In a digital age, how can banks identify and select charging models for their online services? Hans-Martin Kraus gives answers in his essay for finews.first.

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Digital banking offers are growing in popularity. However, most banks continue to provide services such as online banking, transfers, standing orders and apps free of charge. Meanwhile, the media and retail sectors have provided exemplars for potential new digital pricing approaches in financial services.

These areas already have established approaches to customer-specific billing in a digital environment. Here are four levers with the capability to trigger a new phase of paid-for digital content from banks.

Lever 1 – Paid-for Enhancements, In-app

From the world of digital publishing, many customers are familiar with the in-app approach to purchasing. Customers can download an app for free that offers reasonable functionality without charge.

However, the app encourages users to pay for extra, enhanced features. Many media companies already use this approach to price their online offers, having established for a long time nowthat paying for additional or enhanced content is a standard practice.

In banking services, charging for intensive usage of apps and content – above and beyond a free base level – could be one option. However, the simplest pricing vehicle is the cost-effective download, where customers pay a fixed price for the app and can then use all its functionalities.

Today this contrasts with current financial services practice where, with a few exceptions, digital banking apps come free of charge with all their available functionality.

Lever 2 – Subscription or Usage-fee Payment Basis

Many customers have long been familiar with streaming services, such as Spotify and Netflix. By paying a certain amount monthly, bank customers, too, could access all their financial service provider’s digital offerings.

A pay-per-use approach is also conceivable, in which customers pay a certain amount for the specific functionality they access. This is how so-called shared economy leaders, such as Airbnb and Uber, profit from each booking.

Lever 3 – Pay-to-use: One-off’ or Bundled

Another possibility is to think in terms either of bundles or individual features purchase. The bundled option rules out billing for individual services. The GPS navigation app Scout is an example. Instead of paying separately for features (country maps, speed camera alerts, traffic info, etc.) the customer can buy complete bundles (traffic and Europe; traffic and speed cameras; traffic, speed cameras and all maps). The incentive comes from the fact that these bundles, of course, cost less than purchasing each of the services individually.

By contrast, the payment-per-feature route carries a one-off charge that is not determined by usage levels. Instead, it is billed whenever a user accesses the feature. One high-profile example of this approach is the App Store from Apple. Here, the customer only ever purchases a single feature or app. Apple earns pro rata from individual sales.

Lever 4 – The Freemium Strategy

The freemium business model provides base-level usage free of charge, while the full product and any enhancements are paid for (using levers 1 - 3 above, to incentivize the customer). The free services attract and secure a substantial customer base. These customers are then offered optional extras, or an enhanced version of the core service, for an extra charge. A wide range of internet companies already use this strategy.

In today’s banking, we see that banks charge fees for certain apps, and some have implemented usagelevel-dependent online charging strategies. But going forward, the banking industry has a strong chance to regain lost profitability through new pricing strategies.

Alternative to Account Charges

Medium term, banks have an attractive opportunity to develop digital services fee income to the level of today’s account charges. For retail banking, the business models explored here are in their early stages. However, given the enhanced transparency and fairness that digital services fees provide, they represent a real departure from today’s account management fees.

In the context of increasing digitization, giving something for nothing cannot remain a viable option. Retail banks have an opportunity now to create a profitable new kind of value exchange with their customers, based on content-rich services and enabled by multichannel technologies.

Unwelcome Discovery

Those who succeed have the chance to combine revenue growth with customer satisfaction and market share. Those who ignore the possibilities may make an unwelcome discovery: Customers prefer to pay for useful content way more than they enjoy no-option – and often opaque – account maintenance charges.

Hans-Martin Kraus is Head of Payments EMEA. As a Capco Partner based in Frankfurt, he leads the cross-border payments activities out of one of the fastest-growing markets, Germany. Additionally, he is a member of the German and European Executive Management Team.

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