If You Are Going to Bank on Customer Loyalty, Return the Loyalty

A veteran community banker assesses how to make 'relationship banking' more than lip service through increased attention to policy, profitability analysis, and quality control issues that will help both banks and customers.

Though always important, customer retention has become increasingly critical today. But retention depends on banks operating in a way that encourages customer trust and loyalty.

The banking industry doesn’t have a great record in this area, often due to poor policies and practices. In fact many of the consumer banking regulations implemented in recent decades came about because of how some institutions’ behavior hurt consumers. The Truth in Savings Act, for example, required that deposit yield be disclosed in a common defined calculation because there was no standard in use at the time for the way interest was accrued and paid. Transparency was lacking.

That regulation leveled the playing field, especially for banks that did not play games. This may not have resulted in an overt improvement in customer trust, but it removed an opportunity to increase mistrust.

The atmosphere in Washington is leaning toward more regulation again. Here are some thoughts on bolstering customer trust and loyalty, based on lessons from a 40-year banking career.

Make Relationship Banking About Desirable Relationships

Building relationships with one’s bank frequently comes up in financial advertising, but are your institution’s products and approach to account aggregation designed to automatically benefit customers, and, even better, households?

Simply offering free checking, with no monthly maintenance fee based on balance requirements, is not an effective strategy by itself. A true relationship structure might be based on a very simple product array, aggregating active primary account holders’ accounts, with the capability of adding household members balances manually.

Once balances are aggregated, a tier structure can be defined that can bring relationship-based extras, such as increased interest rates, waiver and refund of ATM fees, and more.

One caveat based on experience: Many, if not most, banks train for and promote maximizing face-to-face contact with customers to encourage them to add additional products and services to the relationship. Some use incentive programs. The more effective the program, the more accounts and services become part of the relationship, but expensive deadwood will develop if activity doesn’t develop. An automated program to flag inactivity can help.

Building an automated customer contact system for those accounts and services not used for 45, 90, and 120 days is critical to building an active customer base where retention will pay off.

Keep the Lines Open:

Automated systems should generate communications to customers so they know that an account will be closed and purged if there is no activity over the next 30 days.

For transaction accounts, inactive notices can be sent and fees initiated at 12 months of inactivity.

Systems can often be set up to automatically change the last customer contact date for all of a customer’s primary accounts to the most recent contact of one account. This avoids dormant fees for customers with any active account in the bank. (Dormant fees can minimize the time and cost spent processing abandoned property accounts.)

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As CD Focus Grows, Get Your Systems in Order

Consumer interest in certificates of deposit demands that banks inspect their approaches to renewals. Policy on renewals can be a source of additional customer mistrust.

I was a system administrator in banking for most of my career, and worked with a dozen different core systems. Typically, the choices available for handling renewals included automatically renewing the CD for the same term at the current bank published rate for the term; rolling the CD over to a savings account; and simply rolling into a 0% rate and waiting for the customer to contact the bank and specify their choice.

Truth in Savings documentation provided when the account was opened will have disclosed bank policy, but memories are short. In addition, if customers came from a bank that automatically renewed at the same term at current rate, failure to meet expectations can result in mistrust.

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Customer Retention Demands Strong Quality Control Practices

An imaginative quality control process can identify setup errors for new accounts and new products. Responsibility can be assigned and reviewed both for the error and the correction. Strong quality control can identify the need for additional staff training or improvements to the way your system is set up.

Failure to create, manage and correct system field errors that impact customers will sow mistrust, not only on the consumer side, but also with regulators. Automated daily exception reports that identify critical field errors based on product can identify immediately those issues that can be corrected before any customer impact is felt and create confidence for regulators in a bank’s quality control process.

Among the factors that quality control efforts must watch for: rate fields too high or too low; erroneous service charge codes, date last interest paid, CD term based on product codes; and missing social security numbers and birthdates for primary account owners.

Exception reports can be created using if/then/else logic to spot multiple exceptions in one report, automatically processing them in the reports system with notification sent to those responsible to research and correct the error. These systems will also place notes in the reports system indicating that the report was processed.

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Profitable Relationship Management Requires Measurement of Returns

Another tool that can enhance an effective customer retention program is a basic account/service monthly profitability calculation that can be rolled up to product levels, customer levels and household levels.

For those of you who have battle scars from working to gain a consensus among sales, marketing, finance and operations of what “profitability” is, your eyes may glaze over at this point.

Profitability Analysis Is a Critical Tool:

Profitability consensus will never happen — but creating a basic framework of known costs and using the earnings component of the bank’s average earning asset rates can add value.

For those using third-party processors, the monthly invoice can be used for deposit account costs and other services costs. Adding in bank transaction costs, as well as the costs of image statements and postage, mobile banking and online banking costs, card cost less interchange income, and more can create a reasonable picture of which accounts, services customers and households are profitable on a scale from low to high.

It is not unusual to determine that some high-balance customers are actually low profit or even unprofitable relationships. Identifying those that are highly profitable enables the bank to focus on how to retain those accounts, while those that are among the lowest can be identified. Then the bank can change behaviors to make them less unprofitable, or to incent them to bring additional deposits to the bank.

About the author:

Rule Loving was an executive at several Massachusetts community banks during his career, including StonehamBank, Andover Bank and the former Brookline Trust Co. He retired in January 2018.

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