1 THE ECONOMICS AND EXECUTION ELEMENTS OF RETENTION A PRESENTATION FOR RYAN, BECK ANAT BIRD

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THE ECONOMICS AND EXECUTION

ELEMENTS OF RETENTION

A PRESENTATION FOR RYAN, BECK

ANAT BIRD

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• The economics of retention• Changes in customer behavior and

expectations• Why customers defect• Execution elements• A peek into the future• Takeaways

Agenda:

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The Economics of Retention


Profit from Price Premium

Profit from Referrals

Lower Operating Costs

Increase Number of Accounts

Increase Account Balance

Base Profit

Substantial attention being devoted to task of quantifying benefits of increased customer retention; early research in area suggests at least six potential benefits of improved retention performance. 1. Increased retention lengthens customer lifetime, 2. Individual account balances grow across time, 3. Number of accounts grows across time, 4. Cost servicing may drop, 5. Customer’s conversations yields referrals, 6. Loyal customers less price sensitive. Source: Bain & Company

($2)

$0

$2

$4

$6

$8

$10

$12

$14

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Pro

fit

Scale

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What is 1% Retention Improvement Worth?

• Allstate $1 Billion income improvement per 1% increase in retention*

• Industry 27% NPV improvement per 5% increase in retention **

• $100B Bank $22 million profit improvement per 1% increase in retention ***

• $9B Bank $1.2 million profit improvement per 1% increase in retention ***


* Source – Reichheld, "The Loyalty Factor"** Source – Advisory Board*** Source – Internal Company Analysis

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Cross Sell and Retention

Customer Retention Based on Services Used

Checking account only 2-1 50%

Savings account only 3-1 33%

Checking and savings 10-1 10%

Checking, savings and investment 18-1 8%

Checking, savings and mortgage 50-1 2%

Checking, savings, loan and safe 200-1 ½% deposit box

Source: Bank Marketing Association

Chance of First YearBanking Service Odds Customer Loss

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Cross-Sell and Retention Profitability


$391

$245

$174

$113

$41

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2 4 6 8 9+Acct/HH

Household Annual Profits

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Household Profitability and Cross-Sell Success

Are Linked


Why 8+ Products per Household

Profitability Tier

Premier (>$1,000)

Excellent ($200 - $999)

Moderate ($0 - $200)

Potential (<$0)

Average Cross-sell

7.64

5.61

3.73

3.33

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Cross-Sell and Profitability One Bank's Story


• 8+ Product Households Represent 10.5% of Total Households and Contribute 31% of Total Retail Household Profits

• 35% of Premier Households Annual (profit $500 - $1000) have 8+ Products

• 58% of Premier and Excellent Annual (profit >$1000) Households have 8+ Products

• Only 7% of Unprofitable Households have 8+ Products

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Cross-Sell and Retention


83%80%

74%

58%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2 4 6 8Accounts Per HH

Product Per HH

Retention

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Where Is The Opportunity?

• Average Households Have 8 Different Financial Service Providers

• Households With Income Greater Than $100,000 Have 12 Different Financial Service Providers


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Life Cycle Profitability in Credit Cards


-100

-50

0

50

100

150

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

$ of Profit

Age of Accounts (years)

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Customer Satisfaction Scores Do Not

Predict Defection

Customer Behavior

Most of the customer (86%) who recently closed an account, appear to be somewhat or very satisfied with Bank's services overall, giving the Bank a score of 6 or higher on a 1-10 scale where 1 means Extremely Dissatisfied and 10 means Extremely Satisfied.

On average, these customers rated their overall satisfaction level at 8.5 on a 1-10 scale.

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

9 - 106 - 851 - 4

Overall Satisfaction Average Rating: 8.5

Source: Internal Bank B Analysis

Index Scale: 1 = "Not At All Satisfied" to

10 – "Extremely Satisfied"

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Changes in Customer Behavior and Expectations

Customer Behavior

• As more customers use the internet, the branch's role in building retention diminishes

• Internet per se isn't a solid retention tool; bank sites need to be enhanced to achieve improved retention results

• Customers' definition of convenience is shifting from physical facility to a portfolio of channels; implications to future branch expansion and staffing levels need to be considered

• Current mystery shops generally are not aligned with retention results

• Current banker behavior expectations are not aligned with customer expectations, particularly regarding problem resolution

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Primary Reason for Closing Account

Why Customers Defect

Customer Tenure

TotalRespondi

ng(n=434)

Less Than

1 Year(n = 105)

1 – 5Years(n = 191)

6 or MoreYears(n = 112)

Don't Need the Account 12 % 13 % 15 % 4 %Consolidated Accounts at Other Bank

6 % 4 % 7 % 6 %

Consolidated Accounts at Community Bank

6 % 7 % 5 % 5 %

Service Charges / Fees too High 6 % 2 % 6 % 8 %Marital Status Changes 6 % 1 % 7 % 9 %Legal / Trustee / POA / Deceased 5 % 0 % 4 % 13 %Moved In or Out of State 5 % 6 % 5 % 4 %Needed the Money 4 % 9 % 4 % 1 %Lost Job 3 % 3 % 2 % 3 %Bank Error 3 % 7 % 2 % 2 %Location Is Not Convenient 3 % 3 % 5 % 1 %

