The Quest for Customers

By Kenneth Cline

Competitive differentiation, customer segmentation, redesigned branches — and yes, even free checking — can help acquire and retain customers. But, our panel of bankers stresses the importance of keeping it simple.

There is no problem in retail banking more difficult than the challenge of acquiring and then retaining customers. Banks often make significant investments to attract new clients, only to find that the departure of existing customers can largely negate acquisition efforts.

To examine some "best practices" in customer acquisition and retention, Banking Strategies assembled a panel of top retail executives. We found agreement in many key areas, such as the need for institutions to differentiate themselves in the marketplace with clear value propositions to attract new customers. Some aspects of branch redesign, such as greeter stations and more "retail-like" facilities, were also seen as helpful.

Customer retention, the panelists agreed, requires aggressive marketing to new customers within the first few months of the new account opening (see sidebar). Bankers also supported customer segmentation based on detailed customer data. At the same time, there was recognition that the best segmentation schemes in the world are useless without effective front-line implementation, a point underscored in a recent study by BAI entitled The Front-Line Factor (see November/December 2004 Banking Strategies).

"Even with the data, it's important to make sure you have the right people talking to the right customers," said Craig Kelly, chief marketing officer at Atlanta-based SunTrust Banks Inc. "You can do the data mining and define the segments. But matching those customers with people who know how to interact with them is critical."

A related cautionary note had to do with excessive complexity at the branch level in terms of systems and business procedures. Several roundtable participants felt that extensive data mining and customer segmentation burdens branch employees with more information than they can handle. Robert Kottler, senior executive vice president and chief sales support officer at Hibernia Corp. suggested that banks let front-line employees focus on the basic tasks, "like opening checking accounts and making loans and referrals."

Banking Strategies: It's often been said that it's really hard to move deposit market share in banking. Is that still true?

Kelley: We have found, at SouthTrust, that it's actually getting harder. Competition is increasing and everybody's giving away everything free these days, like free checking. The question is: when you're in a commodity industry, how do you differentiate yourself? Everybody wants to differentiate on service, so how do you really set yourself apart?

One specific problem we face is the churn rate of customers, which is increasing. So we're focused on trying to reduce that churn in the first 90 to 120 days after a customer opens an account. We've tried to hook them on bill payment especially, not just online banking, because it's such a hassle to change those links when you've set them up. We have had more success retaining those customers.

McLaughlin: I would agree that increasing market share is more difficult than in the past. Part of the problem is that it's hard to be competitive on a price basis with the monoline companies like MBNA and Capital One unless you have similar scale. Then you've got the big integrators who can take banking, insurance and investments and put them in one package.

The Canadian market is a little different from the U.S. in that there are no community banks. Most of the players are big integrators, with banking, investments and insurance. The challenge is to tell them apart. If you took all our advertising and put it on a wall and then switched the logos around, it would all look the same.

Kelly: At SunTrust, we don't look at market share data per se as much as the number of households. That's because at certain times, you might not be as hungry for certificates of deposit and that can make a big shift in your Federal Deposit Insurance Corp. market share data. So while it's important to understand and watch market share data, we're more concerned with growing the number of households. But that's not any easier either. I think it gets harder every day to grow households and maintain them.

Going back to what Leigh Anne said, I find the churn rates particularly troubling. When you work hard to acquire customers and then end up losing them, that's money out the door. We're trying to figure out what we can do to make those customers stay. The real challenge confronting us is to build lasting relationships with customers so they don't churn.

Kottler: In that context, it's interesting if you look at the buying patterns of customers. There's definitely an opportunity to sell customers additional products within the first year after they open a checking account. If you miss that initial opportunity, it's harder to build on the relationship.

McLaughlin: That means it really comes down to the differentiation issue. If your institution can properly differentiate itself and be clear about the value proposition it's offering, you can build a more solid relationship.

All the free stuff and giveaways are, too often, used as a replacement for a solid value proposition. When you do that, you open yourself to someone else coming in and stealing away the relationship.

Banking Strategies: Any thoughts on how you can achieve that differentiation?

McLaughlin: Certainly it's not easy. At Royal Bank, we have a client marketing strategy group that is charged with coming up with unique value propositions for specific customer segments. We recently increased our market share in one of those segments from 1% to 29% in less than 12 months.

Kelley: Was your data warehouse instrumental in allowing you to do that?

