Modest Jump in Loyalty May Be Key to Bank Profitability
Loyalty is a wonderful quality in friends, family and dogs. But in banking, it’s an economic necessity.
By Kevin Tynan
A happy affluent banking consumer in the U.S. is worth nearly $10,000 more in net present value over the customer’s lifetime than an unhappy, disloyal customer, says Bain Consulting.
Loyal customers buy more banking products, stay longer, cost less to serve and grow deposits faster. Furthermore, banks with the highest average loyalty scores enjoy the greatest deposit growth.
Even a modest slowdown in customer turnover could bring a significant jump in profits. In his book, "The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value," Frederick Reichheld claims a five percent reduction in customer turnover can increase bank net profits as much as 80%.
Despite the apparent benefits, banks aren’t doing a good job of earning customer loyalty. About one third of bank customers bought a new product from a bank other than the customer’s institution.
We have to ask, why would a customer who is happy with an institution purchase a product elsewhere? Consider these four possibilities.
1. No ask, no sell. More than two-thirds (68%) of virtual-only customers indicate they have not been contacted by their bank in the past year according to the JD Power 2015 Retail Banking Survey. If we don’t ask, we won’t get their business. There’s no excuse for not contacting an accountholder at least two or three times a year.
2. Bank shopping. Consumers are establishing more bank relationships. A 2015 study from Ernest & Young found the number of customers using only one bank has dropped from 41% to 31%, while those with three or more banks have increased from 21% to 32% since 2011. As the number of bank relationships consumers maintain increase, product competition also intensifies.
3. Unhappy Customers. In a recent study, 34% of customers contacted their bank to resolve an issue, and 33% were left unsatisfied by the resolution. One study showed that two out of three consumers said they’d stop buying from a company if they had just one bad customer service experience. On the other hand, each issue is an opportunity to strengthen a relationship… if resolved correctly.
4. Other institutions offer better rates or services. Banks have two types of customers: transactional, and relationship buyers. Transactional buyers are interested in price; they see little differentiation between banks, and will leave when offered a better deal. There’s little value in changing your pricing strategy to keep them. You can’t and shouldn’t try to please everyone.
Marketers must continually stay in touch with customers. Communication builds loyalty. Good service spurs loyalty. Banks with strong customer loyalty have an open door for winning more business. Rather than focusing primarily on new customer acquisition, most FIs would be wise investing in efforts to please accountholders and strengthen relationships. Metrics such as net promoter scores which identify bank advocates and detractors, can be useful tools for pinpointing receptive accountholders and shoring up relationships vulnerable to competitive solicitations.
If you don’t communicate regularly, provide quality service and offer products consumers need, you can’t blame them if they don’t remain loyal.
