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BUILDING CUSTOMER LOYALTY IN RETAIL BANKING

IN AN INCREASINGLY COMPETITIVE MARKET, IMPROVED LOYALTY IS ESSENTIAL FOR DELIVERING GROWTH

As competition between banks in developed markets intensifies, retaining customers has taken on increased importance. In a post crisis market, it is something nobody can ignore. It represents a significant factor in both loyalty and additional revenue opportunities it presents. The difference in cross/up-selling rates between customers that possess high confidence in their primary bank and customers with low confidence is a healthy 15 NPS (Net Promoter Score) percentage points on average for developed countries and 11 points in developing countries.

Looking at markets such as the UK, the level of market maturity is such that the cost of acquisition is too great to compete over new customers. Instead, banks must look to deepen relationships with existing customers and drive increased wallet spend and product holdings.If managed successfully, this approach can offset any losses arising from customer attrition. As such, loyalty is something banks must value, cherish and manage as if it were the very oxygen they breathe. In an intensely competitive market, maximising the customers you currently have is of utmost importance. Successful banks excel at providing customers with the competence and confidence to then purchase additional products.

Below, we have identified the key elements we feel shape and drive customer loyalty. Strength in these areas will make a significant difference in the relationship between banks and their custom-ers. These are the areas where competitors are seeking to establish competitive advantage and as such, cannot be ignored.

A Winning FormulA For Customer loyAlty

Our experience has shown that customer loyalty is intrinsically linked to the following elements. It is these that form the platform for effective cross/up-selling and the basis for improved customer confidence, satisfaction and loyalty.

1. Focus on where you want to succeed and identify the challenges to overcome to

The reality of banking customers is that customers are not created equal. The inherent challenge is that many banking transactions are common to all customers such as replacing lost cards. How-ever, the value of a customer to a bank can vary widely, even within common transactions.

Each customer segment has different priorities, expectations and lifetime value for a bank. Re-search in the US finds that older customers care more about branch location and quality of branch staff, while younger customers place greater value on mobile device interactions and rely heavily on recommendations from family, friends and colleagues. This is of particular importance as digital developments pull younger and older customers apart in terms of expectations.

Leading banks create an excellent basic level of service that ensures all customers have their needs met as a minimum. However, for high value customers, there are higher value (margin) products on offer along with differentiated service channels and a premium level of service. Amer-ican Express are excellent at providing premium services to their high-value customers offering exclusive facilities through their concierge network.

Others have created entirely separate models for young adults. In Singapore, OCBC’s “FRANK by OCBC” branches could pass for a hip clothing store. They offer edgy images on debit cards and a simple savings account. However, the brand is low-cost. There are no cashiers and most of the functionality is self-service and online.

Self-service has empowered low-income customers to access better value products through a significant reduction in overheads. In Malaysia ‘lean’ branches are a growing sector serving the low income customers. Self-service reduces the need to access branches. Increased digitisation also means that the elderly or those unable to travel are able to manage their banking without the pressure of visiting a branch, freeing them up to engage in other activities.

2. Design products with impact

The challenge with innovation in the retail banking market is that competitive advantage does not last for long before being swallowed up through imitation. As such, there need for innovation is great, but the incentive to do so is not as great. The market reality is that you cannot afford to be left behind, and as such, banks must ensure that their products at least match the core features and rates of their competitors.

Customers are more informed about product features like interest rates and fees, rewards, ease of transaction and, for more complex products like wealth management, the quality of advice. This has raised expectations from the customer side with banks rushing to catch up to customer ex-pectations. Banks show significant variation in how customers perceive their product performance. Among US banks, the share of customers who say their primary bank performs well or extremely well on home mortgages ranges from 62% for the lowest bank to 97% for USAA.

In Australia, Westpac has differentiated its BT Super for Life superannuation account by allow-ing customers to apply online and to see the account online alongside their current account. St.George links its home equity line of credit to various interest offset accounts, making it easier for customers to manage taxes and investments.

Whether with a current account, credit card or mortgage, the key is to strike the right price-value balance for the target customer. And there’s a minimum menu of offerings necessary just to have credibility in a category. Of equal importance is building products that give the customer confi-dence that you are creating a good deal for them. With the rise of aggregators, customers can see which providers are generous and those that are less so. This transparency means that caution is advised when building products. The aim is to leave the customer pleased.

3. Accelerate the digital transformation

With the proliferation of digital technology in our everyday lives, it is difficult to imagine that some banks may be slow in adopting digital banking. It is a platform that allows new channels of sales and service as well as enhancing those that already exist. Even with excellent offline infrastruc-ture, a poor online offering will be a massive competitive disadvantage to customers used to being able to operate anywhere at any time. Speed and quality are of the essence when looking at digi-tal solutions.

We are moving into a fully integrated omnichannel market where customers can define where and how they engage with their bank. As such, banks must be flexible across their digital landscape as well as in managing the separation between online and offline.

More than half of customers’ interactions on average took place through online or mobile chan-nels, ranging from 75% in Norway to 38% in Mexico. But many banks could make more use of the technology or steer customers towards adoption. Globally, fewer than half of customers in developing countries and just over one-third of those in developed countries used smartphones or tablets for their banking. The cross-country variation ranges from 60% in China to 17% in Belgium.

