In the competitive landscape of global finance, banks often employ innovative pricing strategies to expand their market presence. A prime example is second market discounting, where a differential pricing strategy is used, in which an organization leverages its strong performance in its core market to balance out discounted pricing in another. This is an established pricing strategy widely used by airlines, movie theaters, OTT platforms, and the banking sector. It is an effective way to enter new markets, build and grow market share, and ensure competitive advantage.
For instance, a large bank leverages its leadership position in the USA to offset lower interest rates and annual fees for credit card products in Southeast Asia. This drives adoption of their credit cards in the emerging Asian markets and helps expand their customer base. Another major bank leverages their affluent customer base and the high fees from their premium banking accounts to offer discounted or free basic checking accounts to students and low-income customers in the same regions. Both these examples demonstrate the application of second market discounting.
But banks intending to implement this strategy must understand and address the challenges associated with it to prevent losses and fully realize its potential.
Understanding the Challenges of Second Market Discounting
Second market discounting cannot be rolled out by any organization whenever it enters a new market. Unplanned implementation can lead to losses and prove to be ineffective in the long run. There are a few significant considerations that must be kept in mind before rolling out this strategy:
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Feasibility Issues: A second market discount strategy must only be implemented when the bank is confident of continuing to serve the primary market as required. At no point should the primary market be left underserved. This is not a significant challenge for banks thanks to digitization. It does not cost anything to create products and most banks have a nearly infinite production capacity. But they may face feasibility issues with expanding to a new geography with a product used in a primary market. A new region may work with core banking systems that are significantly different from the primary market. And banks may then find it difficult to replicate or run with the same product that worked in the first market.
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Average Price: At no point should the average price of the product in both the first and second markets be less than the cost of the product – both fixed and variable costs Again, due to the digital nature of products, the product’s variable cost is negligible. But there are other costs they must consider:
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Cost of Systems Change: The cost for modifying systems to create, launch, and maintain the product in the second market can be extremely high. Costs of implementing changes, testing them, and maintaining the systems can make the product launch in the second market unviable.
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Feasibility and Cost of Localization: A product needs to be localized before it can be launched in the second market. This may range from simple tasks such as a name change to complex ones such as compliance with local taxation rules. This could become a significant overhead cost especially if the systems involved are outdated and inflexible.
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Process Costs: To be successful in the second market, the product must continue the processes that made it successful in the first place. If the second market’s systems cannot leverage the processes developed in the first market, then the replication process can be time and cost intensive.
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Freebies: Dynamic customer segmentation can become a cause for revenue leakage. Let’s say that a successful product is made available to a new segment of customers (second market) based on the total relationship value (TRV) the customer maintains with the bank. If the bank lacks the means to track the TRV conditions continuously then the bank may continue to provide discounted rates even when the TRV falls, and the customer is no longer eligible.
The Right Technology Foundation for Second Market Discounting
While second market discounting is an effective way for reaching new markets and customer segments, banks need a powerful, agile, and scalable technology platform to address the challenges of this strategy. Unfortunately, the legacy core banking systems many banks still work with lack the functionality and flexibility required for effectively implementing second market discounting. Modernizing legacy cores can be expensive, time consuming, and risky. But banks can choose to externalize this process by partnering with a specialized provider that can deploy a robust middle layer that sits over the core. A cloud-native, microservices-based middleware platform can provide the powerful scalability and flexibility that banks need to launch second market discounting strategies and manage them profitably. Such a platform can ensure operational efficiency, accurate pricing, continued TVR monitoring, quick time to market, and enable APIs for seamless integration of applications and services.
Banks must consider a few key and interrelated capabilities when choosing such a platform:
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Glocalization: Global banks, by default must be able to create “global products.” The system must allow banks to select the markets in which the product has to be launched and provide the functionalities with which to customize them to meet the requirements of the second market.
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Central /Enterprise Product Catalog: An enterprise product catalog (EPC) helps in creating and managing a product repository of sellable products with rule-based configurations. This can help the banks create innovative bundles and offers from products and services across the ecosystem. A good EPC system will allow banks to build a product layer over the top (OTT) of core systems to complement those systems.
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Published APIs: Systems must have published APIs using industry standards to ensure ease of integration between systems, such as EPC integration with other systems.
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Eligibility and Enrolment Criteria Management: Product or offer enrolment systems must be able to track and monitor customer’s eligibility criteria to avoid giving away undeserved freebies. The system must be capable of monitoring the customers TRV in near real time to ensure there is no revenue leakage.
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Governance Workflows: Managing products, offers, their lifecycles, their rate cards are sensitive, error prone, and time-critical work. The system must be capable of ensuring that validation and governance rules and workflows are configurable in the system.
Second market discounting is an effective strategy that enterprises across sectors have been using to tap into new markets and market segments. But banks intending to leverage this strategy must be aware of the challenges involved and be ready to mitigate them with a robust technology foundation. To learn more about how second market discounting can benefit your banking strategy and how to effectively implement it, write to us at [email protected].
