Retail banking satisfaction research by J.D. Power has found that only 4% of customers switched financial institutions in the past year — a striking reminder of how the business has changed.
A decade or so ago checking account attrition rates routinely hit double digits. Waves of bank mergers ignited consumer dissatisfaction. Back then, moving to another state also frequently meant having to switch primary financial institutions.
“Researchers found that consumer bias for stability increases as they are offered more choices — the pull of ‘the known.'”
Since then, a number of developments have come together to make banking more convenient, easier and efficient. These include the expanding national presence and scale of big banks, the automation of processes, mobile and digital banking technologies that make it easier to stick with your original provider, and an increasing focus on customer experience.
Large retail banks benefited the most from this trend. The ten largest retail banks together manage 48% of the industry’s deposits, according to the J.D. Power research, and the six biggest banks now have higher customer satisfaction scores than regional and midsize banks.
This trend is likely to continue. In general, people don’t like to switch banking relationships.
The status quo is strong. In a paper, William Samuelson and Richard Zeckhauser reported that individuals tend to favor it. In fact, the researchers found that consumer bias for stability increases as they are offered more choices — the pull of “the known.”
Compounding this situation is the nature of financial services, where the product experience at one institution typically differs little from that at another. Switching just isn’t as likely.
Perhaps that is great for incumbents. But given these barriers, what would it take for a competitor to motivate someone to switch institutions?
1. Ask How Invested Consumers are in Their Current Relationship
A number of factors must align before a consumer takes action to switch banking relationships. This includes how well a competing provider will be able to articulate and then deliver value to consumers.
The value proposition of a bank or credit union is determined by the sum of an individual’s interactions with their current provider. This includes day-to-day branch and digital banking experiences, the convenience offered, the ease of opening an account, how quickly and easily issues are resolved, and how competitive the institution’s products, promotions, pricing and reward or loyalty programs are.
Here the consumer’s expectations and perceptions matter greatly. For example, a consumer who has an account with a big bank might consider convenience to be the most important and attractive value proposition. They expect a streamlined digital and mobile banking experience, easy access to their accounts, and the ability to quickly and easily make person-to-person payments, withdraw cash, transfer money and pay bills.
By comparison, that same individual might also have an account with a regional bank where the relationship includes a business loan and business banking relationship. Here the consumer isn’t expecting a merely convenient banking experience or cutting-edge mobile banking features. Instead, the business person expects more personalized services and even a designated bank manager who they can contact to address any questions or issues.
Traditional institutions have seen fintech firms like Acorns, Digit and Qapital grow their bases by offering innovative mobile tools and features that make saving easy and frictionless. For example, Acorns allows users to automatically round-up everyday purchases to invest spare change in a savings account. Demographic groups that don’t have a lot of savings are especially attracted to this value proposition. By promising to help consumers acquire more discipline, motivation and tools to save, several fintech firms have been able to successfully attract and grow deposits.
To motivate an individual to switch relationships, banks and credit unions must start with a deep understanding of the customer’s banking behaviors, needs, preference, challenges and pain points.
Success depends on the ability to leverage these insights to offer a more compelling value proposition. This hinges on hitting the right combination of better pricing and products, accessibility, ease-of-use, convenience and innovation, loyalty programs or promotions.
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2. Be the Best Next Choice When the Incumbent’s Service Quality Fails
Retail bank customers are bombarded with offers and have learned to ignore most of them. So the timing of when you approach a potential customer matters greatly. There is a window of opportunity, a time when consumers suspend this selective filtering process: When they are unhappy with their financial institution.
This can happen because of a service blunder or processing error, mortgage or loan issues, or poor staff conduct. A consumer can also be dissatisfied simply because the institution failed to meet their expectations.
At this crucial hour, such consumers are willing to be swayed. They will be open to receiving offers to switch financial institutions, especially if they receive an attractive enough offer from a brand they recognize and trust.
3. Build an Attractive Brand and Reputation in Advance
An institution’s image and reputation greatly impacts the decision to switch. Our own research has found brand awareness to be an important determining factor in a consumer’s decision to pick a new primary financial institution.
It’s doubtful that a consumer would consider opening an account at an institution they have never heard of, even if the institution offered a savings rate substantially higher than what the customer currently receives. If the savings or deposit rate is attractive enough — and if the ardent wooer has a strong brand presence — the consumer might be more open to moving over.
In our research, we found that in today’s rate environment, it would take on average an additional 50 basis points bonus to motivate a customer to deposit money in a new institution’s account. This is where a player like Marcus by Goldman Sachs will have an advantage. The Goldman Sachs brand ranks as the 44th most valuable, according to the Interbrand Best Global Brands 2018 list. Marcus by Goldman Sachs also offers very competitive rates for its high-yield online savings account.
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4. Don’t Forget to Brag on Your Branches
Institutions that have a branch presence can also benefit from the critical role a physical presence contributes to a feeling of trust, credibility and security.
Some say branches are history to consumers, but what do consumers say?
There are plenty who might never visit a branch, but are willing to forgo a higher yield in exchange for that feeling of comfort knowing that a nearby branch is there should they ever need it.
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5. Breaking Free from Inertia is not Optional
One of the most common methods employed by financial institutions is to encourage customers to switch banks by offering a competitive rate. However, we estimate that only about 20% of customers are extremely rate sensitive and will respond well to a savings offer for a higher yield. For the majority, a competing offer of marginally more money is unlikely to win them over by itself.
Arguably, one of the biggest barriers to switching banking relationships is inertia. In their paper Samuelson and Zeckhause explain that individuals prefer the status quo for a number of psychological or non-rational reasons. These include avoiding potential future regret, “retaining” sunken costs, and the desire to feel that one is in control.
Fortunately, as Daniel Kahneman and Amos Tversky point out in their article, “The Psychology of Preferences,” these departures from rational choices follow a pattern that can be predicted, described mathematically and potentially overcome.
“Potentially” — but how?
To help people overcome some of their mental barriers against switching, we can consider the application of behavioral nudges. For example, through strategic presentation of offers, attractive graphics, clear language, and presentation of choices in convincing manner, we can highlight the benefits and value of establishing a new relationship.
The competitive environment for deposits means players have to be able to articulate a differentiated value proposition. Success depends on the extent that institutions can:
- Offer the right product for the right segments.
- Deliver a unique banking experience.
- Be at the right place at the right time.
- Build a brand that instills trust and security.