In South Korea, fully 56% of customers engage in mobile banking. Hana Bank has consistently fo-cused on digital innovations, such as the ability to withdraw cash from ATMs via smartphone, with only the phone number required, not an account number. Parents can also send money to their children via their smartphones, and the digital currency works at many Korean retail outlets.

Mobile usage also varies within most national markets. Lagging banks and countries should be concerned, because mobility continues to spur customers to recommend their bank. Mobile users tend to be stronger brand advocates than people who don’t use mobile devices, and that premium rises in countries such as China and Thailand.

As banking moves to an omnichannel world, the future of the physical branch remains an open question. But two things have become clear.First, too many routine interactions, like making a deposit, take place in the branch in many coun-tries. Banks can no longer afford the cost structure that supports such interactions, which could go through lower-cost, self-service digital channels. Globally, some two-thirds of branch interactions consist of the routine, with only one-third being sales or service.Second, branches in every market remain the dominant channel for starting relationships. Roughly three-quarters of new account openings happen in branches.

During this omnichannel transition, success hinges on making digital channels convenient and de-fect-free, and on converting branches to more sales-oriented operations. Nordea, one of the larg-est Scandinavian banks, has shrunk and modified its branch network so that only 45% of branches now manually handle cash, down from 85% in 2009, and they focus instead on advice and sales. But banks must be sensitive to the cultures in which they operate. There are cultures that are hap-py to operate digitally and remotely, whereas others have a legacy of accessing branches and this is unlikely to diminish for a few generations yet. This means the rate of digital adoption will vary, but what cannot vary is actually having an excellent online proposition to begin with.

4. loyalty gives you the right to win more business—but you do have to ask for the sale

Banks that have customers that are regular brand advocates often have higher rates of cross-sell-ing as well as higher retention rates. More importantly, they are more likely to buy the higher value products as well, which come with higher profit margins.

However, cross-selling and up-selling are exactly that – selling. The additional opportunities will not come to you. Instead, banks must use the goodwill they generate to sell the additional prod-ucts to their customers. Our research shows that it is very much a cultural factor. In the US one-third of additional products are sold, which reflects the sales-focused culture of the US. In contrast, markets like Hong Kong will sell at a far lower proportion as sales are not as highly praised as they are in the US.Maybank in Malaysia has chosen to bundle products in a way that make it easy to sell them. Customers apply once for all products and provide all necessary information at that time; they then can activate and access products as needed, through the channel of their choice.

In Australia, Hong Kong and India, Citibank excels in onboarding and then cross-selling to custom-ers, particularly in wealth management. Citibank mandates that every relationship manager raises his or her customers’ share of wallet each quarter.

Some banks that are loyalty leaders perform less well on the sales metric, but the good news is that their customers accept the right kind of sales overtures. Other banks have high selling scores but lag on loyalty. These players will want to concentrate on adjusting the tone of their selling and delivering a better experience after the sale.

5. Build branding that delivers more trust, less fluff

The importance of branding cannot be overstated. It is the main relationship the world will have with a bank. It is normal for high satisfaction scores to correlate positively with brand strength. As such, building your brand is important and at the heart of the approach is the need to build trust and confidence.

Banks’ standing among regulators, legislators and the broad public took a hit in the years following the financial crisis. In response, many banks have increased their advertising and other forms of explicit marketing over the past few years, with the hope of restoring their image. The media has also been vital in rebuilding confidence, highlighting various issues such as mis-selling, which forc-es banks to improve at a rate they were not prior to the financial crisis. Increased customer advo-cacy has now created greater risks around reputation, which means banks are approaching their business with a focus on how customers engage with them.

Building awareness is valuable but lacks strength if it is not supported by an improvement in ca-pability and products. They key thing is to communicate a strong story about what you deliver and how you do so. These simple messages are the ones that customers can relate to. It is not enough to communicate them; the organisation must live them and embody the values in all they do.

Hang Seng in Hong Kong, for example, promotes the attributes of a friendly, service-oriented local bank. Hang Seng reinforces these brand attributes not only through activities with local neighbour-hoods and universities, but also through convenient branch locations in the local transit system and through staff training.

A customer-led, not marketing-led, perspective on the brand leads bank managers to spend their time differently. Instead of asking brand questions (“Should we rebrand?” “What logo and tag-line should we use?”), Managers will find it more effective to start with customer questions (“What do our best customers say about us?” “How can we amplify that?”).

A few large incumbent banks have made meaningful progress on several of the five elements. Consider JP Morgan Chase in the US. Of all the national banks, Chase posted the biggest sact-isfaction scores in 2013, moving from the third quartile to the second quartile and opening a lead over other national banks. That’s due to such factors as select investments in mobile technology, a concerted effort to improve the customer experience and effective marketing to tell people how the bank can simplify their financial lives. Those factors also combined to help Chase perform well above average in winning new relationships and cross-selling to existing customers.

SEYMOUR SLOAN

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IDEAS THAT MATTER

SEYMOUR SLOAN