However, the core banking solution itself cannot cater to all the fee-income needs of a bank. This is attributable to the complex nature of each bank with regard to its independent departments or business silos and their disparate systems.Over a period of time, what results is a severe inability to visualize the fee income or pricing of charges at the enterprise level.
How a Core Banking Solution Works
A core banking solution, often referred to as a CBS, typically has a GL subsystem at its core with plug-in satellite modules catering to the various divisions of the bank. The satellite modules, referred to as "modules," cater to the business functionalities of the various lines of business of the bank. Typical CBS modules include but are not limited to:
Non-financial modules:
- Customer definition and accounts
- Customer limits definition, lines of credit, a central bank reporting structure
- Messaging and advice
- End-of-day processing modules, etc.
- Loans, deposits, money markets
- Letters of credits and bills
- Treasury
- Liquidity management
- Local payments and cross-border payments
- Nostro reconciliations
- Interest and charge definitions, etc.
Transactions are generated at the component level during various events of the contract life cycle, such as contract initiation, booking, accrual, liquidation, rollover, advice generation, contract cancellation, etc. Such dollar (or any other currency) transactions hit the accounting and GL subsystem at the core. Thus, the core GL and accounting system ties the various silos together.
As we have seen, the CBS and its modules are used by the lines of business to manage customer contracts and their life cycles as well as most income classified as non-fee income.
Core Banking and Fee Income
The modules in a CBS have a charge component associated with a customer contract that allows the bank to charge fees. This charge component can generate transactions during various events. The charges, however, are only basic charges that could be required at an account-contract level.
In practice, there are multiple other fees and charge components that banks capture using multiple fringe systems in each silo.
The Limitations of Core Banking Solutions for Fee-Based Income
Fee-based income plays a significant role in the overall profitability of a bank. Limitations on the growth of traditional spread-based income have only led to an increase in the weight of fee-based income.
Hence, banks are looking for a way to view charge income at the enterprise level—i.e., a single-customer view of all of a bank's fee-based income. This means there is a need for the ability to develop enterprise-level pricing strategies, charge the customer at the relationship level, give a bundled fee offering to the customer, etc. A CBS and its modules are not designed to cater to a need for enterprise-wide pricing and billing.
Pricing
The services, maintenance, and utilization charges are important revenue streams for the fee income of a bank. These charges are priced before billing a customer for charges.
Typically, in a large bank, the number of and types of charges can run into multiples of thousands. Here is a small set of examples of a bank's fee income:
- Initiating charges for ACH (automated clearing house)
- Charges for sweeps, target balancing, and pooling products
- Account-receivable tracking and reconciliation charges
- Money-market sweeps
- Charges for advice
- Service charges for DD, collection, and lockbox transactions
- Check 21 imaging services
- Multiple statement charges
- External service charges such as fax charges, courier charges, etc.
- An enterprise-wide pricing and billing strategy such as relationship-based pricing
- The ability to launch products on the fly with low time-to-market
- The flexibility to launch bundled product offerings, etc.
A PBS is a centralized pricing and billing engine that can accept multi-currency transactions from multiple systems and multiple pricing parameters. A good pricing and billing solution (PBS), has the ability to dynamically price millions of transactions based on multiple parameters and bill a consolidated charge to the customer.
A PBS product offering is the ability to put together preferential price schemes for various charges. Product pricing can be based on the type of customer or the type of relationship of the customer with the bank. For example, a high-value customer and its subsidiaries get a committed or preferential charge for ACH and Sweep products. To add some complexity, there can also be minimum agreed revenue for those service lines or minimum monthly volume commitment from the customer.
The products can also come as a bundled offering or as a volume-tiered product or with cross-product-based pricing discounts, etc. All of these help the bank optimally price a customer based on the relationship. The priced transactions are thereafter billed according to the billing preferences of the customer (i.e., bimonthly, monthly, quarterly, half-yearly, etc.).
The bank, therefore, gets a single consolidated customer-level view at the enterprise level for all the fee income across its product portfolio. This helps the bank determine its profitability, revenue leakages that can be plugged, and future pricing policies that it can strategize.
Conclusion
A core banking solution is mainly used to manage the spread-based income of a bank. The fact that the fee income of a bank is a key differentiator in terms of profitability only increases its importance in the current scenario.
Having an enterprise entity and pricing strategy is important to the fee-based income of a bank. A pricing and billing solution helps manage the fee income of a bank by providing a single-customer view of all charges across the bank's product silos. A pricing and billing solution, hence, brings to the table a unique value addition to a bank by helping it maximize its fee income.
K. Nanda Kumar can be contacted at knk@suntecgroup.com, and Prashanth Bhat can be contacted at prashanthb@suntecgroup.com.
