From time to time, businesses have to raise their prices.
Sometimes this is a grab for bigger profits, but just as often, it’s a matter of cost. If the cost of your inputs rises, you’re under pressure to raise the price at which you sell your outputs. But, understandably, this often leads to consumer backlash.
Australia’s big-four banks have just this problem.
While they’ve never exactly been popular, the global financial crisis has harmed our largest financial institutions in two ways. Firstly, it has made bank bashing more popular than ever, and secondly, it has made it more expensive for banks to access funds. Connect these two things, and you have a public unreceptive to the bank’s efforts to explain why they are raising interest rates.
A complicated story to sell
James Hickey, a banking partner at Deloitte, says the pressures on the big for bank are significant.
The RBA-set cash rate, after all, only sets the interest rate for short-term overnight loans that the banks owe to each other – a little understood fact – which has almost no impact on their cost of funds.
Almost half of mortgage lending is financed from overseas. Australians borrow more than they save, so their deposits are not enough. Hickey says: “In order for banks to keep lending, they need to go offshore”.
The interest rates for off-shore loans are not stable, explains Hickey. Before the global financial crisis, the banks could predictably guess how the rates would move. “Since the GFC, there’s been heightened volatility,” he says.
Compounding this, the battle for deposits has gotten fiercer, pushing up the cost of another funding source for the banks. The big four have kept interest rates for retail depositors high, despite the latest RBA interest rate cut, as a report in today’s Australian shows.
It is easy to criticise
But regardless, the Australian public expects banks to pass on the RBA’s interest rate cuts. The public is aided in this view by the words such as those of Treasurer Wayne Swan. After this month’s interest rate cut, Swan said the banks should “do the right thing and pass this on”.
The last three months have seen customer satisfaction fall across all the big four banks, as customers react to interest rate increases. These ratings matter. “Banks are very conscious that first and foremost they’re providing a service to Australian households and consumers. They want to make sure those interactions are positive,” Hickey says.
It’s hard to keep customers on side while simultaneously raising interest rates. However, the experts LeadingCompany spoke to said it isn’t impossible.
Selling higher rates (or prices) can be done
Adam Ferrier, founder of Naked Communications, says anything can become desirable or undesirable depending on how it’s framed. “For example”, he says, “people are motivated more by potential losses than potential gains.” This means when organisations are selling a message that appears to be against the customer’s interest, they can use the risk of loss to cut through. In the bank’s case, they could say that if they were tied to the RBA’s pronouncements, customers could miss out on good rates when conditions eased. “It all comes down to understanding consumer motivation and framing it in the best way possible,” Ferrier says.
Andrew Hughes, a professor of marketing at the Australian National University, says another way to sell the message is by reducing the importance of headline interest rates through product differentiation.
“What you want to do is to move away from a monetary price figure to providing specific value to the customer,” he says. “Instead of ‘get a home loan costing this much’, give other benefits. That’s what they’re trying to work on.”
An example of an industry that has done this successfully is airlines, Hughes says. When people buy a ticket, they look at more than the price to factors such as the service offering, and the class and flexibility the ticket offers when determining whether it is overpriced.
Both experts praised the approach being taken by ANZ, which since December has been announcing interest rate changes on a fortnightly basis rather than the monthly RBA-driven cycle banks have traditionally adhered to.
Ferrier says this will help them sell the message.
“Now more than ever, there needs to be congruency between how an organisation behaves and the message it gives. They need to back up what they say with action.”
“I think what ANZ is doing shows it is independent [from the RBA], progressive, and probably says quite good things about the bank to customers. I think ultimately it’ll pay off.”
However, competition between the banks makes ANZ’s stance harder to maintain. While ANZ has gone to some lengths to explain how it raises its funds, competitor NAB is pushing a cut-price campaign, with a promise to always have the lowest variable mortgage rate of the big four.
“To change customer perceptions, you need to have everyone else in the industry doing the same thing,” Hughes says. “If you do it by yourself, you end up being seen as a premium product.”
Another way the banks can explain their case to the public is through what’s known in the industry as “trans-media storytelling”. This refers to telling a story differently in different media, particularly with regards to how much detail you give.
The medium and the message
Hughes bluntly says the banks should not be advertising in mainstream media with details of how their funding costs are going up. This is too complex. “In this day and age most people are being hit with a lot of information,” he says. “Tell people ‘we have other costs’, but provide those on a website, breaking down your costs in percentages.” This is currently done by a lot of petrol companies, and it allows the very small percentage of customers who’ll go to the website to see what impacts the price.
Ultimately, Hughes believes the future of banking lies in a great range of targeted products. Both NAB (through its focus on individual banking) and Westpac (through its multiple brands) are already going down this road, and he expects the other two will soon follow.
“Companies are realising that if you meet most of the consumer’s needs, they’re going to have a positive experience.”
“The reason you have satisfaction is when customers get what they expected to get. Dissatisfaction is caused by a gap between expectations and delivery. If you segment the market, you minimise the gaps.”