Bankers have finally realized that keeping a customer is generally more profitable than acquiring a customer.
There are several reasons:
- Seasoned customers keep much higher balances.
- They tend to have multiple accounts, so it is much cheaper to maintain their customer information files.
- The prospects they bring in through word of mouth are much likelier to sign up than those attracted by advertising and less likely to be rate surfers.
- They have higher tolerance for slightly lower rates. This is important, since a 25-basis-point rate tolerance - the willingness to accept 25 basis points less on your CD or pay 25 points more on your loan - is worth millions of dollars to any bank.
For these and other reasons, customer retention is rising to the forefront. One major contributor to this ascent is the preponderance of free checking mailing programs, particularly those with attractive gifts, which has resulted in huge checking account growth for many banks, but also increased attrition.When banks started looking into causes of that attrition, what they found was simple:
Defections happen early, mostly within the first year, particularly the first six months. And they occur more among single-service households than any other category.
Formerly loyal customers leave when the bank has done something specific to anger them. Long waits in the teller line, errors that cannot be corrected quickly, and having to contact several people to resolve a problem all lead to defection. Customers expect efficiency and accuracy. Problem handling and resolution is the great differentiator between a retained-for-life customer and one who will never forgive you.
After countless studies, focus groups, and surveys, dozens of banks around the country concluded that they needed to change some processes to improve customer retention. Here are some steps they are taking:
Quantification. Many banks don't know their attrition rates by product or how much a 1% reduction in attrition would help revenue and earnings.
That was one of the findings Fred Reichheld discussed in his book "The Loyalty Effect." I too found that curbing attrition by only 1% brings millions to the bottom line.
Changes to incentive compensation. Customer attrition has simply has not been on banks' radar screen for years, and the best incentives have been for things like selling the most accounts, rather than combining effective sales with a growing portfolio base.
This has been true for both commercial and retail sales forces, and it is slow to change. Compensating a loan officer or a retail banker on net growth in a portfolio (versus gross goals) as well as overall portfolio profitability is one way to begin addressing the issue of attrition.
Another approach (and one that has worked well for me) is grossing up goals for each branch, department, and even banker by individual attrition rate. As attrition is cut, the per-portfolio goal shrinks.
Smarter mystery shopping. Many banks have mystery shopped for evaluations and compensation programs for years. The problem is, mystery shops all look for the same things: Did the teller stand up? Did he smile? Did he call you by name?
Moreover, getting better mystery-shop scores does not necessarily mean you are getting better at customer retention - the scores can keep going up, but customers may still be leaving the bank. We are measuring the wrong thing because it's all we know how to measure and it's easier to measure than the right thing - which is what truly leads to customer retention.
It is important to align the mystery-shop questions with what customers do, not what they say. That way you can correct the process flaws that cause defections.
On-boarding. This popular technique involves mandating a certain number of contacts with a new customer during the first 90 days after account opening. It's a prescriptive and fairly mechanical process, yet it can be quite effective.
Banks have found that customers are most likely to make additional purchase decisions shortly after account openings, and that such activity slows down considerably after the first 90 to 120 days.
Redefining the sales session. For computing a cross-sell ratio, many banks consider a "sales session" to be one day - the first time a customer enters the bank and opens an account. Yet all studies and the on-boarding process indicate that more selling occurs after the initial visit and before 90 days are over.
So it makes sense to have a sales session of much more than a single day for the purposes of calculating cross-sell ratios and compensating employees.
Redefining cross-selling. The old practice of selling anything to anyone who would buy it was costly to the bank (products that weren't being used entailed systems maintenance fees) and the customer (who soon realized that the bank wasn't the trusted adviser it claimed to be). As inactive accounts skyrocketed, banks looked further into suitability.
Current research, like long-ignored old research, indicates that the best way to retain a customer is by selling products from various categories. For example, selling seven certificates of deposit isn't nearly as valuable as selling one checking account and one loan to a customer.
Combining offerings from transaction, credit, protection (insurance), and asset-accumulation categories links a customer much more closely to the bank and increases retention exponentially. In addition, customers have a genuine need for products in all these catagories, so they are more apt to use them.
Improving problem resolution. This important component of the retention drive is the hardest to execute. Banks are generally designed to get things done in the most efficient way for the bank, but not necessarily for the customer.
In most cases a customer will not solve a problem by contacting only one person in the bank. Bankers themselves typically have to navigate a maze to find the right person to deal with the issue.
That maze is a reflection of the increasing product complexity and bureaucracy at many banks. The relative simplicity of small community banks explains their typically lower attrition.
