Provident Bank is embarking on a new program that is forward-thinking and based on sound market research, according to the bank as well as outside observers. But, oddly, its approach is atypical in the banking industry.

The customer-retention program is simple. It is not based on a minimum requirement of assets, but rather on whether the customer uses the bank as its primary financial relationship, says Heather Anderson, product manager at the bank who came up with this program.

The primary goal is to entice customers to make Provident their primary financial relationship, Anderson says, regardless of how wealthy they are. And customers who commit themselves to a primary relationship with the Baltimore-based bank will get better rates on both deposits and loans, she says.

For instance, those valued customers would get a home equity loan rate of prime minus 1.02 percent, whereas other customers who do not have their primary relationship with the bank would get prime minus .25 percent, says Anderson.

On the deposit side, a regular savings account from these customers would get 30 basis points, compared to 25 basis points for other customers. For a $25,000 CD, the valued customers would get 3.5 percent, as opposed to 3.1 percent for other consumers looking for just a CD, she says.

The plan was introduced first to employees on November 1, followed by a January 3 marketing campaign for customers. Anderson said she expects six percent of the existing customer base to migrate to the plan.

In a larger sense, this plan is just part of the bank's "Right Size" branding campaign, which tries to convey that it is essentially the perfect size, regardless of a customer's financial needs, Anderson says.

This type of attraction and retention program is one area where banks have not had much luck, says Bruce Clapp, president of MarketMatch, a marketing company that focuses on banks. The novelty of Provident's program stems from the fact that it does not focus on the immediate profitability, he says. "Banks tend to look at [their marketing programs] with the idea of 'How can we make this work for us?' instead of focusing on the customer," he says. But in the long term, longevity of the relationship encourages a more rounded use of the bank and a more profitable customer, he says.

Clapp says he does not know of a bank that has been successful with a program like this, even though it sounds like a good idea. A number of banks have tried, but pulled the plug, he says, although he did note that America Express offers its own version with membership rewards.

Lance Kessler, president of consulting firm Lance Kessler & Associates, agrees that Provident's approach makes sense even though he also did not know of any success stories in the banking industry with this type of program.

He was not familiar with Provident's specific program, but banks should be looking to build long-term relationships instead of simply seeking more transactions, he says, and this type of program is a step in that direction. The airline industry offers an example of how not to do it, says Kessler. Airlines are constantly revamping their frequent-flier mile programs, whereas banks should strive to be more long-term thinking, he says.

Clapp adds that banks will be well served to determine the roughly 33 percent of the market that constitutes the best potential customer targets. He segments consumers into three groups of roughly equal size. One-third of customers are rate-driven, he says, and will always go with the best rates. Those customers are easy to lose as they may change banks at any time, but provided they are correctly identified and provided it fits into a bank's long-term strategy to offer low rates, they are also easily lured, he says. Another third of the market is rate-insensitive, and will choose a bank to be loyal to and stick with it.

The middle tier of consumers will consider rates as well as other factors, so a bank does not necessarily need to offer the best rates. Rather, it needs to be competitive and offer a sense of trust with good service and knowledgeable employees. And this middle stratum is where banks fight for customers, he says. "The middle third are the ones you compete for," he notes. (c) 2006 U.S. Banker and SourceMedia, Inc. All Rights Reserved.

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