In line with their improved reputations and loyalty measures, financial institutions raised their standing this year in service quality.

The American Banker/Gallup Consumer Survey said the overall level of satisfaction was up for the first time since 1995.

The number of people "very satisfied" with their principal institutions' overall level of service - the high rung on a three-choice question (very, somewhat, or not satisfied) - increased by 2 percentage points since the previous survey in the fall of 1997, to 60%.

Given the three-point statistical margin of error, the general satisfaction level approximates the 61% and 62% of 1993-95, before a skid among commercial banks that most experts viewed as an aftereffect of merger activity.

Among the roughly half of survey respondents who designated a commercial bank their primary financial service source, the "very satisfied" total had slumped to 53% in 1997 from 61% in 1994. It climbed in 1999 back to 56%.

Some of the observers who pinpointed the bank-merger problem - one that may have since spread to the thrift industry, which declined in customer satisfaction this year - are strongly suggesting that banks not rest on their better laurels.

Consumer perceptions of quality can be hazy to begin with, consultants say. Also, commercial banks have hardly closed the gap with credit unions, which remained by far the star performers in customer satisfaction, at 74% very satisfied.

For only the second time since 1992, nondepository institutions registered a higher satisfaction score among their most loyal customers than banks, at 58%.

"The numbers may look good," said Les Dinkin, principal of NBW Consulting in Westport, Conn. "But the question is, is the (banking) industry changing and improving fast enough to win the customers and markets they really want?"

"Market and deposit share data are starting points," Mr. Dinkin said. "But which segments of the market are we talking about?" Banks have to be making strategic choices, as they cannot succeed being "everything to everybody."

The news is mixed on that front. For example, commercial banks have a 56% "share of mind" among people with $75,000 and higher household incomes. That compares with 51% of the total population that named banks as their primary financial provider.

But that upper-income category was 60% "very satisfied" with its principal financial institutions, right on the average for all consumers and all institutions. That figure for the over-$75,000 group was a higher- than-average 63% in 1997 after dipping to 47% in 1996.

Financial consumers, and not just the upscale, appear increasingly discriminating in their outlooks, suggesting that the market is very much up for grabs. Since 1995, "very satisfied" people below $20,000 in income - including young people and others who are wealthy and retired - have declined to 53% from 71%. In the $20,000-$40,000 range, this reading fell to 59% from 64%.

Chaos reigns in the marketplace because of mergers and other structural changes, said Michael Lowenstein, a consultant to the Bureau of Business Practice in Waterford, Conn. He prescribes such loyalty-enhancing cures as personalized service and attention to fundamental details such as drawing customers into branches and supporting the relationships with broader product lines, on-line services, and call centers.

"Provide the kind of speed, convenience, efficiency, consideration, and personal service that every customer wants," he said.

The importance of brick-and-mortar and personalization has not been lost on Charles Schwab & Co., viewed by many as the prototypical nonbank competitor of the moment. Despite its commitment to meeting customers in person as well as on the Internet, Schwab still lacks the branch coverage that many banks can exploit in serving and reassuring customers, said Dan Latimore, financial services industry director of the Cambridge, Mass., consulting firm Mainspring.

What might differentiate Schwab in the "Internet economy" is its attention to customer experiences rather than to the operational improvements that have long been bank back offices' preoccupation, said Edward Nazarko, a financial industry consultant at Scient Corp., a San Francisco-based e-business consultancy.

"Schwab is focused on the customer experience - customer service, recourse, and conclusion" of transactions, he said. Banks tend to focus on originating and processing transactions themselves and "optimizing the business model."

E-Trade Group, the dynamic securities trading house on the World Wide Web, "is not just about transactions," Mr. Nazarko said.

The 1999 American Banker survey, conducted by Gallup in March, returned to questions about components of the traditional banking service last asked in 1996.

On most of them - from staff friendliness and courtesy to statement formats to service efficiency to various questions about pricing - the numbers rating their principal institutions good or excellent were up.

