PwC Fusion Solutions Pricing improvement asset side (1/2)

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1 Fusion Solutions Pricing improvement asset side (/) TOP, Romania Personal loan redesign Based on the conjoint research, we identified different segments (for main lending purposes) with clearly different priorities in the selected price elements. This approached increased profitability and product attractiveness at the same time, resulting in a real winwin (clientbank). TOP Building Society, CZ Product and price redesign of personal loan to increase sales results and product attractiveness for customers. Two main customer segments identified and product/price parameters tailored based on these findings. N 5% increase in total sales EUR.5 m savings/year Large TOP 7 bank, Poland, disbursement fee, and monthly fee pricing elements were found to be significant in customer choice and the customers seemed to really understood the pricing structures of personal loans. Nevertheless, customers did see benefits in purchasing PPI. increase in cashflow profitability EUR.7 m savings/year

2 Fusion Solutions Pricing improvement asset side (/) TOP bank, Czech Rep. Complete redesign of product and pricing parameters to increase profitability of credit card products. Detailed analysis of price leakage and customer price features sensitivity. Completely new pricing structure implemented including new pricing logic and features. EUR 5.6 m savings/year Inovative bank, Poland One of the most dynamic bank in Poland servicing.6 mil customers faced the lowest market interest rates in history and had to find an optimized price for each client to boost the s earnings. customized price streamlining based on the price flexibility engine was implemented increase in cumulative sales volume 5

3 a. Case study: Personal loan price optimization in a TOP, Romania Client expected further potential income streams identified on the interest and fee payments received from the existing loan portfolio Result of the introduction of segment based subproducts the market attractiveness of product and the profitability significantly increase One standard product approach 59, personal loans RON,, disbursed amount RON,, net interest & fee* in the total lifetime Lifetime = 5 year Total increase in net interest & fee*: EUR 5. million/year Segment specific products approach IR driven segment Share of segment % Increased profitability 6% Repricing effect** +5. Changed utility +% Volume effect +.9 Lifetime = 5 year % % % 9% Lowest tenor the better Low monthly fee over low IR Non financial aspects % 9% % 6% 7% % % +6% 5% RON 9,, net interest & fee* in the total lifetime Annual growth in profit based on repricing: EUR. million Annual growth in profit based on increased utility: EUR.6 million * Not including credit loss, sales commissions and allocated costs

4 b. Case study: Personal loan price optimization in a TOP, Romania Client expected further potential income streams identified on the interest and fee payments received from the existing loan portfolio Four different segments with very different preferences identified (IR) driven (%) Tenor (months) Monthly fee Up front fee (RON) Product benefits TTC Non financial aspects (%) Tenor (months) Monthly fee (fixed Up front fee (RON) Product benefits TTC Share of segments in total sample % % Lowest tenor the better (%) Tenor (months) Monthly fee Up front fee (RON) Product benefits (%) Tenor (months) Up front fee (RON) Product benefits TTC TTC Monthly fee 6 7 Low monthly fee over low IR 6 Net Interest & Fee earnings/loan/lifetime Standard: RON,9, Specific: RON 5, (+6%) 5 9 Segment based subproduct development for interest rate driven clients increase the utility (+%)and the profitability (+6%) at the same time % 9% Segment based subproduct the conjoint analysis has identified four different segments with significantly different preferences and utilities. For these segments special value propositions can be defined which can increase both the attractiveness and the profitability of the products. (IR) driven 6 pts.5% Tenor Monthly fee Upfront fee Prod. benefits TTC (days) Utility Profitability Tenor Monthly fee Upfront fee Prod. benefits TTC (days) Utility Profitability 59 pts 9 pts 59 pts 7 pts 5 pts 5 pts 6 pts Non financial aspects pts 7 pts 9 pts 7 pts pts 7 pts 7 pts pts 6M xy A +% + 6% 9.5% 6M xy A % + 5% 7 pts 59 pts pts 59 pts pts 7 pts 5 pts pts pts 7 pts 9 pts 7 pts pts 7 pts 7 pts 9 pts Share of segments in total sample % % % 9% Tenor Monthly fee Upfront fee Prod. benefits TTC (days) Utility Profitability Lowest tenor the better pts 6 pts 6 pts pts 9 pts 5 pts pts pts Low monthly fee over low IR Tenor Monthly fee Upfront fee Prod. benefits TTC (days) Utility Profitability 9 pts 7 pts 75 pts 55 pts pts pts pts 57 pts 9.5% M xy A +5% + 69% 9.5% 6M xy A;D;E +% + % pts 67 pts 5 pts pts pts 7 pts pts pts pts 7 pts 69 pts 55 pts pts 5 pts pts 66 pts November 5

