Two of the dirtiest words in banking are inertia and attrition. It’s hard overcoming inertia — that all-powerful force that seems to keep consumers glued to their current banking provider. So when your marketing works and you get someone to switch to your institution, you need to do everything possible to combat attrition — those annoying defections that gnaw at your net growth.
According to Accenture, attrition rates in the banking industry hover around 11%, and the annual churn rates on new customers are roughly in the 20-25% range during the first year — half of which don’t make it past the first 90 days after opening their accounts.
And thanks to acquisition costs, it can take a bank or credit union two years or more to eek out profitability on the typical retail consumer. With a quarter of new relationships jumping ship and more than one in ten existing customers defecting, there is clearly a big attrition problem in the banking industry.
Profitability is a function directly tied to lifetime value — the longer your relationship with a consumer, the better chance that consumer will become profitable. So you want to bring consumers in and then keep them? That means you need to up your defensive game.
Beware of Those Hidden Defections
There’s a standard defection — where someone closes all of their accounts at your institution and leaves for another. And then there are hidden defections, where people simply leave their existing accounts with your institution, but slink off to open a new account at a different bank or credit union. That can make managing attrition tricky. How can you detect if someone is a flight risk? By the time you realize they are defecting, it could be too late to intervene.
“Most banks are unaware of the extent of their retention problem because of blind spots in their approach,” says BCG. Banks generally track only the most visible forms of attrition, client exits, because these are easy to monitor. Most fail to track and manage the less visible forms that account for the majority of revenue leakage: the partial exits and the gradual winnowing back of business.”
While it might not fit your traditional definition of attrition, these hidden defections still have the same net result. Whether someone closes an account, or stops using their account, or chooses to open a new account somewhere else, or add new products/services at another institution, the impact on your bottom line is still the same. It’s a lot like cancer — you can often cure it if you can catch it quickly enough.
The trouble is that these types of fragmented financial relationships are on the rise. Consumers have the same amount of money and loans as they always have, but they are spreading them across more banks and credit unions. Back in the Good Old Days, a consumer looked to one banking provider for their checking account, savings account, home mortgage, and maybe an auto loan. Today a customer may still have a checking account and savings account with their primary financial institution, but not much else. In fact, they may have most of their savings at another institution — e.g., an online bank paying a higher interest rate. They shop their mortgages with LendingTree, and no longer feel limited based on geography.
Overall profitability across the banking industry remains the same, but for smaller financial institutions, the slices of profitable pie keep getting smaller, according to CEB.
Consider the business banking market. Prior to 2000, nearly every small business used a single financial institution. Today, only about one-third of small businesses are loyal to a single institution. One-fifth have four, or more, financial providers.
What Happened to Loyalty?
Consumers today can access digital banking solutions from a variety of providers — all from a single screen. In the digital world, CEB says it’s just as easy to choose one icon or app for mobile banking as it is to click on another.
Think back to the 20th century for a moment. Back then, when someone added another banking provider into their financial lives, they were forced to also take additional physical trips to another bank’s branch. But when people can conduct all their banking affairs on one screen, these lines get very blurry. Consumers no longer make distinctions between one banking provider and another — the phone in their hand is their bank, regardless of how many apps or icons for different institutions they may have on their device.
“When a customer has a new need, convenience draws them to their one-screen shop,” CEB says. “There, it is as easy to use the best-of-breed solution as it is to use a current provider. There is no downside to adding an additional provider (app/icon) and getting the best possible outcome.”
Banks and credit unions spend a lot of time and energy trying to anticipate life events that might trigger a financial need, such as buying a new home or having a baby. These events typically start the consumer on a search that begins with the incumbent financial institution. But in reality, CEB says these life events aren’t the kind of buying signal you can expect to see with great regularity, accounting for only about one-quarter of financial product purchases. Instead, consumers rely on “networked learning,” in which they realize they need a product or service because they read about it, or heard about it from a friend or family member. Herein lies on of the more profound impacts of the digital channel; it isn’t just changing how consumers shop, but how and what they actually buy.
Over half of customers have opened or closed at least one banking product in the past year, and nearly as many (40%) plan to do so in the coming year. Each of these customers represents a new business opportunity for a competing bank or credit union.
— Ernst & Young
Another reason that loyalty in banking has become more tenuous is that consumers — particularly Millennials — are increasingly driven by outcomes. No one really wants “a savings account”; they want more money. They are saving to reach a specific goal, whether that be a vacation or a well-funded retirement. If your financial institution is simply offering “a savings account” — just like every other financial institution — you have not helped the consumer achieve their coveted outcome of saving more. All you’re doing is commoditizing yourself.
But consider what could happen if you instead offered a savings account coupled with a savings app that allowed someone to build and maintain a budget and warns them if a recent purchase is going to blow that budget. With such personal financial management tools (PFM), you now are helping them take specific steps that drive towards a concrete outcome. And it is with these outcomes, says CEB, you see a healthy increase in loyalty.