McLaughlin: Absolutely. It helps you analyze your existing customers and then apply those analytics to external customer segments. We've had some brilliant insights by looking at a mix of four things: traditional market research, customer analytics, profitability analysis and finally, talking with clients and non-clients face to face.

Profitability analysis is important because, for all of us, a small percentage of customers provides most of our profitability. The rest break even or lose us money. Every bank I've ever talked to has that same scenario. And there's a fine line between the two groups. We've found customers who are massively unprofitable yet, from a database perspective, are statistically identical to people who are massively profitable. We've been able to convert some of those people to profitable customers by giving them better financial solutions.

Clients will do exactly what you tell them or allow them to do. If you give them no reason to act profitably — from the institution's perspective — and there is no penalty for acting unprofitably, guess which one they'll choose?

We uncovered one group of clients with large aggregate investments but spread across several similar products. They were doing that in order to give themselves flexibility. But our servicing costs were impossibly high and we were forcing them to negotiate hard to get the best rate. By offering them a consolidated product with great flexibility and reasonable after-tax returns, they were willing to change their behavior and consolidate their balances in the new product.

Because their need wasn't really price, we were able to do it profitably. In the end, the clients felt that we helped them out and we earned more profit — a way for both of us to win.

Kelley: We've also seen tremendous success using the data warehouse tool. We'll never get to true one-to-one marketing, but identifying those customer segments does give you a good start on that. The profitability data, combined with the detailed account and transaction data, as well as segmentation based on propensity for financial services and lifetime value, are very powerful in targeting customers.

We use all of these types of data to develop specific programs and then work closely with the branches to implement them. Such targeted programs allowed us to pay for our initial data warehouse investment in one-half the time originally estimated.

Banking Strategies: So, customer segmentation is the key?

Kelly: It's one of the keys. But at the end of the day, even with the data, it's important to make sure you have the right people talking to the right customers. You can do the data mining and define the segments. But matching those customers with people who know how to interact with them is critical. If you don't deliver the right experience to the customer, you run a real risk of losing them.

Kelley: That data is no good unless you can take it to the front lines and make sure those employees understand why the data is important.

Kottler: That's right. We've built some very complex segmentation schemes around the data. And you can probably make complex segmentation schemes work when you apply them to direct mail and direct marketing. But when you get the data out to the line, it's got to be understandable, actionable, measurable and trackable. We've found you're more limited in how you can use the data when you're dealing with the field sales force or a relationship management group.

So at Hibernia, we've actually taken a step back and are focusing on very basic ways to use customer data in the field so that our folks are targeted and focused. For example, each branch can look on our corporate Intranet and access an icon to see a next product to sell. Our next step will be to provide retention information. We get more lift that way.

Kelly: I'd throw out a cautionary note here. One of the things that we, as an industry, haven't done very well is understand the need to simplify things. We've made things very difficult in the branch. It's like the menus in our phone centers where, an hour later, you're still trying to figure out which button to press. We've gotten so enamored with sophisticated and complex things that maybe we've made branch operations harder than it has to be.

That's doesn't mean you shouldn't segment the market. But I'm not sure all the employees need to understand what goes on behind the data. It's more important for them to understand what their role is. Some days I get concerned that people in our branches are focused on so many different tasks that they can't be quite as good as they need to be at any of them. Maybe we would be better off if we placed less demands on them overall.

That's not a popular thought in large institutions because you've got various business lines all clamoring to get into the distribution channel for their shot at the customer.

Kottler: A lot of our focus going forward is imposing more discipline in that respect. When we ask our branch employees to do too much, they either do one of two things. They stop listening altogether or they just do what they're most comfortable with. I think we're all going to have to get back to basic issues, like opening checking accounts, making loans and referrals. That would limit how much training we throw at people and let them focus on what they do best.

Kelley: It's also important to understand that different market locations require different types of employees.

Two years ago, everybody at SouthTrust had the same loan and deposit goals. But when we started looking at the trade areas surrounding the branches, we realized that everybody doesn't have equal opportunity to sell the same products. So we did a segmentation of our branches to understand the trade areas that surround those offices. We called that program "financial center optimization."

Now we place people selling more complex products, like securities, investments and small business products, in branches that have the opportunity for those types of sales. Employees in other branches tend more to the needs of the mass market. McLaughlin: We're also starting to build that segmented approach into the branch system based on trading areas and the types of people who come in. We've gotten rid of the notion that the branch "owns" the customer. Everyone is accountable for making sure customers have the right experience, not just their home branch.

Banking Strategies: Let's talk about free checking for a moment. How useful is that as a technique for bringing in new customers?

