Core Banking Pricing Paradigms are Changing with the Times

In the words of famed singer-songwriter Bob Dylan, “The Times, They Are A Changing.” In this blog we examine how pricing models are changing and emerging, both in terms of consumer behavior in general, and for the banking industry in particular.

Pricing models are changing before our eyes. On-demand, consumption-based pricing is seemingly everywhere. The first examples of this pricing are a century old – in the 1920s Michelin introduced “pay per-kilometre” tyre leasing (or “pay per mile” tire leasing depending on where you’re located in the world). However, it’s only relatively recently that these flexible pricing options have become prevalent in so many aspects of our daily lives. From the films we watch to the food that we eat, nearly everything can be paid for and consumed on a “pay-as-you-go” or “pay-as-you-use-it” basis.

Modern banking is no exception.

The attraction of these alternative pricing models is clear for consumers. Paying $120 per year to use a new video streaming service may seem a little expensive, perhaps prohibitively so, when the total payment is due in a lump sum. But how about $10 a month, and you can cancel anytime? Suddenly the numbers become significantly more palatable, especially when most people are not paid on annual cycles.

It’s not simply the alignment of cost to income that resonates with consumers. The ability to drop and pick-up subscriptions as required, or desired, provides each of us with much greater control over the services we consume, offering a better fit in our own unique and changeable lives. This also gives us more confidence in engaging with businesses we’ve not used before.

Consumers aren’t the only ones reaping the benefits from these pricing models. The businesses benefit as well. Lowering the barrier to entry is designed to increase customer acquisition, to a point that outweighs any potential customer attrition that results from giving consumers the ability to drop the service on demand. Importantly, the recurring monthly subscriptions allow organizations to become less reliant on “lumpy” revenue streams, making forecasting cashflow more precise. This type of model, in turn, ultimately makes the vendor-consumer relationship more mutually beneficial than ever before.

Current consumer behaviors are creating an interesting duality of challenges in the banking technology market. Increasingly, banks are under pressure to find solutions that help them meet rapidly changing expectations from their clients, clients who demand an experience more akin to what they encounter with Google or Amazon than a traditional bank. To this end banks are beginning to move away from the traditional banking technology paradigm of big bang “license plus maintenance” contracts and implementation projects; instead opting to steadily replace legacy, monolithic systems with highly adaptable service-style offerings from technology partners, building open ecosystems that offer the level of dynamism required to be competitive in the modern market.

It is also apparent that personal consumer subscription behaviors are filtering through to influence corporate buying strategies as well, with the banks’ decision makers questioning the significant up-front capital and technological commitments and the years-long contracts that come with traditional “license plus maintenance” models. More and more, banks want the same level of control over their short and long term requirements as an individual consumer has when subscribing to favorite streaming services – albeit on a much larger scale, the banks too want the economy, convenience and predictability to pay for what they are specifically using, nothing else. They want to select from a menu of services and be able to pick and choose when and how they consume those services. This makes complete sense given the accelerated rate of change in both the banking market and the world at large – how can a bank possibly predict what their customers will expect in five years’ time, let alone what technology will become available to best meet those demands?

I am not denigrating the legacy banking stacks out-of-hand, they absolutely had their place in a time where customer expectations changed more gradually, but the industry and the advancements of digital technology have changed the game.

The onus is now on the fintech providers to adapt their solutions, services, and pricing options to meet the changing and dynamic market requirements. An essential element is providing banking clients with a low-risk strategic path to compete in the modern world. Those that embrace and adapt to these challenges will thrive. Those that don’t…