Asset Based Lending
Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewcustomer retention facts and fiction
This week's article trains the limelight on customer retention, core to consistency of earnings yet omitted from many incentive compensation and corporate goal programs. Unlike the Ritz Carlton, with its Big, Hairy, Audacious goal of 100% customer repeat business, our industry shies away from putting a stake in the ground regarding customer retention. Further, we boast high retention rates for our most loyal and profitable customers, yet fail to push the envelope further, in the area where every percentage point improvement counts the most.
As always, I'd be grateful for any thoughts and comments on what works and what doesn't in this all-important arena. Looking forward to hearing from you,
Customer Retention Facts And Fiction
It took the industry a decade, but bankers have finally realized that generally keeping a profitable customer is more profitable than acquiring a new one. Not only does one avoid acquisition costs, but seasoned customers are significantly more profitable than green ones for several reasons:
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. As a result, banks started looking into root causes of customer attrition.
What banks found out is simple and overwhelmingly consistent:
Following countless studies, focus groups and customer surveys, dozens of banks around the country concluded that they need to change some of their processes in order to improve customer attrition. Here are some of the steps they are taking internally:
In addition, there are many things that can be done to improve retention vis-à-vis the customer. One popular approach that is a response to finding out that customer attrition occurs early in the account's life is the concept of on-boarding. It involves mandating a certain number of touches each new customer is supposed to experience from the bank during the first 90 days after account opening. It's a prescriptive and fairly mechanical process, yet it can be most effective. Banks require their employees, particularly on the retail side, to contact a customer with a courtesy call a few days after account opening, then a couple of weeks later to inquire whether all went well during the process, checks have been received, their debit card is working etc., to be followed by other calls and thank you notes designed to help the customer feel connected to the bank. In addition, cross selling efforts take place during that period, since 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 90-120 days.
An interesting internal conflict in the cross selling and on- boarding effort is that many banks consider a "sales session" for the purposes of computing a cross sell ratio 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 activity occurs after the initial visit and before 90 days are over. Therefore, keeping the "sales session" open for purposes of calculating cross sell ratios and compensating employees for a much longer period than the one day makes sense. Matching the cross selling sales session definition to the research finding and on-boarding process needs to be done in all banks that are practicing on-boarding. Otherwise, one measurement contradicts other mandated practices.
In addition to on-boarding, cross selling efforts have been long established in our industry. We have also graduated from selling customers products they don't need nor want, to selling products across product categories. In the past, selling anything to anyone who would buy it has been a common and unfortunate practice. This is costly both to the bank (since these products aren't being used yet they often entail a systems maintenance fee) and to the customer (who soon realizes that the bank isn't the trusted advisor they claimed to be, since they sold them a product that doesn't meet their needs). As banks realized that the number of inactive accounts has sky-rocketed, they looked further into suitability. Current research, consistent with old research that has not been looked into for years, indicates that the best way to retain a customer is by selling them products from various categories. For example, selling 7 CDs isn't nearly as valuable as selling one checking account and one loan to a customer. Combining product solutions from transaction, credit, protection (insurance) and asset accumulation product categories links a customer much more closely into the bank and increases retention exponentially. In addition, customers do have a need for products in all these categories, so the likelihood of them using the products is greater. Hence, the definition and expectations of cross selling are being refined to go beyond counting number of products, or even services, into assuring that the products sold cover a number of categories.
Another important component to the retention drive, and the most difficult one to execute, has been problem resolution. Banks are generally designed to get things done in the most efficient way for the bank, not necessarily for the customer. Our organizations are quite convoluted from the customer's viewpoint, which makes problem resolution exceedingly difficult, even when our own people get involved. A customer is unlikely, in most cases, to get a problem resolved by contacting only one person in the bank. Similarly, a banker couldn't solve a customer's problem by contacting only one internal bank person. They, too, typically have to navigate our internal maze until they find the right person to deal with the issue. This is due to the increasing complexity of bank products, the growing bureaucracy in many banks, and the inability of many bankers to identify who is the right person to handle what problem. Small community banks have the edge in this situation, often a function of their size and commitment to service, which explains why they typically experience lower attrition rates than their larger brethren.
The challenge for banks is to improve their problem resolution process. Other huge companies have found paths to success by empowering their people own the problem and spend a certain amount of money to help their customers. FedEx, for example, has a motto for years, "We rent helicopters", meaning that when it absolutely, positively has to be there, every employee is empowered to do what it takes. The Ritz Carlton had a similar policy, authorizing employees to spend several hundred dollars to keep the customer happy. Some banks are going down that path, but progress has been slow and painful. Some have established "problem resolution centers", where employees spend their days trouble shooting problems for customers. More on problem resolution in a future BirdsEye View.
Whatever the path to effective problem resolution is, it is essential, together with other steps, to achieving the customer satisfaction levels (and the retention associated with them) we are all looking for. Your competitors are already working on this issue. You need to do that as well, to ensure that your own customers will choose to stay with you and not be driven to a better service provider.