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Customer Experiences Rule
BY PAUL MCADAM and B. JOSEPH PINE II
Differentiation in retail banking requires differentiating via the customer experience. BAI Research spotlights the experiences that matter.
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SYNOPSIS | New research by BAI indicates that improving the customer experience is the best means for retail banks to differentiate themselves and avoid commoditization. A national consumer research survey in BAI?s The Relationship Experience project spotlights eight specific banking experiences that customers value highly. Rewarding customers for the size of their business with the banks and keeping branches open weekends and evenings are among experiences that can drive customer loyalty and profitable relationships.
It?s all about the customer experience, particularly the customer experience in the branch. Retail bankers today would broadly agree with that statement, as the industry focus in this decade has shifted from acquisitions and online technology to customer interaction issues on the frontlines. That?s evidenced in the massive investment being poured into de novo branch expansion, facilities remodeling and efforts to improve frontline employee effectiveness.
Less clear is what kind of customer experience is the ideal. Are customers attracted by ?new-style? branches, with coffee baristas and media walls, or do they just want shorter teller lines and more knowledgeable employees? Do customers want heightened service or is it more of a distinctive ambience they seek? Or both?
BAI?s The Relationship Experience research project, conducted in collaboration with the innovation and experience consultancy Strategic Horizons LLP of Aurora, Ohio (see ?About The Relationship Experience?), revealed eight target areas for enhancing customer experiences in order to expand customer share. Some key experiences: rewarding customers for the size of business they did with the bank, keeping branches open on weekends and evenings, and providing branch personnel with more flexibility to make decisions.
Improving performance in these eight areas will enable institutions to increase their number of loyal and most profitable customers. Our research shows that such ?Loyalist? customers bring 24% more deposit and 14% more consumer loan balances to their primary banking institution than the national average and are three times more likely to recommend their bank to a friend or family member. More loyalist customers mean more profitability for the institution.
And there?s definitely room for improvement here. While 20% of the total U.S. banking population can be classified as Loyalists, there are great variations by type of institution. Large banks count only 15% of their customers as loyal, compared to 24% for community banks and 26% for credit unions. Larger banks, therefore, can gain more traction by improving the customer experience.
While nearly half (46%) of the executives we surveyed cited investments in experiential store design and merchandising as being important, 80% stated that the ability to consistently apply a customer-focused corporate culture across the retail network will be the primary factor that makes or breaks their efforts to enhance differentiation at the frontline. These executives feel there’s a very strong correlation between that customer experience and the employee experience, meaning that institutions require happy, motivated employees in order to generate a positive experience for customers.
How can this differentiated customer experience be attained? In The Relationship Experience, we deployed a research approach to provide guidance on that issue based on two key questions:
- What customer expectations are not being met?
- Where are customers sacrificing, or giving up, in terms of what they really want?
To analyze the answers received, we developed a Customer Sacrifice Index, which measures the gap between what customers want exactly and what they settle for (the sacrifice). Minimize, or eliminate, sacrifice in the highest priority customer experiences and customer loyalty will follow (see “Why Customer Sacrifice?”).
More Loyalists Needed
A key objective of our research was to develop an understanding of the relationship between customer experience, customer loyalty and the customer’s willingness to bring additional business to his or her primary bank. But this relationship will vary based on the types of customers involved, so a segmentation scheme was required. Based on analyses of a series of consumer research questions related to overall satisfaction, advocacy and a willingness to expand their relationship with their primary bank, we defined three broad customer segments: Loyal, Positive and Hesitant/At-Risk customers.
Loyal customers (Loyalists) comprise 20% of the overall population. Another 25% were generally positive toward their primary bank, but not loyal. And more than half (55%) were hesitant to depend too much on their primary bank and/or were at risk for leaving it.
The large group of Hesitant/At-Risk customers is comprised of three sub-segments. The first are skeptical customers who do not trust banks and are uninvolved in managing their finances, primarily due to their low incomes and financial assets. The second are affluent and sophisticated customers who view banks as having insufficient capabilities to meet their financial needs; they use their primary bank for transactional services and prefer to diversify their finances among multiple bank and non-bank providers. The final group is comprised of customers who desire high levels of customer service but experienced significant disappointments with what they encountered at their bank.
Converting any customers from these three sub-segments into Loyalists or Positive customers requires greatly increased services levels across the board in addition to targeted customer experience and communication initiatives to overcome their negative attitudes toward their bank. Research suggests that the allocation of discretionary resources to gain greater wallet share from the Loyalists and to convert Positive customers into Loyalists may be the preferred course of action, for it requires fewer resources on a more focused group of customers.
