Window of Opportunity

By Paul McAdam, Ajay Nagarkatte and Steve Klinkerman

Firmly anchoring new depositor relationships offers great opportunities, but requires a great commitment as well.

Winning new deposit relationships is a top priority for retail banking institutions around the country. Collectively, major U.S. players have unveiled plans to build more than a thousand new branches over the next few years. Free checking is busting out all over the place and many players are spending vast sums to pump up customer service. Some are even shelling out premium interest rates on accounts.

Driving this campaign is a renewed realization that the deposit business remains one of the most profitable activities for many institutions and the checking account is the anchor of retail banking relationships. Weakness in Wall Street-related businesses certainly has something to do with it, but the bigger picture is that the deposit arena is now widely seen as the key battleground for profitable customer relationships.

The problem, however, is that not nearly enough is being done after the ink dries on account applications, causing huge opportunities to be lost during the first few months of new customer relationships. After going to all of the trouble to acquire new depositors, many banks are tending to focus cross-sell and retention initiatives on a completely different crowd — their mature accounts — inadvertently giving short shrift to newcomers.

The drawbacks of this approach are underscored in a recent study of eight large banks, conducted by BAI Research and MarkeTech Systems International, which reveals that nearly three-quarters of all cross-sales from a new retail checking account take place within the first three months of the commencement of the relationship. Furthermore, some major institutions report that the customer attrition rates in the first six months of newly established checking accounts (and other core deposit relationships) are typically as much as 200% to 300% higher than normal annualized attrition rates.

Clearly, a much higher level of follow-through is needed with new customers, but it's not just a question of committing raw resources. A variety of factors must come together to make the most of new relationships, and the complexity of the undertaking will challenge many, if not most, major retail banking companies over the next few years.

One of the best ways to retain a deposit relationship, for example, is not to focus solely on that family of products but to widen the relationship to include credit and investment offerings — and do so as soon as possible. But to reach this higher level of customer involvement, the provider needs the right blend of diagnostics, front-line skills and incentives, and product packages, among other things. Then there are the basic requirements for accuracy in setting up accounts, adequacy of disclosure and orientation and follow-ups with customers in the early days of the relationship.

Taken together, these measures may entail a significant redirection of resources for many companies, but the rationale is compelling. The profitability of new relationships strongly depends on how well they are retained and expanded, and the success of these efforts is largely determined within the first three to six months.

Package Approach

Core deposits often are seen as the ultimate wholesale business, with thousands of institutions competing for funds on what traditionally has been viewed as a few simple criteria, such as rates, convenience and service quality. While these factors still are important, they have become "table stakes." Definitely, providers will lose if they have significant weaknesses in any of these three areas, yet mere adequacy on the basics will not produce superior results.

Instead, success increasingly hinges on the quality and breadth of the total relationship. A much higher level of performance is required to take a single point of entry, like the opening of a checking account, and grow it into a durable, profitable, multi-faceted relationship. And this is not just happy talk: The depository institutions that have done the best job on their relationship homework today will have the best chance of coping when the next strong stock market rally entices their core customers.

While it is encouraging that banks are rising to this challenge in areas such as customer relationship management, lead management, cross-selling and retention, it now appears that a significant portion of such efforts are misdirected. There's a near-universal emphasis on retaining and expanding relationships with established customers, but recent research findings strongly suggest that banks can obtain better returns on these critical outlays of capital and human resources if they redirect them to the first three to six months of brand new customer relationships.

One priority is to redefine product packages so that offerings are better suited to customer needs and encourage multi-faceted relationships right from the start. Many deposit product packages are narrow in scope and constructed on the basis of internal financial and production considerations, as opposed to the needs of prime customer segments.

There's a strong tendency to push new customers into a standardized blend of deposit-related products, including a checking account, credit and debit cards, and online banking and bill pay. But this approach doesn't do the best job of expanding and cementing relationships. Both in packaging and cross-selling, the better approach is to emphasize relationships that span three areas of customer needs: deposits, credit and investments. Evidence suggests that in customer retention, it's not the number of products that makes the difference; it's the mix of products, with the ideal being at least one type of product relationship in each of the three domains.

Progressive institutions are capitalizing on this insight by supplying customer-defined product packages that may include deposit, credit and investment products. These packages are targeted to particular customer segments and vary the interest rate, fee and minimum balance structures based on the total assets and liabilities that the customer brings to the institution — thus rewarding the overall value of the relationship.

Illustrating the potential in this approach, one major U.S. institution has succeeded in guiding a fourth of its retail banking customers into relationship packages incorporating at least one product in the deposit, credit and investment domains. This customer group is exhibiting three times the profitability of the average for the entire customer base, according to the company, plus annual attrition has been hovering at less than 1%, compared with annual turnover rates of between 10% and 20% seen across the industry.

Front-Line Challenge

Beyond generalized product packages is a class of offerings tailored to specific needs. A family with young children, for example, may benefit from a package geared to its particular "life-cycle" needs. The "Homeowners Option Checking Pack," offered by Wells Fargo & Co., automatically enrolls customers into a four-account relationship that includes the first mortgage plus checking, money market and credit card accounts.

Other examples of needs-based packaging include offerings targeted to customers wanting to establish a credit history, or just getting started in their careers, or saving for children's education or retirement. In still other cases, special events, such as relocation or divorce, prompt the need for custom packages of financial services that address particular situations of importance to the customer.

