As the cost of funding has risen sharply and compressed banks’ profit margins in many markets, a more sophisticated approach to pricing has become essential. One problem that stands in the way of better pricing is incentives that favor volume at the expense of profitability, and which may undermine efforts to lend responsibly to customers. If you give the front line discretion to discount 10 basis points on a mortgage, they will give away that amount virtually all of the time. Yet in many cases, the giveaway could be avoided by greater discipline. Bain & Company analysis in Australia finds that new homebuyers say they intend to solicit an average of 2.5 mortgage quotes, but wind up getting only 1.5 quotes. More discipline would take such behavior into account.
Rob Hyams, Bruno Perrin, Mark Schofield and Peter Stumbles are partners with Bain & Company’s Financial Services practice. They are based, respectively, in Melbourne, London, Toronto and Sydney.
Disciplined pricing can counter the rising cost of funding, and it also benefits banks at any stage of the economic cycle.