Loyalists bring a significantly larger share of their wallet to their primary bank (see chart “Loyalists More Profitable” on page 54). Loyalists maintain deposit balances (checking, savings, money market and CDs) with their primary bank 26% larger than that contributed by the Positive customers and 34% larger than provided by Hesitant/At-Risk customers.
On the consumer lending side, a similar divergence occurs. In terms of combined home equity loan and credit card balances, Loyalists maintain balances with their primary bank that are 5% higher than the Positive customers and 24% higher than those held by Hesitant/At-Risk customers.
A deeper dive into this data reveals that customer loyalty does not generate incrementally larger balances for the primary bank within transactional product lines, but does within the product lines that are more relationship-oriented. All three segments maintain checking, savings and credit card balances with their primary bank that are relatively similar.
There are a couple of attitudinal and behavioral factors that lead to this result. Nearly every consumer owns these three financial products and the consumer’s decision regarding the preferred provider and how much business to share with that institution is largely driven by convenience and price (both hallmarks of commoditized products). Additionally, given the underlying structure of these products, there is a natural ceiling in terms of the balances that consumers will maintain.
However, when it comes to a larger financial and attitudinal commitment on the part of the customer — with the purchase of a CD, money market, or home equity loan product — the data clearly reveals the payoff that customer loyalty brings to the primary bank. Within these three products, Loyalists maintain balances with their primary bank that are 34% to 66% higher than the national averages.
But institutions must be careful to not overlook their transactional customers. Although transactional
customers may initiate their banking relationships with entry-level transactional products, some of these customers will eventually expand their deposit and loan balances. In addition, the ability to fully understand the complete wallet potential of customers is a notoriously difficult challenge for banks. The average customer with CD or money market holdings maintains 60% of his balances with a provider other than the primary bank. The right customer experience may be capable of driving some of these balances back to the primary bank.
So, loyalty makes a difference in that the gains that can be realized by expanding the number of Loyalists, as opposed to those that are merely satisfied, are substantial. That’s an encouraging research finding but not news (see “Why Can’t Some People Commit?” in the March/April 2006 issue of BAI’s Banking Strategies at www.bai.org/bankingstrategies/2006-mar-apr/cover/index.asp).
The real challenge, and opportunity, that stands before the industry is how to extend the conversation regarding customer loyalty beyond the topic of customer advocacy into understanding the specific experiences that create Loyalists. Once these issues are understood and measured, the industry has a better prospect of figuring out how to minimize sacrifices and replicate positive customer experiences consistently across the branch network to generate a growing pool of Loyalists. Our research indicates that probing deep to uncover the true sources and implications of customer sacrifice provides a useful exercise for executives in their quest to attain these objectives.
Eight Critical Experiences
Are retail banking customers sacrificing? Indeed, they are, but in some ways that you might not anticipate. The research was designed to measure customer sacrifice across a range of more than 30 branch sales and service attributes and their impact on relationship receptivity, loyalty and ultimately wallet share. (See chart “What Matters to Customers”).
We uncovered eight customer experience areas for which customers endure high levels of sacrifice, meaning that customers have a high desire to receive these services but do not feel that their bank adequately provides them. The highest reported sacrifice related to a feeling of not being rewarded by the bank for the size or duration of one’s business with the bank. Sacrifice related to inconvenient branch operating hours was number two. The next six most important areas of customer sacrifice all have direct linkages to customer-employee interactions that take place within branches.
What’s interesting about these eight areas of customer sacrifice is that many extend beyond some of the typical customer experience approaches emphasized by banking institutions today, such as having enthusiastic/friendly staff, greeting customers when they enter the branch, taking time to chat with customers as they are conducting transactions, redesigning the teller line, and creating a comfortable environment that encourages the customer to spend time in the branch. It may be that some of these, such as providing a warm and inviting branch environment, remain so far outside customers’ current experience with their bank that they can’t envision it, and therefore don’t realize they sacrifice today by not having it.
But while these are all important initiatives and should certainly continue to be emphasized, the BAI research indicates that for the most part customers do not realize high levels of sacrifice in these types of areas because customers do not view them as being vitally important, or are generally satisfied with the current delivery of the experiences.
The practice of branch staff taking the time to chat with customers while conducting their transactions provides a good example. Thirty-seven percent of customers view this as a very important element of the branch experience, but 29% of these customers are completely satisfied that their bank is providing this particular interaction. The result: only 9% of customers are experiencing sacrifice, which translates into a score of 21 on our Customer Sacrifice Index.
