Recently Disney introduced “Dynamic Pricing” at Disneyland resorts. While it is not yet real-time, demand-based pricing, it got me thinking. What if all bank pricing was dynamic?
For years we’ve lived with the now fading FICO Score as a snapshot of our credit worthiness. But in the same way a photo does not represent you or your life, a one-time assessment of your risk is NOT who you are. A single score is also very light on context, which includes what you are doing at that moment, your holistic financial picture, and your life stage to name a few other inputs that really need to be considered. Your specific stats at any one moment are not only an unfair characterization of who you are right now, this assessment of you includes no understanding of who you will become.
How many of us have been in the situation where we were trying to qualify for that first car loan or that first mortgage and it was a stretch with the obstacles and requirements the bank put in front of us? Just about everyone. At that moment in time, you were not the financial “you” whom you would become. Today you might be able to buy that car for cash or you’d put a lot more down. Chances are you now drive around in a car that’s paid off. Sofi, an Alternative Finance leader, recognized that Stanford Business Students don’t default…period. If they are trying to buy something during business school, they are an ultra safe bet. They recognized that you don’t have to charge them that risk premium because THEY AREN’T A RISK!
Now let’s speed this whole process up with big data and real-time analytics and execute at a pace that consumers now expect. This means the financial institutions you have accounts with need to continuously meter you so they are prepared to offer you products whenever and wherever you want them that serve your needs and they can make money by serving these needs. As an aside to make the point, Easter is nearly upon us, and I like Jelly Belly black jelly beans. Yep, I know I am the black sheep of every Easter Sunday, but I can’t help it. I’ve always likes anise and licorice and it is definitely a gene that skips multiple generations. Go into any store in your town and ask for black Jelly Bellies. Even if you live in New York city, you’ll probably have only 1 or 2 places you could find these. Amazon has them and they aren’t seasonal. I ordered a two pound bag yesterday. And if my craving was all-consuming, I could have had them delivered same day. Amazon just made money from an impulse buy I didn’t know I was going to order two days ago and have never ordered before from them. They also now have a insight about me that would allow them to set the price for black Jelly Bellies unique to me. Also, if I order enough of them, they’ll know that I am not particularly price sensitive.
Cut to Financial Services. If banks know who we are and have a statistically reliable prediction of who we will become why couldn’t we get Financial Services products in the same way? In the real world, people have real-time financial needs and the uncertainty of whether or not they are getting the financial product they need causes anxiety and prompts them to look elsewhere.
A dad is standing in front of a Honda Civic and his 16 year old daughter. She’s in love with the car and they just happen to have the rare color she wants. Dad checks his bank account on his phone, and he needs to finance half of it. Why can’t he have a loan at the click of a button with a digital signature? In theory, his bank knows him and statistically knows the type of customer he’ll become and it has a near instantaneous understanding of the market, their cost of funds, as well as this individual’s price sensitivity. The bank can not only offer a dynamic price, but it could be completely individualized.
A mom is on a college tour with her son and they are now at his top choice. His interview goes so well that they offer him a position on the spot. The tuition is twice what the family can afford. She pulls up her account on line a gets a home equity offer immediately. She completes the paperwork with a few clicks, signs the loan and gives her son the good news that he’s going to the college of his choice. Why isn’t this possible?
Newlyweds are at the supermarket and pick up a real estate rag and see a perfect starter home. They call the agent and get a tour an hour later. It’s exactly what they wanted. They pull out their phones. Their accounts are linked. The combined balance is enough for the down payment. Their bank knows their history and profile, can instantly assess their current situation, and preapproves them for a mortgage that meets their needs. They make an offer on the spot on the porch of their new home. This isn’t science fiction. It’s a real business case.
When you think about the millennial buyer, they grew up with experiences like this. They are gravitating on mass to the Alternative Finance players because these companies are delivering the experiences they expect and they get in all other aspects of their lives. So what if every price was dynamic? The expectation is already here and its pretty clear that a huge chunk of the spoils will go to the bank willing to make the first move.