Utilizing a Pricing Model Can Help Your Community Bank Increase Profitability and Earn More Business

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Bankers meticulously assess a borrower’s creditworthiness—standards we would never consider compromising on. Yet, when it comes to pricing decisions, a thorough evaluation of profitability often isn’t part of the equation.

The Flaw in Current Pricing Methods

The biggest problem facing virtually every community bank in the country is a widespread mispricing trend: we typically overprice our largest, most profitable customers and underprice our smallest, least profitable ones. This isn’t done intentionally; the methodology and processes most banks have in place unintentionally lead to this unfavorable result.

In turn, this approach unintentionally puts the bank at risk with its best customers—who may leave for better rates—and causes the bank to miss opportunities to maximize profitability with the least profitable ones.

A robust pricing solution is essential. It allows banks to quickly and easily see where they can price more aggressively to secure new business or maintain important customer relationships. Simultaneously, it shows where they need to price up to ensure the bank is appropriately compensated for the work it does. On deals that historically lose money, a pricing solution can even help the bank lose less.

Competing with the Mega Banks

Large regional and mega banks operate with their own very advanced, sophisticated internal pricing models. These tools allow them to view every deal in the context of the entire client relationship, not in isolation. These applications aggregate all current and future expected revenue from a client across all departments. This sophisticated view allows them to “cherry-pick” by illustrating that the bank can afford to aggressively lower the rate on one product to secure massive profits on another, ensuring they win both pieces of business. Strunk’s solution brings this same kind of power to the community bank.

Strunk’s Pricing Manager: The Solution

Strunk’s Pricing Manager is a full-featured loan and deposit pricing solution and relationship profitability tool that helps community banks win more business and increase profitability. Pricing tools do not tell lenders what to do or make decisions on their behalf; rather, they provide additional information that allows lenders to make a more informed decision and to more effectively compete.

We ask bankers to consider how pricing is set today and to let us show them how our solution will help identify the true drivers of profitability at their bank. Strunk focuses heavily on gaining lender buy-in so that the tool will be properly and effectively implemented with the entire lending team.

Relationship-Focused Insight

The solution provides lenders with valuable relationship information, which includes all loans and deposits, for a full picture of profitability.

  • Loans can be priced individually, or users are able to build out a relationship that includes all of the customer’s loans and deposits.
  • Return on Equity (ROE) targets are provided for both the loan-only perspective and the full relationship view.
  • The relationship view is particularly beneficial as it provides a historical look into how well the bank has done with a particular customer in terms of profitability, since all prior loans for that customer are included. This allows the user to see how profitable each decision has been regardless of when it was made.
  • You can quickly determine: “have we historically met or exceeded our targets with this particular customer – or – have we typically come up short?”. This is an important consideration when making the next pricing decision for the client.

Core Integration and Granular Analysis

Strunk also offers integration with any core system. The solution is designed to pull loan and relationship data directly from the core into the software.

  • Robust profitability and origination reports are then built using this data.
  • These records can be used to model the full relationship when a new pricing decision is being considered.
  • The data is also used to develop a detailed loan profitability analysis that shows at a very granular level where the bank is making money within its lending portfolio and what components of the portfolio are not as profitable.

This granular insight is excellent information for bank management to help drive strategy, while it is also helpful for the entire lending team to see more specifically why the bank needs to take a different approach to pricing.

For more information, please email info@strunkaccess.com or visit us at https://strunkaccess.com/pricing-manager/ to schedule a brief demo.

An independent certified public accountant has examined Strunk’s operations and found them to be in compliance with the AICPA’s Trust Service Principles. It was determined that Strunk meets the Security, Availability, Processing Integrity, Confidentiality, and Privacy criteria for SOC 2 established by the AICPA.