Account Opening Ethics

Personal Status Change

Accuracy

Price

Convenience

Source: Bank C Analysis

• Not Needing the Account was the most frequently mentioned reason for closing an account at this Community Bank

• Most reasons do not show response rate differences based on customer tenure

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Factors in Account Closing


0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

ATM Malfunctions/Problems

Number or Location of ATMs

Number or Location of Bank's Branches

Any Changes That May Have Resulted From Merger

Mininum Balance Requirement

Better Interest Rate/Rate of Return Elsewhere

Monthly Fee

Miscellanous Fees

Web Banking Issues

Experience With Telephone Banking Center

Change in Account Features

Personnel Changes

Error/Problem Experienced on Account

Experience With Bank's Branches or Branch Personnel

Importance of Factors in Decision to Close Account

(Top-2-Box Scores on 7-Point Scale)

Source: Bank A Internal Analysis

Bank Experience

Price

Convenience

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Factors in Account Closing

30%

15%

0% 5% 10% 15% 20% 25% 30% 35%

Open (0) (n=37)

Closed (C) (n=41)

Problem Resolution Experience(Among those who had a problem)

Satisfaction with Problem Resolution

(Top-2-Box Score on 7-Point Scale)

Mean # TimesContacted Bank

to Resolve Problem

4

3

Source: Bank A Internal Analysis

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Reason for Moving to Other Financial Institution

37%

29%

26%

25%

25%

22%

0% 10% 20% 30% 40%

Had an Account There

Good Service

Convenient Locations

Friendly / Pleasant

Lower Fees

Good Reputation

Adds to more than 100% due to multiple responses allowed n = 171

Nearly four out of ten (37%) of the respondents who opened a new account with their funds (with this Community Bank or other institutions), chose that financial institution because they Already had an account there.

• Service – 54%• Service & reputation – 77%• Convenience – 26%• Price – 25%

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Overall Relationship with Bank

67%

26%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Open (0) (n=207)

Closed (C) (n=199)

Overall Satisfaction with Bank(Top-2-Box Score on 7-Point

Scale)


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Problem Resolution

• Banks are not organized toward effective problem resolution

• The challenge: get the initial customer contact person to own the problem

• This is a true differentiation opportunity on the defection variable that matters the most

• The change is major enough to require an organization-wide mandate for success

Execution Elements

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Convenience

• Differentiation on convenience is difficult among all but the mega banks

• Internet and phone banking are putting most banks on an equal footing regarding convenience

• Improved "stickiness" on internet and phone sites can become an important differentiator

Execution Elements

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Pricing

• Customers don't mind paying fees; they mind being gouged and nickel and dimed

• Review your fee structure to ensure you have the right balance between optimizing your fee income and turning off your customers

• Develop a desired position for your fee income levels relative to the competition

• Improve responses to customer fee inquiries and offering account alternatives to fee-sensitive customers

Execution Elements

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Cross-Selling

• Cross-selling isn't about lip service — it is about doing

• Executing cross-selling is difficult

• Product packages ("Happy Meals") are a good path to success

• Mass customization of cross-selling works

Execution Elements

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Service

• World class service — what does it really mean?

• Everyone claims they offer it, so few truly do

• Can you compare yourself to Disney or the Ritz-Carlton hotels? If not, why not?

• Identify major service defects and address those first

• Mystery shop for the right stuff vs. the easily measurable behaviors

Execution Elements

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Bank Intervention

• Less than 25% of all customers report that the bank has made an effort to salvage their account

• We lack processes to ensure that every account closing is handled consistently with the intent of recovery

• Customers welcome account recovery initiatives by the banker, even at the point of closing (which is generally too late)

• Some sales efforts bring about inappropriate account openings, which result in more account closings

Execution Elements

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A Peek Into the Future

• The big banks will figure retention out; some are already working on it. Waiting on this issue is a losing proposition.

• Website sophistication and stickiness, as well as phone bank activities, will become more important in retention management as customer usage increases

• Learn from non-banks about customer loyalty; they are ahead of us

• Customers are looking for a bank they can trust. Winning that position will gain you long-term retention

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Takeaways

• Customer retention is clearly tied to shareholder value, both in terms of current income as well as earnings predictability

• Improved retention must touch the employee wallet, not just their heart

• Align what matters to customers with what employees are trained, paid and measured to do

• Root causes for defection are consistent across the industry; spend less time on fact finding and more on fixing, measuring, rewarding

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Takeaways – Cont'd

• Correct sales process to ensure that only needed accounts are open; i.e. reward only for fully-funded accounts, back out sales incentives for zero balance accounts

• Measure both cost and benefit of account retention; advertise results throughout the system

• Show your employees why retention matters; they ultimately are the number one cause for retention OR defection

• Goal controllable attrition levels and reward for them

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My Family

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Isabella

Documents

1 THE ECONOMICS AND EXECUTION ELEMENTS OF RETENTION A PRESENTATION FOR RYAN, BECK ANAT BIRD