When Bain & Co.'s Frederick Reichheld published The Loyalty Effect, he praised companies who built incredible profit machines by first focusing on building value that wins the loyalty of profitable customers. His list in 1994 included no traditional banks.

It still does not.

The loyalty guru says that Northern Trust Co., which he classifies as an investment manager because of its highly profitable trust business, is the only bank that makes his list, which includes MBNA, Northwestern Mutual Insurance, State Farm, USAA and Vanguard. The problem with banks, he says, is that their quarter-to-quarter mentality has pushed them to invest heavily in technology while abandoning their greatest asset: people.

FSM: Why do most banks fail in gaining customer loyalty?

Reichheld: Most banks still have no practical way to measure customer profitability. The insurance industry has figured this out, and, in my mind, insurance is a far more complex calculation with actuarial science and all of the risks and capital allocation issues.

FSM: So what firms are doing a good job of building loyalty?

Reichheld: USAA has something on the order of a 98 percent retention rate. State Farm is doing business with a much broader segment of the population and has about a 97 percent retention rate. And in a much tougher life insurance business, Northwestern Mutual has a 96 percent-plus retention rate.

FSM: How do they do this?

Reichheld: I know you would like to hear a technological answer, but the real answer is the way they treat their own people and what the underlying objective of their business is. Instead of trying to maximize profits as the be all and end all, they feel that they want to deliver an outrageously good value to the customer. And they've tuned up their system to serve the customer first and foremost. ...State Farm, by focusing on creating outstanding value for the customer and earning their loyalty, has generated over $35 billion dollars in retained earnings. ...Then there is how they treat their people. They have very high standards of performance, but they are willing to share the benefits of superior performance back with those people who achieve it.

FSM: Why is that?

Reichheld: Most banks have put in place a human resources system that tries to treat people fairly as opposed to rewarding those (employees) who create the most value. ...Look at tellers. Churn rates of 40 to 60 percent are common. You can dismiss the teller as an irrelevant position, but, frankly, those are the people who face the customer and have enormous influence on whether customers want to come back for more.

FSM: You like Vanguard's customer retention rates. What's its secret?

Reichheld: Vanguard understands perfectly how that retention translates into a cost advantage for them. The CEO has (said), "Our goal is to be low cost because we want to be the best value to our customer, which of course gives us the best retention rate." ...Segmentation plays an important role here. There is something on the order of 30 to 50 percent of the market that is completely performance driven. Vanguard does not want that segment. ...One of the signs that I see of a loyalty leader is that they consciously avoid certain kinds of customers.

FSM: What about in the card business?

Reichheld: The class act is MBNA...They have the highest retention rate of the card issuers, though I think it slipped with their growth. ...And the thing that distinguishes MBNA even further is the way they treat their people.

FSM: Is its next step to move from retention to creating good product and reinforcing brand?

Reichheld: The real issue in earning share of wallet is not just selling more stuff. But it is once you have discovered a way to be a superior value to a segment of customers-and then have done it-that gives you an information advantage about your customer and what they truly value. And, if you're wise in how you use that, you can then often be the low-cost, high-value supplier of other product lines.

FSM: Do you believe that cross sell destroys shareholder value?

Reichheld: More often than not. ...The trick is discovering what sets of customers to whom you can give even better value, so you get more of their business.

FSM: Aren't banks selling commodity products to customers who decide based on price?

Reichheld: Commodity and loyalty are oxymoronic. But you cannot create loyalty (from) someone unless you can create a differentiated service and product that they value. In financial services, it is still primarily "services." And it requires intelligence, personal intervention, (a) committed trustworthy workforce, and that's missing.

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