5 a. Case study: Redesign pricing for unsecured building loan in a TOP Building Society, Czech Republic Client redesign its unsecured lending product portfolio and expected to increase overall product profitability and customer attractiveness Which do people prefer monthly instalment or interest rate? Which do people prefer lower interest rate with fee or higher rate without fee? Which do people prefer an attractive interest rate or a more expensive instalment? Loan CZK, Loan CZK, Loan CZK, Loan CZK, Loan CZK, Loan CZK, 6.5% Monthly instalment CZK,77 6.5% Yearly fee CZK 6.6% No other fees 5.99% Monthly instalment CZK,999 6% 77% 5% 55% 7% % 5

6 b. Case study: Redesign pricing for unsecured building loan in a TOP Building Society, Czech Republic Client redesign its unsecured lending product portfolio and expected to increase overall product profitability and customer attractiveness 5 Which is best monthly or annual fees? Preferences distribution CZK monthly.% 59 CZK monthly 6.6% 95 CZK monthly.% Equal Price CZK yearly 7.6% 5 CZK yearly.57%.% 7 CZK yearly There are two major segments with different preferences price seekers and bundle seekers. The only attribute, where the segments have different perceptions, is interest rate Aggregation Segmentation p.a./ monthly instalment Management fee for loan account Fee for loan activation Additional benefits of the loan Provider % % % % 6 % 6% % % % 6% 5% 7% 7% % 5% 5 75% % 5% Bundle seekers Price seekers % % (monthly instalment % % (monthly instalment % (monthly instalment 7.7% 6.5% (monthly instalment %.9%.6%.% 6.9 (monthly instalment 6 Bundle seekers Price seekers 7.5% (monthly instalment 99 6

7 c. Case study: Redesign pricing for unsecured building loan a TOP Building Society, Czech Republic Client redesign its unsecured lending product portfolio and expected to increase overall product profitability and customer attractiveness Profit/loan ASIS STATUS 6.5%.% CZK/year MIN market share 7.5%.9% 7 CZK/year 7 Profitability and market share can you have both? Bundle seeker 6.9 CZK/month One payment back benefit 5 5 Bundle seeker without benefit 6.9 CZK/month Only benefit 6.5%.% /year One payment back benefit Bundle seeker 6.5% CZK/month One payment back benefit Price seekers 5.55%.% 59 CZK/month 5% 5% 5% 6 Market share MAX market share 5.5% CZK/month One payment back benefit Sales increase by 5% + EUR.5 million/ year 7

8 a. Case study: Personal loan price optimization in a large TOP 7, Poland Client expected to increase overall profitability of retail business by deliberate product redesign based on deep understanding of market and clients preferences Recommendation #: Comprehensive retiering & repricing helping to stimulate both sales & profitability, better management of risks and repositioning of credit products Key principles & changes. The higher the amount is the lower the interest rate can be. The longer the tenor is the higher the interest rate is. No variable rates on short term and no fix term on long term (FTP fix vs. FTP variable is + bps higher). Openline facilities are only available on variable rates, with a ~ bps premium vs. variable amortized loan 5. Under PLN 5, credit card or overdraft is to replace personal loan 6. If tenor < months and amount < PLN 5, other than no personal loan is offered (sales finance solution can be an alternative) 7. No standard offer over months (only casebycase negotiations are possible) Accessibility, PLN, PLN, PLN 5, PLN, PLN PLN month 6 months 7 6 months 6 months 5 month Amount Fixed VAR Fixed VAR Fixed VAR Fixed VAR Credit Card/ Overdraft (No personal loan) 5.9%. 6...% 5..7% % 5.5% 6.7% 6. 6.% 9. Lower amounts are not in the target: 5% of total volume (5% of deals ) gives room for selling credit card and overdraft + EUR,/ year + a chance to offer attractive variable headline interest rates and straighten long term funding structure 5.6% % 7.5% 5.7%. 5.9% Credit Card Overdraft (No personal loan) 5% 5.5% 6% Legend for the table 9% 9,5% % Bold: Recommended indicative Normal: Actual effective rate 6% 6.5% Open Line*.9%.9%.9%.9%.9%.9% * Variable rate Share In last months sales 5% 5 5% 5 5%

