Commercial Bank Deposit Product Differentiation Pricing Research

While the interest rate liberalization since1980s delegated the right of pricing to western commercial banks, it also did narrower the deposit-loan rate margins and led to excessive competition for both deposit and lending market share; Increasing personalized service demand raised the request to bank to provide differentiated and customized product and service; Financial crisis already shifted the commercial banks’business focus while retail banking profit became the new area of commercial bank to increase profit; The new information technology opened the new channels for commercial bank and also resulted the change of banking service...In the current financial environment, the traditional market share enlarging strategies including acquisition and diversification are yielding disappointing results while organic growth through de novo branches and cross-selling are providing less fruitful. Faced with these opportunities and challenges, commercial banks are finding that they must jettison their traditional profitability model and develop a new one based on customer value. Can the Pricing and Revenue Optimization model proved to be the success one in other service industries (i.e. hotel and airline) be applied in commercial bank industry? How will the customer value management work well in commercial bank? How to calculate the customer value metrics? How to further determine the customer market segmentation based on customer value metrics? How will segment population react when presented with special price offer? How to optimize the price for the given customer or customer market segmentation and then lead to commercial banks’revenue optimization?After years of reform, China has already made substantial progress in interest rate liberalization, however, there still remains a floor on bank lending rates and a ceiling on deposit rates. The deposit rate ceiling, in particular, appears to bind, as nominal deposit rates have remained clustered at their benchmark when real deposit rates have been on average zero or negative value for years. Benefited from the issue of "the regulatory of banking service fee pricing management", China’s commercial banks already have their own rights to price most of banking service fees except for several kinds of public transactions’fees which are still under government control. Currently China’s commercial banks earn the huge profits through the big deposit-loan rate margin due to the interest rate control policy, however, the impact to other industries and residents already caused financial sector’s management concern and social’s antipathy, on the contrary, it’ll also accelerate the interest rate liberalization as well. Should China’s commercial banks started to prepare for that by learning the experience and lessons of western commercial banks experienced in their financial liberalization? For a start, is it possible to implement the pricing and revenue optimization model in banking service fee pricing areas while it already caused people’s antipathy by the current pricing methods?To find out the answers for all these questions, the author started the theoretical researching and empirical evaluation in the deposit interest pricing and related service fee pricing context.Based on the analysis of deposit contract’s attributes, micro-structure, demand incentive and categories, and also by referring to the current deposit and related service pricing methods and theoretic studying achievements, the paper summarized out31factors which can impact to deposit and related service pricing, and built up the customized pricing and revenue optimization model to be applied in the deposit and related service pricing areas.Taking one simplified deposit sample the paper introduced the theory of price differentiation and the benefits created for both bank and consumers; Evaluated the general conditions to implement Pricing and revenue optimization model in the context of deposit and related fee pricing, proved that this implementation is adaptable; Analyzed the current customer market segmentation methods and practices, found out the areas to be improved, and then built up the customer segmentation model based on the statistic factor analysis method; Researched the tactics to apply price differentiation method in different customer segments and built up the corresponding strategic theory; Based on the market structure theory and game theory, concluded the logistic price react function for deposit and related services’pricing purpose as well as find the solution to optimize the price in this area.The paper has done the empirical evaluation of factor analysis using850bank customers’data, and extracted3principal components standing for customer value, cost to serve and customer loyalty separately as expected, and then calculated the Net Relationship Value by accumulate the3principle component as per different contribution weight in explaining the data. Taking the non-interest bearing current account as sample, the paper has done the empirical evaluation of logistic price react function parameters separately based on the assumptions to have customer segment or non customer segment. The result has shown the positive efficiency of this function in terms of prediction to pricing offers’acceptance ratio, with the assumption of non customer segment, the correct prediction ratio is more than90%evaluated by the predictive group data used; with the assumption of customer segment, the correct ratio is improved in further. Finally, the paper also optimized the prices under different situations and proved the revenue optimization as well.The Activity-Based-Cost method was used in manufacturing industry successfully at first, and then was bright by applying in bank industry. The Author believe that Pricing and revenue optimization, which were implemented in other service industries successfully, also can be applied in commercial bank product pricing areas and bring the change of profit models. The only thing is that bank services have their own different attributes, people need to take more time to study on how to customize the method in commercial bank product pricing context.