As bankers use their newfound data-mining proficiency to demolish many of the old nostrums about customer profitability, PNC Bank Corp. has arrived at a reassuring old conclusion.
It pays to keep customers satisfied, the Pittsburgh-based company has found, because they generate more revenue than the dissatisfied and are more likely to increase their business with the bank over time.
Executive vice president Susan B. Bohn contended that employee morale, teamwork, and expertise - stemming from length as well as quality of service - have everything to do with it.
"We have empirical proof that employee satisfaction and customer satisfaction are linked," said Ms. Bohn, who presented the findings at an American Bankers Association retail banking conference last week in San Diego.
"People who are with us longer know our products, procedures, and systems," said Ms. Bohn, who is responsible for corporate development and communications and who in 1991 was assigned a key role in unifying her company's many acquisitions under the PNC logo and operating methods.
"Are we keeping (staff) stability in mind as we go through this churn?" she said, referring to the merger-related upheavals sweeping the industry. "Ultimately it's the employee that the company stands on."
She expressed a reluctance "to talk directly about profitability because there are so many factors that go into that. But I can talk about revenues."
Annual revenue per "very satisfied" household - those whose satisfaction scores are 6 or 7 on a scale of 1 to 7 - is 23% above the average for all PNC households. Customers at lower satisfaction levels generate below- average revenue.
Meanwhile, people rated 4 and up on the satisfaction scale are significantly more likely to increase than decrease their business with PNC, Ms. Bohn said, which she views as "the real difference between being satisfied and not."
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The broad emphasis on satisfaction goes against some of the prevailing grain of an industry that has found more recent rewards in downsizing, particularly after mergers that permit sizable personnel reductions.
Sophisticated data base technology has allowed bankers to understand their customers, and their customers' habits and preferences, as never before, leading to some surprising conclusions. Among them: the most affluent are not necessarily the most profitable. The same might be said about the customers who have multiple accounts or keep them the longest, calling into question some of the assumed virtues of long-term customer retention and cross-selling.
It has also become a truism that no more than 30% to 40% of a typical retail bank's customers are profitable. But some analysts have pointed out that any bank successful at lopping off the bottom 60% to 70% would not automatically become 100% profitable. Its distribution system would remain out of whack.
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Banks have successfully developed automated, self-service delivery channels, but have not sufficiently streamlined their labor-intensive infrastructure. Nor have they aligned enough of their customers, according to preferences and profitability, with the appropriate distribution methods.
"Our delivery systems over-deliver to some customers and under-deliver to others," said Robert E. Hall, chief executive officer of Action Systems Inc., Dallas. "We allocate 60% to 80% of our resources to customers producing less than 20% of profits.
"If we were in manufacturing, we'd be out of business."
He said retail banking remains mired in certain myths: that better customer data will surely translate into smart decisions, or that alternative delivery systems diminish the need for front-line employee expertise.
"Labor-based" customers still yield 40% to 60% of bank profits, Mr. Hall said, compared with only 10% to 20% from people completely dependent on self-service. The rest comes from "mixed channel" customers.
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Ms. Bohn typifies a desire in many quarters to take data analysis techniques to a new, if slightly revisionist, level, and act on them.
"Customer satisfaction is a lot more than a smile and thank you," she said. "It's knowing what the customer needs and wants, and getting the product together with the right system to deliver it. That's what data base mining, data warehousing, and segmentation are all about."
Her emphasis on the connections among satisfaction, retention, and revenue, applying to both employees and customers, closely tracks "The Loyalty Effect," a new book by Bain & Co. consultant Frederick F. Reichheld.
Mr. Reichheld, putting into print the customer-retention theories he has been championing for years, starts from the premise that loyalty, broadly defined, fuels business success. Throughout the industry, he says, 30% to 60% of customers, employees, and investors run off in an average year.
Companies can profit by beating the averages - the book cites MBNA Corp. and State Farm Insurance among many examples - and Mr. Reichheld claims he has proof in the returns on his personal investment portfolio.
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"We have the proof at PNC (that) stability, knowledge, and teamwork of the staff make a difference in customer satisfaction, and customer satisfaction leads to increased revenues," Ms. Bohn said.
She said the bank uses the term "service partner" to describe its customer focus, which is reinforced from the top by the fact that "customer satisfaction is first on the list of marketing issues for our management committee."
At his recent book-unveiling in New York, Mr. Reichheld offered a less charitable view of the industry as a whole:
"There are, and should be, excess jobs, but the banks haven't formed effective partnerships with the people who remain," he said. "Their loyalty is diminished and they become a lower-valued asset.
"Banks don't know the effect of layoffs on customer loyalty - they simply don't measure it."
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James Fouss, president of Response Analysis Corp. in Princeton, N.J., argued for measurement, but warned it requires a long view.
He said companies should define profitability as a combination of their product and service quality and reputation, minus costs. This formula is investment-based and doesn't lend itself to quarterly tracking, but longer- term paybacks can be substantial.
"Improving service quality can improve shareholder wealth," Mr. Fouss told the ABA forum. "We can cite numerous examples in addition to what we have seen in our proprietary research."
He said the quality-enhancement rigors of the Malcolm Baldrige National Quality Award program, which a few banks have entered but none have won, can produce measurable benefits within two years. He added that shareholder returns from companies that won the Baldrige have been four times better than that of the Standard & Poor's 500.
"We can relate customer and employee satisfaction to the bottom line in terms of P/E and other financial performance," Mr. Fouss said. "Your own perception of value doesn't matter. The internal and external - employees' and customers' perceptions - matter."
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Perceptions about supermarket banking came under some critical scrutiny.
Martin L. Cohen, a management consultant and self-described change agent for BankAmerica Corp., Citicorp, and Merrill Lynch, among other clients, noted that new-age financial competitors like Fidelity Investments and Charles Schwab are opening branches at a time when major banks want to close theirs.
Banks in turn have opened thousands of in-store branches that Mr. Cohen said have not proved their worth.
"Most people in supermarket banking today are not making money," he said. "They are doing it defensively.
"Sometimes delivery channels are chosen out of a sense that 'I'd better do it'."
Douglas W. Ferris, a supermarket banking champion, conceded the fact.
"Too many banks go into the supermarket and treat it like a traditional branch," said Mr. Ferris, president of National Commerce Bank Services of Memphis, which helps banks set up in-store facilities.
Profit problems arise when "there is no management commitment. ... They are doing it for the wrong reasons, not doing it right, don't change their operating systems or the types of people they hire, and don't invest in continuous training.
