Banking Share of Wallet Threatened By Hidden Attrition

Consumers and small businesses are increasingly using products and services from alternative financial providers. In many cases, customers haven't closed their existing account, but have diversified their financial relationships, impacting the economics and growth potential at banks and credit unions.

Customer attrition is a never-ending battle, but the competition for existing customers has reached a level of intensity never seen before. Fintech firms, big tech companies and the largest financial institutions are attacking established customers with digital offerings that are both personalized and easy to open.

Because new accounts can be opened digitally – in an instant – without closing an existing account, traditional banks and credit unions often don’t even know relationships are being fractured. Customers are opening checking accounts with Chime, investment relationships with Acorns, expanding their payment options with PayPal and taking out loans with LendingClub in growing numbers.

What should concern most financial institutions is that traditional churn rates often understate the problem, since defection is both a ‘lagging indicator’ (it doesn’t show up until a customer leaves) and because many consumers open new accounts without closing existing accounts. In other words, share of wallet decreases … silently.

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The Threat of Neobanks (and Big Tech) is Real

According to Bain’s NPS Prism benchmarking data, Chime has built a banking platform with almost as many primary checking customers as U.S. Bank and twice as many as Huntington. With no fees, early direct deposit, easy money movement, and a fast account opening process, Chime has attracted a mix of younger, lower-balance customers and older, more affluent customers without any branches, no owned ATMs and no banking license.

More importantly, Chime’s satisfaction rating and likelihood of being recommended far exceeds virtually all legacy competitors. And they are not alone. According to projections by Insider Intelligence, neobanks will see the number of U.S. account holders reach 20.2 million by the end of 2021, more than double the number just two years ago. By the end of 2025, the number of accounts at neobanks will double again … to 40 million.

Making matters worse for traditional banks and credit unions, several fintech firms are expanding beyond offering only checking accounts, including payment services, lending, and small business accounts.

Loyalty at Risk:

As financial options increase, existing relationships are getting fractured, putting loyalty and the lifetime value of customers at risk.

And then there are the big tech firms. Google, PayPal, Apple and other tech giants are delving deeper into financial services. And these competitors dwarf even the biggest fintech neobanks. The current user base of PayPal is over 300 million (with 70 million using PayPal’s Venmo), and Google has an estimated 131.2 million U.S. Android users, with plans to expand even further with the addition of Google Plex partnerships with traditional banking organizations. More concerning is that the satisfaction and loyalty with most of these tech giants also surpasses that of the majority of banks and credit unions.

Churn Goes Beyond Lost Customers

Most traditional banks and credit unions might not even be aware of the fragmenting of relationships caused by non-traditional competition. This is because most institutions simply monitor lost accounts, as opposed to changes in activity, balances and other indicators of lost share of wallet. According to Bain & Company, ‘Most defection in banking consists of people obtaining credit cards, loans, or other products elsewhere, but not closing their original account altogether. Maintaining a healthy base of primary customers may disguise the dire reality of declining share of wallet.”

Hidden Attrition:

Most customers don’t close accounts when they move relationships. Instead, they divert their loyalty to alternative providers that offer more value.

Making matters worse, customer churn is a lagging indicator, meaning the loss has already happened, and it’s just a measurement of the damage inflicted. Trying to recover these customers is often a money-losing strategy. “One-off tactics often fail to produce lasting results and will be less effective than a systematic approach to loyalty that puts customer priorities at the heart of the business,” states Bain.

To reduce churn, you need to get ahead of the loss by identifying leading indicators that help identify when a customer is about to stop their usage or divide their relationship – before they actually do. The goal is to increase the value proposition of using your organization’s services as opposed to marketplace alternatives.

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Leading Indicators of Churn

Determining the reasons for churn and the indicators that can help to prevent churn differ at every organization. In other words, there is not just a single reason, and the importance of any reason is not always the same. To resolve this dilemma, you need to use models. Using deep learning and other modeling tools, financial institutions can combine experience data with behavioral data and transaction insights help predict potential defection on an individual level.

1. Decrease in Engagement. One of the most powerful indicators of churn at financial institutions is a decrease in activity and/or engagement. If customers are using a product or channel less and less, this is a strong indicator of future churn. And, since many transactions may be automated (direct deposits, automatic payments, account transfers), each customer must be measured against their individual norm over time. Interestingly, even a reduction in customer support calls can predict potential attrition if a customer has simply given up the desire to try to resolve an issue.

Power of Engagement:

More than ever, loyalty (and revenues) are driven by where a consumer focuses the majority of their financial activity. Usually, this engagement goes beyond simple transactions.

2. Decrease is Product Appeal. Competition in banking has always been high, but the diversity of offerings today is greater than any time in the past. Monitoring the marketplace has never been more important, as new players offer higher interest rates, make offerings more personalized, eliminate fees, simplify engagement, illustrate more empathy, etc. To determine the offerings from competition that are resonating the most … follow the money. Use analytics to see where transfers are being made.

3. Life Changes. Households tend to change relationships with financial institutions when personal lifestage changes occur. From births to deaths and everything in between, financial institutions need to be aware of the impact of changes to their customers they can’t control. What can be controlled is the response to these changes. As with any event trigger, these types of changes require real-time action. With the value proposition being reviewed, most relationships are at risk during a lifestage change.

Reducing Hidden Attrition

Once you have a more holistic view of your customers, and their interactions with your institution, you can begin to execute measures that rebuild engagement, improve value and respond to life events proactively. Sophisticated capabilities such as the application of predictive analytics to manage churn can now be integrated with other marketing initiatives to stem the flow of customers using alternative providers.

Satisfaction and loyalty metrics, changes in channel usage, brand preference insight and other measures can help segment customers based on the likelihood of attrition. Marketing technology that builds lifetime value approximations can also help identify segments where emphasis should be prioritized. “Choosing the best method for a given situation typically depends on practical considerations such as data availability and quality, team skills and tools, and a company’s willingness to embrace dynamic segmentation,” according to Bain.

A major challenge for institutions trying to build loyalty and reduce attrition is that traditional surveys are becoming less and less reliable. Consumers and businesses are getting ‘survey fatigue’ creating false insights and unreliable metrics. Closed account surveys are becoming as unreliable as new customer research, making the power of machine learning and AI tools more important. Using correlation analysis helps determine why customers leave and how to stop attrition.

While customer experience is usually not a top reason that a consumer selects a bank or credit union, it is critical for retention. Improving consumer experience results in more engagement, increased expansion of relationships and less churn. In other words, a great customer experience and a better value proposition not only make consumers more likely to continue their relationship with your institution, but they are less likely to shop around for other products and services.

But speed is of the essence. According to Bain, “The pandemic has put a premium on accurate forecasting and more personalized offers, as well as rapid testing and adaptation. After all, it is far more effective to activate current customers who are open to expanding the relationship than to seek new customers at any cost.”

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