more growth-oriented view of revenue management challenges and proof of concept. A successful demonstration of the ability to both detect and manage to different segments’ pricing preferences is typically quite effective at winning internal support for further investment in the capability. In addition, the overall diagnostic – which “benchmarks” the bank’s pricing capabilities, processes, systems, governance and culture against leading industry practices – typically becomes the foundation of a prioritized roadmap of initiatives required to operationalize an enhanced approach to pricing.

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Finally, a small fraternity of top transaction banking houses appears to sense that recovering forgone or lost revenue may only be the tip of a much larger iceberg. In these cases, a logical place to begin may be at the beginning – with the bank’s preferences, perceptions of key value drivers and price elasticity, an institution quietly positions itself to rationalize and optimize today’s products, services and pricing. However, of even greater importance is the remarkably advantageous position this kind of approach can yield in preparing for tomorrow by enabling the bank to strategically leapfrog competitors and market conventions with genuine innovations for which it is sure it has a buying audience. Whatever the starting point, banks may want to consider several important points as they pursue these opportunities. Make sure transformation is executive-driven Implementing a Product and Pricing Lifecycle Management tool needs to be an executive-level decision and operation because it involves fundamental business and buy into the necessary governance, organizational, process and technology changes. Bank employee roles could change or, in some cases, be eliminated. And technology changes could impact virtually every area of the institution. Strong leadership and governance will be needed to shepherd the organization through to the future state. Begin modestly It is important to evaluate different business lines to determine the right product set, customer set and region in which to begin the process. Identify and interview the subject matter experts within the organization who can help in understanding the ROI of different lines of business. Most successful transformations begin with

Think about implementation The new product catalog, pricing and invoicing systems may need to sit atop a legacy core system. It’s important to understand how these will integrate, including the types of interfaces and other technology infrastructure that will be required.

about a plan to transition to pricing that considers the value of the entire client relationship. Again, strong executive leadership and involvement will be critical, as the changes will likely lead to reorganization of operations and product management groups.

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Journal of Product and Pricing Lifecycle Management for Financial Institutions | Sibos edition, Fall 2013


The future of revenue growth ever what products and services customers want and at what price, and then

by unprecedented lost spread and fee income. To succeed, institutions will need to know better than ever what products and services customers want and at what price, is a complex challenge, but also a huge opportunity. Winning banks will be those that marshal internal buy-in to innovate existing offerings and to challenge outdated noty and pricing analytics are esoteric, ‘ivory tower’ pursuits. Their executives and employees will embrace the mantra of ‘treating different customers differently’, and they will leverage innovative technology solutions that enable creation and management of high-value, tailored products aimed at distinct client segments and supported by ac-

Frank Mackris is a Partner at Capco and the leader of the North American . James LeVan Capco's and leader of the firm's Revenue Growth practice.

headquarters

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Centre Stage: Realizing Transaction Banking Revenue Growth