Pricing - How Much?

 It seems like a good idea to keep in mind the target customer when we consider the way and amount we want to price.

Let's say that we want to price this service at $150.00 / month ($1800 annually). If you are already paying $18,000 per year in fees and taxes for your financial life then you are going to increase your annual cost by 10%.

But...!

You are probably saving yourself more. 

Let's say that you think that an hour of your time is worth $500 (how you get there is unique - maybe that's your job or you just sort of have this idea in your hear). If you need 3 hours a month to manage and react to all of the different aspects of your financial life, then you are spending $1500/month.

If a company can offer you a 66% reduction in time, in this case $1,000, how much would you pay for the service?

To be clear, you are still spending $500 a month on your financial life. You are also still spending $18,000 annually on your financial life for fees and the like. 

But if you pay $150/month for this service, you are keeping $850 each month of the value that the company has created for you. So, you are paying $1800 more in fees but you are saving $10,200 annually of indirect costs and you can go further by spending that time with you family or whatever it is that adds even more juice to this equation.

Party on Wayne!

Party on Garth!

Cost to Serve as Opportunity

McKinsey estimates that in the United States, it costs ~$550 per year to service each customer or $45.83 per month. I have found this data to be approximately correct in reviewing the financial statements of several banks in the US that are publicly traded (JPM, Citi, BofA, WFC, USBank, Alpine Bank, Morgan Stanley).

These numbers can be divided between compensation costs and other costs, which are mostly technology, marketing, and occupancy (real estate). You can't get all of this for the retail-only business lines but you can make some assumptions and get some estimates that are useful guideposts.

That is an interesting number from the perspective of a new venture. This is because ultimately incumbent service is neither very good or very cheap. It is built of legacy systems that are held together by masses of people whose only job is to make sure these systems keep talking to each other. 

After decades to properly integrate all of this, most banks have not yet done so. Even with the coming of AI it seems a job that is both unappealing and unlikely to be done. The sheer expense of this kind of effort alone is probably enough to dissuade most CEOs (note that JPM already expenses ~$8 billion on tech each year, which does not include the purchases that they capitalize.

If you can provide objective and platform-agnostic service that is better and hit this target, the one that these banks already pass onto their customers anyway, you could be in business.

Literally...

Financial Supply Chain - Asymmetry in Action

 For anyone interested in business, supply chains are an important concept. 

The traditional idea takes you to a large field in the middle of nowhere, to find a huge building churning out whatever. Taken to the next step puts you (probably) on a plane to many parts of the globalized world to find the raw materials that make up the inputs for the factory you just left.

Though it looks quite different, there is a supply chain for financial products. Instead of smokestack factories however, it is composed mostly of people sitting on high floors of buildings in major cities (e.g. lawyers, financiers, regulators, and more lawyers). 

Just like in traditional manufacturing, every link in that chain adds cost to the product that is being sold. 

Just like in traditional manufacturing, these products must be sold for a profit (calculated as cost+ or some other methodology).

If this is true, then the price that is charged for the product must be influenced by the cost. The difference in financial services is that there is a variable revenue stream in many cases. 

As an example, a mortgage costs $X to put together. If the bank wants to make a 10% margin, then it sells for $X*1.1. But the revenue that the bank makes is based (mostly) on Net Interest Margin (NIM), which is the difference between the rate they pay on deposits and the rate they can get from (in this case) this loan. The price of a mortgage is just all the projected future cashflows discounted back to today, using (again) interest rates to do the discounting. 

You can see that if the supply chain were cheaper (had fewer steps or was more efficient at each step), then the price of the product would be lower, which in turn would lower the price that the bank would need to sell it for. In essence the supply chain, just like in traditional manufacturing, influences the price of the product irrespective of market conditions. It is also reasonable to assume that this only hurts consumers - that is when the product "should be" cheaper, banks do not let the price fall whereas when the product "should be" more expensive they let the price drift to "market levels."

"Hey Siri, define 'asymmetry'"

Cost -> Profit Center

 In the true goal of all companies today, transforming a cost line into a profit center is the ostensible goal of many management teams. 

This can be used both within a company that exists but also to help understand how to enter an industry. Interestingly, this goes beyond the idea of merely cutting the costs of the incumbents (see: Neobanks and fintech companies vs. incumbent financial institutions). It goes to the idea that a cost line is an available revenue line instead of just something to be cut.

To wit, McKinsey:

https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/our%20insights/reshaping%20retail%20banks%20enhancing%20banking%20for%20the%20next%20digital%20age/reshaping-retail-banks-enhancing-banking-for-the-next-digital-age-full-final-v1.pdf?shouldIndex=false

If this is correct, then by 2020 estimates there is a $550 cost per retail banking customer available to be another company's revenue. Today, this is $550 spent with inefficiencies, poor service, obsolete technology, etc. etc. It would seem that a much better version could be offered out of the box without the need for all of the capex that would make its way into this line if an incumbent tried to do it...