The Price Is Right? Price Optimization Software Tailors Product Pricing with Greater Precision. Yet It Must Be Handled with Care

When it comes to recalibrating loan or account features--especially price--banks, historically, have limited their revisions to matching the competition. [ILLUSTRATION OMITTED] Or, they've kept their analysis to peeks at cash flow, projected interest rates, and movements of capital markets, before setting terms. Changes often are made the old-fashioned way, with a spreadsheet and on a department-by-department basis. But more demanding customers have made alternatives to plain vanilla pricing necessary. At the same time, bank managements that want to create pricing in a centralized, predictable, and repeatable way have made price optimization technology the new hot thing to have. PO--otherwise known as profit-based pricing systems--can add precision, notes Kathleen Khirallah, managing director and practice leader retail banking with TowerGroup, Needham, Mass. The best of these also compensate for tendencies such as adverse selection, or terms that could sink the bank with less desirable customers. PO systems are said to replace the many forms of manual workaround that gets information from the streets into a bank's back office without the need to mess with the core processor. To date, says Khirallah in a report she co-wrote called Pricing Optimization: A Practical Guide to a Retail Bank Implementation, the most common implementations of price optimization are typically in automotive and home equity lending. Rather than help with segmentation or any form of customer analysis or record keeping, PO instead lasers in on the product, tailoring it to the customer by incorporating rules engines and intuitive interfaces that let bankers easily enact corporate strategy, on the one hand, and respond to situational or segmentation variables on the other, in building pricing models. It's a complicated, emerging area that nearly every big bank is interested in or already pursuing, but they are trying to do so under the radar, notes Richard De Lotto, principal analyst, banking and securities practice, Gartner, Stamford, Conn. Over 55% of banks polled in a Gartner telephone survey of 34 retail banks in January have already adopted some form of price optimization and more than 75% plan to use these products in some way by 2012. Price-tailoring capability is complicated to master, De Lotto says, because it requires math and pricing-science skills to interpret software results. Many banks are considering hiring consultants to get emerging programs on track. Meanwhile, De Lotto says, price setting is perhaps one of the more personal and political functions at a financial institution. It may mean the end of the sweetheart deal, he asserts. Despite all the intrigue and complication, De Lotto thinks that at the end of the day most banks will use the software and make it work for them. Washington Mutual, one acknowledged early adopter, is using a price optimization solution from Nomis Solutions, San Bruno, Calif., as part of a strategy to hone its mortgage business in the current trying market conditions. Halifax Bank of Scotland, the largest mortgage lender in the United Kingdom (and Nomis' first bank client), is using PO to refine its installment-lending program. Gaining wider use Of course, not every customer shops on price alone, but among those that are counting their pennies and basis points, more refined offerings can yield big successes. In the U.S., three of the top ten banks are incorporating price optimization technology in various line-of-business product offerings, notes Robert Phillips, Nomis Solutions' co-founder, chief science officer and vice-president. Nomis is a market leader and cut its teeth with PO applications for the airline business before moving into the banking space. Four or five other vendors that attack the problem in various ways provide solutions designed to let a bank set pricing policy without interacting with its core processing system. …

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