How to price a current account? consumer perceptions of current bank account pricing in Germany.

• Jurisdiction: European Union
• Author: Moosmayer, Dirk C.
• Date: 22 June 2011

1. INTRODUCTION

   Most retail banking relationships are based on current accounts. They constitute the inevitable base of any use of payment services, and are usually also sold as a by-product with any solid investment portfolio or loan, be it consumer credit or mortgage. And fees and interest contributions from current banking account relationships have been identified as one out of four key areas of bank income (Howcroft and Lavis 1989). At the same time, pricing is generally the marketing tool that is managed the least professional (Nagle and Holden 2002) and current account pricing in the retail banking industry thus appears as an under researched field of high economic relevance. This seems particularly the case as current banking account prices often have a complex multi-dimensional structure that includes many different kinds of fees such as base fee, fee per transfer, or fee for returning a debit note. Therefore, this contribution aims to provide a better understanding of how consumers perceive diverse price elements of their current banking accounts. I therefore first depict the relevance of current account prices in consumers' bank choice. I then theorize on consumer perceptions of diverse price elements by applying reference pricing thought to the issue of complex multi-dimensional account pricing schemes. For substantiating the developed thoughts, I present the results of an explorative study on consumer bank account price perceptions among 157 consumers in Germany. In particular, I will identify three meaningful clusters and show their behavioural relevance. I then present implications for banks.

2. PRICING CURRENT BANKING ACCOUNTS

   For most consumers, maintaining a current banking account is just an inevitable tie between earning and consumption. However, there appears to be a gap between the low product involvement and the reasonably high purchase decision involvement as banking relationships often last more than ten years. Prior research has investigated the importance of diverse criteria for bank choice and found current account pricing to be a relevant issue. In this context, Kaynak (1999) investigated retail banks in Western Australia and found price aspects to be a key decision criterion. Similarly, Rao (2006) investigates customer relationships in the financial service industry in Dubai and found affordability together with confidence and convenience to be the three key drivers of relationship success. Roig (2005) also found price to be important and considered in conjunction with service performance. Moreover, price elements are important determinants of consumer satisfaction (Matzler et al. 2006; Matzler et al. 2007).

   However, most studies also show that aspects other than price are often considered more important. Almossawi (2001) found availability (e.g. branch access and ATM availability) to account for the six most important aspects; and pricing issues just followed thereafter. Similarly, in a study on U.S. consumers' bank selection criteria, pricing issues were ranked number 5 and 6 (Anderson et al. 1976). For Singapore, Ta and Har (2000) identified low charges and low loan rates to be ranked number 5 and 6 among student's key decision criteria. The fact that price is often not the primary decision criterion also suggests that there may be some spaces of opportunities for increasing profit by effectively managing current account pricing. This is particularly the case as the importance given to price depends on personal characteristics. In this context, Fandos et al. (2006) provided further support for the relevance of price and also established that this importance of price is related to the considered price elements by showing that what they call "functional value price" is an important element of a perceived value of the service.

   Similarly, Foscht et al. (2010) identified that preferences with regard to banking services depend on personal characteristics. This pronounces the aspect that current account pricing schemes integrate multiple different elements that may be given different importance by different consumers. Drake and Llewellyn (1995) further suggested that banks--besides combining different elements such as base fee, fee per transfer, and fee for returning a debit note--may generally decide to apply an implicit pricing by offering free of charge accounts when having a specified minimum income or average balance. Hence, for finding an optimum price setting in a way that banking profit may be maximized at a given set of clients, banks need to know, how important specific price dimensions are judged by their clients and what financial impact changes in these dimensions have. In this context, Ulengin (1998) has shown that consumers develop an internal hierarchy of decision criteria; and such cognitive hierarchical inegration may also be assumed when consumers evaluate account pricing schemes.

3. APPLYING REFERENCE PRICING TO CURRENT BANKING ACCOUNTS

   Consumer price perceptions are intensely discussed in psychological approaches to marketing research (Monroe 1971; O'Neill and Lambert 2001). A leading theme in this context is the reference price concept (Kalyanaram and Winer 1995; Rajendran and Tellis 1994) that emerged from applying adaption level theory (Helson 1964) to pricing issues (Winer 1986; Mazumdar et al. 2005). Along with this concept, consumers compare prices that they observe in the market with internal references that may be based on external perceptions like prices of comparable offers (Rajendran and Tellis 1994), or internal references such as previous experiences (Winer 1986). Moreover, consumers may store reference information as an aggregate (e.g. bank A is cheaper than bank B) (Urbany and Dickson 1991), and as relative non-numeric information (e.g. overdraft rates from bank A are lower than from bank B) (Dickson and Sawyer 1990). In particular with regard to multidimensional prices (Estelami 2003), consumers apply cognitive simplification processes for reducing decision complexity. It is thus likely that they focus on those references that appear to be most relevant and distinct to their individual behaviour and that are thus part of their evoked set of decision criteria (Narayana and Markin 1975). For getting a better understanding of the importance that consumers give to different price elements in their current account choice, an explorative empirical approach is followed.

4. METHOD

   4.1 Approach and Sample

   I conducted a questionnaire survey among German current banking account users. The German banking market has been chosen as it is...