Contrast this with the experience of being rewarded by the bank for the size or duration of the business kept with the bank. Fifty-two percent of customers view this as a vital element of the experience while only 12% believe that this experience is being delivered, resulting in a gap of 40% of customers experiencing sacrifice. The combination of high customer desire for this experience and low perception of delivery results in this being the largest generator of customer sacrifice in our study, which therefore garners it a score of 100 on our Index.
Within all eight of the high-priority customer experience areas, the Loyalist customer segment consistently reports lower levels of sacrifice than the total population (see chart “High Priority Customer Experiences” on page 58). This trend and the other research data clearly suggest that these eight drivers, particularly those directly related to the customer-employee interaction, are instrumental in driving customer loyalty.
In fact, when we compare our Customer Sacrifice Index scores for the Loyalist segment to the Positive customers and Hesitant/At-Risk customers, the variations in customer sacrifice are even more obvious (see chart “The Relationship between Sacrifice and Loyalty”). The Loyalists experience relatively high levels of sacrifice in three experience areas (rewarded for size of business/tenure, branch hours and ability of branch staff to make rate/fee decisions). But the levels of sacrifice in the remaining five categories are low. Positive customers experience extremely high levels of sacrifice in the same three categories but have much higher Customer Sacrifice Index scores, ranging from 49 to 66, in the remaining five categories. Scores in this range imply that customers have a strong desire to receive the experience and are receiving some of the service levels that meet their requirements, but definitely would like to receive more.
Finally, the Hesitant/At-Risk customers generated Index scores between 86 and 100 within all eight categories,
meaning that they experience very high levels of sacrifice across the board.
Structural and Organizational Issues
Many of the eight high-priority customer experiences cited in our research reveal customer dissatisfaction with a range of issues that are the result of structural and organizational decisions banks have made regarding the operation of their branch networks over the past couple of decades. These include the centralization of operations and decision-making, the trend toward using product specialists as opposed to universal bankers, and the movement to transition the workforce to attain a greater emphasis on sales as opposed to purely service.
Many of these decisions were unavoidable as banks have grown larger through consolidation. As they transitioned from a local to a mass market orientation, they sought to squeeze more efficiency out of the branch network and restructured workforces. But it does point to the reality that many customers still remember the days when all banks essentially operated as community banks, with high levels of local touch and in-person interaction, where “the banker” was a long-time, respected member of the community who could capably assist you with a broad range of financial needs.
The growing affluence of U.S. consumers and the expanding presence of non-bank financial services providers (brokerage, mutual fund, personal financial advisors, etc.) certainly had an influence as well. As consumers have become more affluent, requiring them to cope with an increasingly complex set of financial circumstances, it is completely natural for many of them to look beyond banking to firms that provide the personal, high-touch interactions they desire.
In any case, it is clear that most consumers still have a strong desire for the types of interactions contained within these eight high-priority experience areas. But many of these same customers feel that their banks are not fulfilling their needs. Given the level of sacrifice that customers profess among these eight areas, we believe that addressing them should be a top priority for every banking institution, both large and small.
Our research results have provided clear signals that 20% of the population (the Loyalists) realize lower levels of sacrifice among these eight experience areas and are rewarding their primary banking provider with substantially higher advocacy, as well as deposit and consumer loan balances. Even modest increases in the quantity of Loyalist customers will have a meaningful impact on profitability. With programs in place to reduce customer sacrifice, over time it will be possible to migrate additional customers up to the Loyalist stage, particularly from the ranks of Positive customers.
However, due to the deep structural and cultural issues that underlie these sacrifices, some depository institutions are naturally advantaged to differentiate by delivering on the eight high-priority drivers of customer experience identified through this research — while
others are not. Community banks and credit unions have a particular advantage due to their local market presence and relative customer attentiveness. Large banks with a keen focus on service culture and the ability to spend aggressively on employee development programs and marketing communications to get the message out will make some headway.
But for many large banks, the sheer size of their branch distribution networks makes it difficult to keep pace with more nimble competitors on a full-scale customer experience agenda. They will be forced to compete largely based on price and convenience. For some large banks, the best course of action will be to focus and invest in a subset of the eight drivers to maintain competitive parity while continuing to focus full-force on their mass-market, transactional customers.
But in the end, any action to improve the customer experience is better than no action at all, for the retail banking marketplace is bifurcating. Many customers simply want to receive retail banking products at the best possible price and at the greatest convenience; they want a mere commodity, in other words. Other customers, however, desire a real banking relationship and high-touch experiences. It’s possible to generate profits on both ends of the market, but generally only the lowest-cost producer prevails when an industry commoditizes like this. The critical decision executives must make is whether to live on the commodity end or stage meaningful customer experiences.
If you choose the latter, then that experience should come to define the business.
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