Realistically, it is a tall order to establish in-depth relationships quickly and get it right the first time, and that is why it is crucial to elicit top performance from front-line staff. Considerations range from skills and coaching to tools and incentives. A certain quality of interaction is needed with new customers that establishes rapport and brings their needs out into the open and into focus. The overarching goal is to help people obtain the products that are most appropriate, thereby laying a foundation of trust.

Through skillful conversation and diagnostic tools, reps can develop needs-based customer profiles that can be useful in many ways and at many points in the relationship. Cross-sell efforts are enhanced right from the start. The demographic, behavioral and attitudinal information typically gathered during account opening sessions also is invaluable for subsequent cross-sell initiatives.

Customer retention is enhanced by these techniques as well. Beyond feeling satisfied that arrangements truly suit their needs, customers want their accounts, checks, cards and online services to be set up accurately. They also want to feel that they have been appropriately informed about features, functionality, pricing and fees. Effective profiling and consultative selling help to reduce the disappointments and errors that can cause new customers to drop out.

At one bank, much like at retail stores, consumers even get receipts that detail all of the features and terms of newly purchased financial products and services. The payoffs from such efforts can be substantial and include increases in loyalty, account balances and cross-sell ratios, plus reductions in error-provoked expenses.

Relationship Anchoring

While these measures do suggest an initial flurry of activities surrounding new customers, the point is not to hustle for a few days and then move on to other things. Instead, the opening round should be part of an orchestrated relationship-anchoring program that encompasses at least the first few months.

The goal is to mitigate attrition by ensuring customer satisfaction, encouraging account activation and usage, and actively probing for cross-sell opportunities. Relationship anchoring activities are critical in the early days, when customers are establishing their account usage patterns and forming impressions of the provider. Moreover, the majority of additional cross-sell opportunities present themselves in the first few months, a time when the new provider and the topic of financial services needs are fresh on the customer's mind.

Several major U.S. financial institutions have established relationship-anchoring programs. They typically begin with a simple commitment to call new customers three times within the first two or three months. The first call comes a few days after account opening, when reps thank new customers for their business and make sure that they are satisfied with arrangements.

After a couple of weeks, reps call to verify the receipt and accuracy of checks, cards, personal identification numbers, etc., a critical activity given that errors are a major cause of attrition. The two-week follow-up also provides an opportunity to inquire whether the new customer has additional financial services needs, and to gather any additional information that might be missing from the customer profiling session that took place at account opening.

Finally, a couple of months after account opening, reps again call customers to ensure that they are satisfied with their products and services. With the relationship more firmly anchored at this point, reps have the opportunity to fine-tune the package of products and services being used by the customer and also identify and meet additional needs.

Beyond proactive measures, the institution needs to stand ready to correct the various kinds of problems that inevitably arise in the early going. Inability to quickly recognize and resolve problems is one of the leading causes of attrition among new customers. Even seemingly mundane issues can damage new relationships, including those that are not the fault of the bank. Along with increasing retention, correcting such situations to the customer's satisfaction builds trust and paves the way for additional cross-sales.

In day-to-day business, one of the best response-and-correction techniques is to authorize employees to fix certain types of problems right on the spot. At one institution, tellers can fix a problem costing up to $100, platform staff up to $250 and branch managers up to $1,000 instantly. Customers like dealing with reps empowered to solve their problems, and reps generally respond well to the opportunity to exercise their judgment.

A Question of Incentives

Given the crucial role that front-line representatives play in acquiring, expanding and retaining customer relationships, incentive compensation structures must be correctly aligned with the company's objectives — and that's decidedly not the case today at many financial institutions. Research reveals that most incentive programs support neither needs-based selling nor relationship anchoring.

Curing this disconnect can greatly benefit both the customer and the institution, especially given that nearly three-fourths of all cross-sales occur within the first three months of a relationship. The best incentive systems motivate reps to diagnose and fulfill customer needs, complete the critical steps in the relationship anchoring process, ensure quality fulfillment and quickly resolve problems.

In practice, banks are responding to this challenge by limiting the portion of incentive payouts given at the time when transactions are completed, and linking the remainder of payouts to other positive outcomes, such as the retention of a new account over a specified time period, the preservation and augmentation of the total "book of business" coming from a certain customer group, and success in making additional cross-sales during the relationship anchoring cycle.

From a broader perspective, providers will have to address the whole spectrum of issues associated with organizational change if they are to re-orient staff and resources to the priority of anchoring relationships with new customers. One bank responded by engaging a senior executive from the branch network to champion the relationship-anchoring project and undertaking an extensive internal campaign to raise awareness and gather feedback.

Focus group sessions were conducted with staff in the branch, the call center and the back office to clarify issues and identify potential solutions, and a multi-departmental team was established to carry the initiative along. Along with piloting the project, the senior executive continuously monitored activities to spot issues and identify improvements.

Putting all of this together, it is abundantly clear that cosmetic changes won't suffice in retaining new depositors. It will take a major organizational commitment to craft a robust relationship-anchoring program that encompasses all of the salient factors. But given the great expense of acquiring new customers and the great opportunities that attend the retention and expansion of relationships, the case for an expanded approach to relationship anchoring is compelling.

Mr. McAdam is managing director and Mr. Nagarkatte a director of BAI Research. Mr. Klinkerman is editor-in-chief of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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