9 b. Case study: Personal loan price optimization in a large TOP 7, Poland Client expected to increase overall profitability of retail business by deliberate product redesign based on deep understanding of market and clients preferences Upfront Fee Attractiveness Recommendation #: Increase upfront fee from % to 5% for amount higher than PLN,. Under PLN, we suggest introducing 7% upfront fee Key principles & changes. Upfront fee has less importance in decision making thus higher fee percentages are less rejected than high interest rates + EUR,/ year. Applying % or 5% does not result in big difference in attractivity. Higher upfront fee can compensate lower interest rates. The fact, that higher upfront fee applied for lower amounts encourages clients to get higher amount can also increase the sales volume Top 7 Other banks...9% From To (higher amounts) To (lower amounts Recommendation #: Introducing builtin, obligatory insurance for.5% monthly fee + EUR. million / year Key principles & changes. Life insurance as well as insurance for permanent disability has very low importance while their profitability is high. Clients seem against upfront insurance but has rather positive attitude toward monthly payment of insurance premiums Insurance Fee monthly.5% monthly.5% monthly.5% Top 7 upfront % Other banks upfront % no insurance Attractiveness.6.9 To From 9

10 Case study: Setup pricing for new Credit card products in a TOP, Czech Republic Client preparing launch of complete new credit card portfolio and expected to increase overall profitability of credit card business Estimated impact on revenues CZK million Maintenance fee Late fee ATM fee in bank ATM Reminder letters ATM fee in nonbank ATM Emergency card replacement Total Current price CZK New price CZK,7 Sensitivity Sensitive Neutral 65 Max 5 6 Max 5 5 Max 5 Max, A 5 B 6 C 99 A 5 B 5 C 5 Neutral A Max B 7 9 C 9 Neutral A B 5 C 6 5 Neutral A 6 Max B 5 69 C 69 Sensitive Proposed price position Price levels of key competitors CZK A B. C 9.% 9.% Sensitive 9. A 9.% Max B.9% 9..9 C.5% Repricing of sensitive aspects of credit cards resulted in~5% revenue uplift + EUR 5,6 million/year Price levels of other competitors CZK D 9 E 5 D % of monthly instalment E 5 D 5 E D E 5 F 5 D E 5 F 5 D, E, D.% E.6% F G.5% H.%

11 pricing elasticity solution works efficiently in one of the most dynamic bank in Poland Background The client was one of the youngest, innovative and the most dynamic bank in Poland. Their assets reached PLN 6.5bn (Jun 5). Product offer targets on Retail, incl. SME. The bank services.6 mil customers, incl. ths of business customers. NML Challenge Alior, as all banks operating in Poland, faced in the lowest interest rates ever and rising pressure from competitors, incl. increasing similarity of offers leading to intensified price competition. needed a proper solution to find an optimized price for each client to boost the s earnings and loan sales volume Solution has successfully implemented pricing model for NML products in the retail segment. The solution entailed the customized price streamlining based on the price flexibility engine, which generated individual offer prices based on modeling of 5+ factors determining clients propensity of taking a loan Results Comparison of cumulative sales volume (PLN bn) 6 Sep Nov Jan 5 Mar 5 May 5 Jul 5 Sep 5 Comparison of monthly sales volume (PLN mn), Sep Nov Jan 5 Mar 5 May 5 Jul 5 Sep 5 s pricing engine pricing Since the onset of the campaign reached a result more than better than the. In consequence, the decided to shift to the system where 9 of offers came from solution In September 5, monthly result was 7% higher than the cumulated sales at the beginning of the project Model recalibration the Central reduces the lombard rate by % action implemented after weeks