The Art and Science of Pricing Financial Services

This paper discusses the various aspects involved in the pricing of financial products and services, and comes up with a core set of competencies required to perform pricing within a financial institution. The paper describes:

• The reasons why prices are difficult to understand;
• Cost, competition and value - the three core concepts of pricing;
• The importance of transparency in pricing, and the methods to improve transparency;
• The problem of misdirection that affects transparency.

The paper states that:

• The prices of savings products reflect the reasons that people are motivated to save; the reasons include: for transactions, for precautions and to speculate;
• MFIs face the challenge of pricing their savings products appropriately;
• MFIs should use differential pricing when pricing loans;
• Pricing electronic banking products is especially challenging.

The paper lists the following set of core competencies that MFIs need to have to perform pricing:

• An understanding of costs and the impact of different pricing models;
• A consideration of the prices charged by competition;
• Research into the perceived value of particular services;
• Transparency in the communication of prices.

The paper concludes that these core competencies are unlikely to be found within a single department in a financial institution. Therefore, pricing should be a collaborative effort, between finance and marketing, senior management and the Board of Directors.