Kottler: I'm a great believer in free checking. I want every single customer who walks in the door — the more, the better. I want as many checking accounts as I can get because I can then segment those customers and sell them other things. But if they're not walking in the door in the first place, I can't do anything with them.

If you believe in your sales culture and believe you can do other things with customers when they sign up for free checking, then there's a strong revenue stream that comes from changing your business model. Free checking may simply be the least expensive customer acquisition vehicle.

Kelly: I've always been an opponent of free checking. I hate giving things away. At the end of the day, we have to deliver to our shareholders.

But having said that, I have to admit free checking has been very successful. We were a bit slow to adopt it at SunTrust, but now we're seeing a real growth in households and deposits. We're also selling more products to more households. And we haven't had huge fraud issues.

Kelley: Like SunTrust, we too have been slow to adopt free checking. However, we recently started it to position ourselves for our merger with Wachovia Corp. Deposits are very important and we have realized the need to offer free checking for competitive reasons.

McLaughlin: Free is simply the price of a checking account in the U.S. We've been isolated from it because we haven't had the same phenomenon in Canada. But certainly with our U.S. operations, free is the price and you have to be competitive.

If that's your only position in the marketplace, though, it's pretty easy to be knocked off. Wal-Mart became dominant for a lot of reasons beyond price. They creamed other people on distribution, for example. So you've got to build on other things.

Banking Strategies: Another popular strategy for bringing in new customers has been de novo branch expansion and redesigning branches to look more retail-like. What's your take on that?

Kottler: We started our de novo expansion in the Texas markets a few years ago, primarily in Houston and Dallas. We felt the physical environment was one of the components that we could change from what we had historically done.

We also felt that going into high-density, high-growth areas would likely produce branches significantly larger in core deposits than we were used to in our core markets, so we could spend a few more dollars to build bigger branches. So we got together with a branch design consultant, and worked through what a new branch environment would look like.

One thing we did was to design the sales floor first and then position the rest of the branch around that sales floor. We felt it was important to provide an environment for our customers to feel comfortable and our sales and service forces to have the best opportunity to take care of them.

Another innovation was to move everybody who wasn't serving customers off the sales floor. Previously, if we had a mortgage banker in the branch, for example, that banker would have an administrative assistant (AA) sitting there doing their job. The customer might not understand why that employee wasn't serving them. Now the AA is off the sales floor.

We've also installed greeter or concierge stations. And these are manned by the branch manager or assistant branch manager rather than by the newest person in the branch. As a result, customers get taken to the right place very quickly. That has worked exceptionally well for us and it's something we're looking to retrofit into our existing branch network.

These things don't constitute a be-all, end-all, but they do provide another piece of the puzzle of making us better retailers.

McLaughlin: We've taken a similar approach by using Disney's "on stage/off stage" approach. On stage is any place where we interact with clients, including the exterior of the building and the parking lot. When employees are on stage, there is a very deliberate experience that we're trying to create in terms of the physical environment and the employee interaction. It's all designed to enhance and encourage things that make the client feel good.

Off-stage areas are places intended for employees only — the lunch room, employee lounge, etc. This is where they have the freedom to relax.

But I should also mention that some of the things being tried in the U.S. don't play well in Canada. Having the customer and teller sit side by side rather than across a desk from each other, for example, is one of those. The pushback from Canadians on privacy is overwhelming.

The other thing we learned was that investing a lot of money in a posh waiting room is just a bad investment. People don't view banks as a place where they want to go and hang out. It's not a Barnes & Noble or a Starbucks. People come to a branch to conduct business that usually results in some form of a transaction.

Kelly: Making the branch look more retail is important. A branch needs to look open and inviting. It needs to create that atmosphere where people want to do business.

But in some cases, we've probably gone too far. This is not about an experience. Customers don't come in to window shop. They want to get good, courteous service as quick as they can. And we need to make it simple to sell and easy to buy. If the buying experience is pleasant, the customer is likely to buy from you again. And that buying experience includes: the appearance of the branch, the competency of the banker, the pricing of the product, the ease of completing the transaction, and the manner in which the transaction is completed.

So while the appearance of the branch is an important ingredient, you can't just do a redesign and leave it at that. There never has been, and I doubt ever will be, a substitute for really knowing the customer.

Questions or comments about this article? Post them at the Banking Strategies blog.

Mr. Cline is senior editor of Banking Strategies.

Copyright © 2005 by Banking Strategies, published by BAI.

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