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BirdsEye View

customer attrition drivers and new tools to combat them

Jeff Brown, EVP at Webster bank, commented on my last article: "Your latest Birdseye View reminded me of a speech I heard Michael Porter from Harvard give a few years back at a banking conference. Porter had addressed this group a few years before that and he referenced that he came back because clearly no one had heard him the first time. His point was that a competitive market place with out differentiation is destined to compete on price alone and subsequently the profitability for all players is marginalized.

I think the key is to find the competitive space you want to dominate and then seek a handful of proof points that pay it off for your customers. The brilliance of the Commerce strategy was not just the coin counters or the hours but the totality of the commitment to delivering what other banks would not. As you so rightly point out, these points of differentiation have to be based on what your customers tell you is important to them not just what you think should be important to them. You then need to continually innovate to find new and different ways to pay off on your strategy. Others will pick off individual good ideas you introduce but few will follow in the totality of the strategy which is what will keep you separate from the pack. If you seek to be different you need to be consistently different."

My son Guy led a team of Yahoo professionals to trump Google and launch an effective audience targeting program for his small business audience. I'm so very proud of him! It's not often that Yahoo trumps Google...

Seder at the Birds was another special time for all of us. We had four adults and thirty ravenous Millennial who descended upon the food with vigor while rapping Dayenu (a Passover song) to a steady clapping beat. It was awesome. Paul's idea to have a tailgate party per-Seder, complete with bratwurst and steak grilling, Bocce Ball, basketball and football, was brilliant. Seder menu is posted on the website, www.anatbird.com. The most touching words came from my son Paul, who texted me as he boarded his plane back to Indiana University: "It's always a good feeling to know you have a place to call home". He touched me heart.

Is spring finally budding where you're at? I dare not tell you about California and those magical almond trees in bloom...

Article synopsis: Debit cards and online banking aren't only fee income drivers; they significantly impact attrition and likelihood to buy other products from the bank.

CUSTOMER ATTRITION DRIVERS AND NEW TOOLS TO COMBAT THEM

This year continues under the banner "The Year of The Deposit". One important and effective way to build deposits is by curbing attrition. It typically takes 18 months for an account to season, so it often takes 5-10 new accounts to make up for the lost balances of a single lost account.

The first step toward reducing attrition is understanding the root causes behind customer retention. The number one reason for customer retention, as identified by 10+ studies I've seen recently from a range of banks, is always customer service. In a recent survey kit was cited by 75% of the respondents as an important reason why they stay with their bank. A close second was convenience, as represented by location of branches or ATMs, but also online banking. Low fees or minimum balances were a distant third.

One interesting addition to the top five reasons for customer retention is "It's too much trouble to switch". Switching costs are heavy in our industry, and range from direct costs (new check orders) to learning costs (figuring out the new bank's procedures, online banking navigation etc.) and contractual costs (such as direct deposit).

As to customer attrition, most of your bankers will tell you customers died or moved, and hence they left the bank. Others might also add poor pricing to the equation. In reality, customer service issues are the #1 reason why customers will change their primary bank other than moving or changing jobs. Fees come next, and then convenience.

When you drill down further, poor "customer service" means wait times longer than expectations (important to note that expectations vary widely from urban, center-city and rural markets); bank employees are not knowledgeable about the product line; and problem resolution is difficult: many handoffs and repeat inquiries prior to resolution. Again, no surprise, except I encourage you to investigate what percentage of customer problems are resolved on the first try, and how many aren't resolved at all&

Interestingly, payments have become a major leading indicator of customer retention in today's world. This isn't simply the old "ACH or direct deposit" rule, but well beyond those two products.

Consider this: Debit cards accounted for 27% of all payment transactions in the US in 2009, and the percentage is bound to break 30% in the 2009 Fed payments study. Checks have declined 25% (!) in the 6 years between 2000-2006.

In addition, debit cards have become the best predictor of likelihood to buy. A person who uses PIN debit cards is 1.5 times more likely to buy another product from the bank than one who simply uses checks. This is surprising and statistically significant.

Secondly, the very use of online banking (not only Bill-pay) has also emerged as a major retention predictor. A study by CheckFree (sample size over 7 million consumers) indicates that consumer attrition rates and profitability vary widely by their online banking behavior. Specifically:

  • Consumers who regularly use online bill pay are up to 95% less likely to attrite than the general banking population
  • Consumers who have somewhat used bill pay are 76% less likely to attrite
  • Even consumers who don't use bill pay but use online banking are 33% less likely to attrite
  • Conversely, consumers who don't use online banking at all are 43% MORE likely to attrite

Further, the study shows that active bill pay customers at at least 2.5 times more profitable than the average. Non online banking users are 29% less profitable than the general study population.

Last, online bill pay adoption leads to greater profitability over time (which stands to reason, since it indicates greater balances and a primary account ownership).

Liat, a statistically insignificant sample of one, added to these thoughts: "Not only that, but a website that is easily navigated. The power of inertia is great (especially among busy college students); we all despise the service we get from AT&T for the internet, but their website is so convenient, and bill pay is free! So as long as the irritation of AT&T never rises above the inconvenience of finding a new provider, Ill stick with them. I feel the same way about my bankyou can do a lot of things to irritate me, as long as you keep the overall equation weighted towards convenience." She also points out that she moved all the way across the country but didn't change her bank, given the inertia and her connection to online banking.

The message of this article is simple: Cross selling and direct deposit are both proven and well known methods to improve customer retention. New data indicates that PIN debit card usage, online banking and bill pay usage are also most effective customer retention and profitability enhancers.