Research: Costing in transaction banking services and cost based pricing

One of the casualties of a recessionary environment is the luxury of not changing the way businesses price their products and services. In order to keep up their top lines, most organization have started innovating their pricing strategies moving it closer to the transaction based model, factoring in the risk and cost. Knowing the cost at various levels is relevant for price optimization, capacity utilization and operational efficiency.

As there is a growing importance to measure the productivity and profitability of service delivery channels like ATM, Internet payment gateways, branches, etc Banks need to implement costing practices at various departments. Today costing is generally a grey area in banks. This is because most banks do not know what exactly the cost of an individual transaction level is. Unlike manufacturing industries where cost at an individual unit can be arrived easily, banks product cost cannot be fully arrived at until it is consumed, and the costs are distributed across multiple departments which vary from customer to customer depending on the service needs. So the cost that is computed may be always be far from the right figure.

Popular among the costing methods are full absorption costing, capacity based costing and activity based costing. In practice full absorption and capacity based costing are most common. These are traditional methods that are simpler to implement and answers most of the profitability related questions. But, where they find inadequate is to answer detailed questions on process efficiencies, indirect cost allocations, etc which banks would like to investigate to bring in operational efficiencies. Activity based costing (ABC) methodology can help this cause. Many banks have tried to implement ABC as a strategic initiative at organization level. Since ABC is relatively more complex to implement and highly dependent on the quality and level of details the bank is willing to incorporate into, it has found low levels of success. It is difficult to say any one costing method is an ideal one since the application varies from bank to bank. I have researched on this subject with an interest to know more from other industry veterans. I hope to put my research on this blog soon after its publication.