Session 1 :Introduction

• Financial services are any service or product of a financial nature that is traded in financial markets (financial instruments).

• Financial services cover an extensive range of instruments e.g. in consumer marketplace on equity release schemes and long-term care

• The marketplace for financial services is extensive

- global marketplace

- wide range of customers e.g. retail consumers, business/corporate customers, other financial institutions

• The key activity of Fis is intermediation, which means that they create assets for savers and liabilities for borrowers, which are more attractive to each than would be the case if the parties had to deal with each other directly

Examples of financial services

• Credit card issuers

• Specialist lending companies

• Stock exchanges

• Leasing companies

1) The Changing Financial Services Industry

• Banks selling and underwriting new products (insurance, investment, transaction processing)

• Offshore outsourcing has changed the economics of service delivery for financial services firms

• Industry concentration:

- Small number of banks controlling the credit card market.

- Small number of online brokers accounting for large number of online stock trades

- ⁠ Mergers made easier due to regulation changes at the turn of the century

2) The Changing Consumer

• Consumers are more in debt than ever before

• Population getting older

• Increasing variance in wealth distribution

• Approximately 70% of Ghanaian adults without bank account.

• In general larger banks charge customers more for their services than smaller banks

3) Economic Forces

• Interest rates

• Stock Market Indicators (GDP, Inflation)

• Unemployment rate (natural level)

• Leading indicators (e.g. crude oil prices)

4) Other Regulations

> Telemarketing Act: Consumers allowed to refuse telemarketing calls by being included on a "Do Not Call" list.

• Identity Theft Protection Act: Identity theft punishable by specific fines and imprisonment terms

• Fair and Accurate Credit Transaction Act: consumers can control the amount of credit information that's publicly made available about them.

"Rational" Consumer's Decision Making Process

Need Recognition

⬇

Information Search

⬇

Pre-purchase Evaluation

⬇

Purchase

⬇

Consumption

⬇

Post-purchase Evaluation

'Behavioural Finance' and Evidence on Irrational

Consumer Decisions

• Christmas clubs pay no interest to depositors. Customers deposit money each week but could only withdraw the money on December 1st

• Use of debit cards has surpassed the use of credit cards

• Consumers' use of overdraft line-of-credit on cheque accounts (despite a large savings account balance)

• People are under-investing into their retirement funds

• Credit card companies' growing use of penalty fees rather than interest charges as a source of revenue

1) Tripod of costs underpinning pricing strategies

•Cost incurred by the customer & service providers

- the cost of money for example

•Competition - the absence of effective branding has led to price as determinant in choice making

•Customer demand - the wealthier the population, the greater the demand for financial services

2) Challenges in Pricing Financial Service

• Financial services are multi-faceted

- Example-Life Insurance: coverage amount, exclusions, length of policy, PREMIUM

• Quantifying costs may be very difficult

• Quantifying profits associated with a given client difficult due to bundled relationships

• Price and value are a function of economic conditions (e.g., interest rates)

• 'Quality' is illusive and may be intangible

• Consumer price memory is very weak

• Potential channel conflicts in pricing (e.g, brokers vs. originators)

• Regulatory constraints on price may exist

3) Role of Price in a Financial Service

Price is

• The sole source of revenue for service provider

• A signal to the competition

• A signal of quality and value to the customer

4) Pricing Objectives for Financial Services

1. Increasing market share (p< competition)

2. Profit generation (p > cost)

3. Profit maximization (p based on perceived customer

value and the demand function)

5) Pricing Methods for Financial Services

1. Regulation-based pricing

Example: flood insurance, reverse mortgage fees.

2. Cost-based pricing

Price = cost x (1+markup)

3. Parity pricing

Your Price = factor x Key competitor's price

4. Value-based pricing

- Possible sources of value:

- Brand name of insurance provider

- Convenient location of bank branch

- Online access to credit card transaction information.

- Friendly customer service

- Price = Base price of the product + value of additional

features of your service