The pattern was less consistent in the excellent answers alone. "Friendly and courteous staff" and "statements easy to understand" were up one point each, to 57% and 51%, respectively. Service efficiency and problem-solving were both unchanged, at 42%. "Knowledgeable and professional staff" fell two points, to 40%.

There can be wide variations among customer bases. Credit unions were rated excellent on staff friendliness and courtesy by 71% - 10 points better than in 1996. Banks came in at 51%, down six points. Banks were also off seven points, to 35%, in "knowledgeable and professional staff," but other ratings were statistically about the same or marginally better.

On speed of loan decisions, credit unions scored 40% excellent, banks 19%, the survey average 23%. On deposit rates, credit unions were at 34%, banks 18%, and the average 23%.

"Banks may on the margin be doing a lot of things better," Mr. Dinkin said. But he views credit unions as especially strong on the basic products, and certain nonbanks and monoline companies as "smarter, more nimble, and more effective." Any improvements by banks are "not at a fast enough rate relative to others."

Kathleen McClave, a veteran banking industry consultant currently with Tillinghast-Towers Perrin in New York, said many commercial banks remain too inwardly focused to get a fair perspective on how they stack up against new forms of competition.

"Bank quality measures tend to be internal, on such things as whether reports are out on time," Ms. McClave said. "If banks have a brand value, it is their reliability," which does not speak to astute use of technology, or to changing their cultures from "order-taking" to selling and advice- giving.

"Bankers just aren't good engineers," Ms. McClave said.

"Dot-com plays like Schwab worry about the customer experience and retention," said Mr. Nazarko of Scient. "Interaction with customers is a better place to invest than on reducing error rates."

In the view of the American financial consumer, the healthy business climate of the late 1990s casts a favorable light on old-fashioned ways. Only a third of on-line securities trading customers in the survey said they were very satisfied with the service, versus 59% of home banking users, which in turn was in line with the surveywide satisfaction score of 60%.

Credit unions top the satisfaction charts year after year for the same fundamental reasons. These institutions are not-for-profit and organized around affinity groups, which may begin to explain their members' differences from bank customers.

The contrast is evident in the outsize general satisfaction score. Only 20% of consumers name a credit union their principal financial institution, but the 74% "very satisfied" lifts the overall industry average 4 percentage points above banks' 56%.

Credit unions also excel on the questions of whether service quality improves from one year to the next, and on how interest rates and pricing are perceived.

In 1999, consistent with past surveys, more than 30% of credit union loyalists said their institutions improved from year to year in service quality. Banks and savings institutions were down around 20%.

Whereas 51% of credit union customers rated their chosen institutions excellent in service charges, and 46% on loan rates, banks came in at only 24% and 15%, respectively. Thrifts did just slightly better than the banks, at 27% and 21%.

"There is that perception out there that credit unions are the nice guys, the friendly, neighborhood people," said David Orr, First Union Corp.'s chief economist.

He groused about it in the way that has preoccupied banking industry lobbyists in Washington: "If credit unions had to pay taxes, they'd be doing exactly what banks are."

"Credit unions exist to provide service to members, not to extract profit from customers," countered Kenneth Robinson, president and chief executive officer of the National Association of Federal Credit Unions. "The survey results show that credit unions continue to do an excellent job fulfilling their mission."

Mr. Lowenstein recommended that all types of institutions, not just credit unions, "think small and emphasize customer service. Financial institutions need to make it their mission to provide comprehensive banking options whenever, wherever, and however customers want them."

Mr. Dinkin suggested that bankers could do better in a few areas: "getting religion" about becoming customer-focused; adopting a monoline- like focus on critical strategies such as Internet banking; and "taking more prudent risks" that will pay off over time.

"Boards have to change compensation structures to reward senior managements for prudent risks they have to take," he said. "There are bets with 18-, 24- and 36-month payouts that have to be initiated now."

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