Why Consumers Stay
Accenture found that consumers will stick around with their banking provider if it delivers in three key areas.
1. Value. Almost half (45%) of consumers say they will remain loyal to their bank or credit union if their institution offers them discounts. These discounts must be on purchases of interest. It doesn’t help to offer an attractive mortgage to a Baby Boomer who has happily made their last mortgage payment on the family home. But there are a wide range of possible discounts that banks and credit unions can creatively offer consumers, including discounts on autos, travel, and home goods, to name just a few.
Loyalty and rewards programs are seen as a huge source of value for consumers. The most effective programs are those that provide cash back in the form of actual cash or pre-paid cards. Accenture found that 41% of consumers found cash-back rewards attractive.
However, financial institutions are doing a lousy job of actually getting consumers to sign up and use loyalty programs. Almost two-thirds (67%) of consumers do not participate in the rewards/loyalty program offered by their bank or credit union; 17% don’t know if they participate, or if their institution even has such program. That means five out of six consumers don’t participate in a rewards program and/or don’t know one exists.
2. Advice. The desire for advice from a banker is one reason that consumers tend to stay put. Most consumers also view their banking relationships as largely transactional as opposed to advice-based. It’s much easier to leave a commodity provider than it is to leave a provider that delivers valuable advice. But Accenture says that advice can be automated. Almost one-half (46%) of consumers say they are willing to use robo-advice for banking and other related financial matters.
3. Branch. Having a convenient branch nearby continues to be a top reason that consumers stay loyal to their primary financial institution. 87% of consumers saying that they will use a branch in the future and when they visit, they would much prefer to speak to a human being.
Consumers Don’t Think Switching Is As Difficult As It Once Was
Consumers used to think that switching primary financial institutions was such a gargantuan, time-consuming task that they wouldn’t bother (translation: inertia). But over time, Accenture says that perception has changed. Now consumers increasingly believe that switching isn’t as difficult as it used to be.
And if they believe that switching isn’t tough, then their eyes are open to the plethora of virtual and alternative banking providers competing for their share of wallet. While 11% of consumers left their bank in the past year, those switchers moved to online virtual banks in double digits.
Switching financial institutions may be perceived as easier, but that doesn’t mean it’s considered easy. However, once it becomes easy, watch out because ForeSee predicts that the number of defectors will almost double to 21%.
In fact, ForeSee believes that the banking industry will be where the telecommunications industry was a decade and a half ago. Before 2003, wireless telecom providers kept consumers virtual hostages because consumers had to give up their telephone number in order to switch carriers. But thanks to the introductions of wireless number portability, available since November 2003, put all carriers — incumbent and newcomers alike — on a level playing field. Similarly, once the banking industry moves to account number portability (as the UK has already done), ForeSee says switching banks will be just as easy.
To keep consumers from leaving, you need to find out when they leave, who is most at risk at leaving, and give them a reason to stay.
1. Find out when consumers leave. Sure, surveys of defecting consumers can provide some insights, but better yet, use data to track the consumer journey throughout their acquisition and eventual departure. At what point in the onboarding process are they leaving? By measuring when consumers depart, you can develop strategies for targeting vulnerabilities along that journey.
2. Predict those who may leave. Apply predictive analytics to identify those consumers most at risk of leaving. But then go a step further to predict the lifetime value of these consumers. Focus your initial retention efforts at those consumers who have potentially high lifetime value but who are at risk of defecting. Can you move these consumers into stickier services such as online bill pay and debit cards? Can a branch manager give them a call to welcome them to the institution?
NGData recommends using the following data points to build your propensity models for attrition:
- Length of the customer’s relationship with the bank
- Logs from branch visits or customer service calls
- Type of cards owned such as ATM, debit, credit or pre-paid cards
- Type of financial products owned — e.g., loans and mortgages
- Transaction histories across multiple channels
- Type of products corresponding to maximum value transactions
- Automatic payments and credits
- Web-based channel and online banking usage
- Locational information and use of mobile payment applications
- Social media engagement and sentiment
Once you have a more holistic view of your customers, and their interactions with the bank, you can begin to identify the drivers of attrition and execute retention campaigns long before a real attrition issue can begin.
Sophisticated capabilities such as risk alerts and auto-trackers might have seemed like mere fantasy just a few years ago, but the application of predictive analytics to manage churn is now a mainstay in many industries, including banking.
3. Give them a reason to stay. Although customer experience is not seen as a top reason that a consumer selects a bank or credit union, it is critical for retention. Improving consumer experience results in less consumer churn.
Great customer experience not only makes consumers more likely to continue their relationship with your institution, notes Forsee, but they are more likely to buy additional services and much more likely to recommend your bank or credit union to others.
One way to improve the experience of consumers is to move them to mobile or online banking. Bain & Company estimates that if the 25 largest U.S. banks were able to achieve the same rate of mobile and online banking as banks in the Netherlands, the U.S. banks would see their Net Promoter Score shoot up by an average of 12 percentage points. Since NPS is a consumer loyalty metric, a higher NPS means more loyal consumers.