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Treasury Strategies and Zafin -- Pricing Excellence in Corporate Banking FINAL

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Pricing transformation: Why now? New banking regulations are putting the traditional corporate banking value proposition at risk, while demanding ever-increasing capital investment. But there is an opportunity for astute banks to leverage the required technology spend for compliance to simultaneously drive excellence in another area: pricing. In the pursuit of regulatory compliance, banks incur direct costs associated with higher staff count, new technology investments, changes to processes, and increased reporting to regulators. These are, of course, in addition to the indirect hit to overall profitability from carrying lower gearing. These costs could, however, serve as a driver for banks to change outdated pricing practices. At a minimum, banks need to incorporate all of these costs into their P&L and find ways to continue to provide value to both customers and shareholders. In this case, pricing is one of the first levers banks can turn to. But banks have faced cost increases before, so why change deeply embedded pricing practices and systems now? Other pressures on profits. In addition to the very large regulatory costs, low interest rates and flat yield curves continue to apply downward pressure on profits. Despite these pressures, banks must continue to meet their growth obligations to shareholders. Strong focus on risk management. Nearly all bank regulations introduced post-credit crisis have been focused on de-risking banks and the collective banking system. By default, banks have been very focused on strengthening their enterprise risk management. Two ways banks are mitigating interest rate and market risk is by diversifying their revenue streams and seeking more fee-based revenue, which – being independent of interest rates – offer the advantage of stability. Some regulations demand better pricing. Some new components of regulatory compliance require greater pricing discipline and coordination across lines of business or product lines. Basel III's Liquidity Coverage Ratio (LCR), for example, links deposit balances to operational services, such as treasury management and other transaction services, which are generally fee-based. To comply with LCR, banks must demonstrate the linkages between deposits and other banking services – which, in effect, will force banks to harmonize their internal systems to monitor client relationships more holistically (including pricing). These drivers make the need clear: make up for new costs and grow fees. But many banks do not do a good job of managing pricing for commercial fee-based services, especially treasury management or transaction services. They often: • Leave money on the table because they have little control over discounts and waivers; • Leave money on the table because services are not priced for value; • Confuse their clients with price lists containing hundreds, if not thousands, of price points; • Retain embedded, outdated practices that have not kept up with other industry advancements; • Fail to invest in their IT infrastructure, preventing pricing at the relationship level; and • Lack transparency around how they manage and set prices – an area ripe for new regulatory oversight. Pricing Excellence in Corporate Banking: The Pressure is On By Chrystal Pozin, Managing Director, Treasury Strategies, and the Zafin editorial team

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