How exactly does customer loyalty translate into better financial results for a retail bank? And how much value is at stake? For many bankers, the link between loyalty and financial results is somewhat unclear.
Most banks are missing prime opportunities to deepen their existing customer relationships and are ceding new product sales to competitors, this according to the “2013 Customer Loyalty in Banking Report” from Bain & Company, a study encompassing 200,000 consumers in 27 countries. The research was conducted online in July and August 2013.
Key findings that highlight the calculus of lost revenue. About half of customers in developed countries and 84% in emerging countries opened a new banking product over the past year. And customers purchased fully one-third of those products, on average, from a bank other than the customer’s primary bank.
Less than one percent of those surveyed were new to banking in the developed world (2.7% in the developing world), with another 2.5% switching from their primary bank (3.2% in the developing world).
Loyalty matters in cross-selling. For almost every product and in every country, customers who scored their bank high for loyalty both own and purchase more products from that bank than customers who gave low marks. The difference in product take-up between customers who are promoters of their primary bank (those who give an NPS of 9 or 10) and customers who are detractors (those giving an NPS of zero to 6) is a healthy 14 percentage points on average for developed countries, and 10 points in developing countries.
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What Drives Consumers to Acquire New Financial Products?
While many criteria play a role in the new product purchase decision (e.g. level of competition in a certain market), Bain found two factors in particular impacted customers to buy: the customer’s loyalty to their primary bank, and the bank’s ability to actively sell to its customers. According to the report, a bank’s relative customer loyalty measure explains roughly half of the variation in its relative win rate, while one-third of banking products in the U.S. are “sold” and not bought. That is, customers did not plan to buy a particular product, but they received an offer and then decided to purchase it.
“The ‘easy growth’ is over for banks, as increased competition worldwide is forcing banks to fight over too few new customers,” said Gerard du Toit, a partner in Bain’s Global Financial Services Practice in Boston and lead author of the report. “But there is a surprisingly large upside with existing customers to increase win rates on new product sales.”
According to the report, the unbundling of financial products has spread through some countries faster than others. In Hong Kong, a highly competitive market, three-quarters of bank customers purchased a new product over the past year, though only slightly more than half did so through their primary bank. On the other end of the competition spectrum is Denmark, where 38% of customers purchased a new bank product, with 81% staying with their primary bank.
Yet unbundling does not necessarily limit a bank to only a certain share of its customers’ financial purchases. Product win rates — the share of products bought by respondents at their primary bank — vary even more by bank than by country. In the US, the rates range from 38% to 63%, with Huntington National Bank leading overall. Several years ago, Huntington (which had high NPS to begin with) began to consolidate customer data and build a unified view across all locations and business units. It replaced its manual sales process with an automated one that made it easier for employees to manage cross-selling and upselling opportunities. Huntington has gradually grown the number of products held by customers.
The Winning Model for Loyalty
Bain recommends a winning model of “loyalty plus five capabilities” to spur existing customers to purchase more from their existing bank, attract new customers and reduce costs without damaging customer relationships. The report highlights how loyalty plays a key role in increasing product uptake in each of the 27 countries examined. In addition, it reveals five key capabilities that are critical to success.
1. Decide where you must win and where you’re willing to lose. Banks in many countries have a long history of egalitarian treatment of customers, regardless of how much their marketers segment the customer base. But catering to the average means catering to no one in particular.
2. Design products that “pop.” Retail banks find it difficult to keep their products distinctive, as product features get copied quickly. At a minimum, banks must at least keep up with the latest features that customers value. Banks also can differentiate products at the margin through innovative pricing or by bundling several products together in appealing ways.
3. Accelerate the digital transformation. As digital banking spreads, banks increasingly have opportunities to excel at moments of truth in the customer experience, such as resolving fraudulent account activity or giving expert advice. They can also use technologies to delight customers through transactions such as remote deposit capture. Conversely, slow or confusing digital interfaces will quickly annoy customers. Mobile also delivers a loyalty “halo effect” according to the report; frequent mobile banking users in all countries give much higher loyalty scores than non-users.
4. Loyalty gives you the right to win more business, but you do have to ask for the sale. In every bank and in every country which Bain analyzed, “promoters” bought more products with their primary bank than detractors. That doesn’t mean the business comes effortlessly — banks have to ask for it.
5. Build branding that delivers more trust, less buzz. Credibility comes by telling the story of what a bank has to offer, not what it aspires to be. 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 tagline 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?”).
The report reveals that few large incumbent banks have made meaningful progress on more than one of the five elements. Bain identifies JPMorgan Chase in the U.S. as an exception. Chase posted the biggest loyalty gains in 2013 among the national banks, as measured by Bain, 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 combined to help Chase perform well above average in winning new relationships and cross-selling to existing customers.
“The banking math is simple,” concluded du Toit. “Loyal banking customers own more products, and buy more products… but that doesn’t mean they’re going to make your sales for you.”