Differentiated pricing offers the promise of higher margins 07 November 2014 4:41PM John Kavanagh Andrew Jennings believes that Australian financial institutions go about pricing their products in a crude way and are missing out on better margins as a result. Jennings, chief analytics officer at FICO, a US credit scoring, debt management and data analytics company, is visiting Australia this week. He spoke yesterday at the annual conference of the Australian Retail Credit Association, the secretive body that lobbies on credit reporting issues.His message is that, as financial institutions confront requirements for higher levels of capital and liquidity, they have to stop treating all their customers the same and move to differentiated pricing.Jennings said that, when he sees posters advertising rates in bank branch windows, what he is seeing is evidence that "the pricing of financial products is crude."Jennings has been working on a project with a Canadian bank to improve the margin on its home loans."The norm in that market is a short-term fixed rate mortgage, so a lot of work goes into securing renewals," he said."What we have been doing is setting up an analytics and decisioning process that allows the lender to find the balance between the desired renewal rate and margin, and the customer's sensitivity."The big change the lender has to make is to take the poster out of the branch window and go one-to-one with the customer," Jennings said."We have worked with the bank the develop some alternative deal structures, using different terms, rates and so on. "Think about pricing in the airline industry. Hardly anyone pays a standard price; it varies depending on how far out from your trip you purchase, what upgrades you want and lots of other variables. All of this is designed to optimise the airline's margin.""Getting the balance right can add a few basis points, and that is very important for a capital-constrained bank," he said.Jennings said financial institutions had to learn to use their data to experiment. "For example, give different customers with similar credit scores different credit limits and see what happens. If the bank's credit strategy never changes it will find it hard to change when it needs to. "If you only ever do the same thing, then doing anything different will be a leap of faith."FICO's traditional business is building in-house analytical applications for clients. It is moving its applications into the cloud so that smaller financial institutions can have access to the same tools.