Customer-level data can yield insights that will enrich efforts to retain and cross-sell to profitable customers, attract new ones, and upgrade the unprofitables. However, advanced practitioners recognize the importance of supplementing this information with direct customer contact, applied in deposits, credit cards, small business, and investment management.
Attrition of deposits comes in two flavors - runoff in accounts that remain open and outright customer defection - and it has become a major profit drain in retail financial services. - $20 million to $35 million per $10 billion of deposits before taxes, our research suggests.
The positive impact of customers' increasing balances and originating new accounts disguises - but does not reverse - the loss in balances. About 75% of the erosion comes from highly profitable accounts, whereas many new accounts are unprofitable. Many balance outflows that are not used for expenditures move to a deposit account in another bank - not to brokerage accounts or to investment products - and a relatively small proportion of attrition is associated with poor service.
Rather than taking "across-the-board" retention approaches - raising rates or working broadly on service quality, for example - programs are required that identify profitable customers at risk, pinpoint their reasons for balance attrition, and take steps that address needs and later forestall the runoff at a cost acceptable to the bank.
Here are the essentials:
- Analyze customers to target only the high-value ones who are at risk.
- Establish an effective conversation with target customers.
- Probe to understand their situations. Are target customers spending the money, or are they dissatisfied? If dissatisfied, why? Where are the funds going?
- Formulate counteroffers that address the underlying causes of attrition; if customers are dissatisfied with fees, for example, is it possible to transfer them to a package or product that has no fees but will still yield adequate profit?
- Convey counteroffers persuasively; address questions and other follow-ups.
- Set up test-and-control processes to quantify what happens.
Unlike traditional market research approaches, this kind of program focuses on capturing the subtle elements of conversations and facilitates on-line script revision. The importance of this may be underappreciated. For example, after the first week of a rapid-cycle research program, the script inevitably has been altered almost beyond recognition. The result is a significant upgrading of insights obtained and a saving in time and cost.Specialized software enables this. This software is used to guide service representatives through the conversation and discussion of counteroffers, while capturing and storing customer responses, which lead to daily changes in scripts and improved counteroffers.
Another strength of the program is in immediately connecting information derived from customer calls to the bank's data base. Using statistical methods, this information can be used to identify and quantify at-risk customer segments.
Wherever applied, this deposit-retention process has exceeded expectations in retaining valuable deposit relationships and avoiding the cost of unproductive initiatives such as blanket rate increases. Mr. Goetzmann and Mr. Tetenbaum are vice presidents at First Manhattan Consulting Group in New York.