It’s no secret that retail banks across the country face an enormous revenue challenge. In the summer of 2010, regulatory changes to Regulation E went into effect, significantly reducing the revenue banks could earn with their overdraft programs. The second punch came with the passage of the Durbin Amendment in October 2011, which capped interchange fees on debit cards issued by banks larger than $10 billion.
Ordinarily, such legislation goes largely unnoticed by the majority of consumers, but the combined revenue impacts from both of these changes in less than a year put grave pressure on the sustained profitability of America’s biggest financial institutions. In response, some of these banks, most notably Bank of America Corp., briefly experimented with an ill-fated debit card fee, which helped inspire many angry customers to move their relationships over to credit unions and community banks during last November’s “Bank Transfer Day.”
Recent research by J.D. Power and Associates shows that customer defection is continuing a three-year rise. Both large and regional banks are taking the biggest hits, with defection rates increasing from 7.7 % in 2010 to 9.8% this year, likely heavily influenced by the negative press big banks continued to receive in the media as well as enticements from smaller institutions to transfer accounts (see chart, “Customer Defection on the Rise”). Even so, banks such as Bank of America continue to experiment with new fees in order to bolster their depressed retail banking revenues.
Banks need to understand that industry fees, absent of associated real or perceived value, have a direct impact on both retention and acquisition. However, there are three strategies that banks large and small can take to keep their customers from switching accounts:
Deliver value through quality in-person service. Reducing attrition caused by new or higher fees starts with addressing the value customers experience for those fees. For customers who cited “fees” as their primary reason for leaving a bank within the last 12 months, three out of five described their prior bank as having “poor service.” While customers will tolerate service which falls short of their expectations for months or even years, findings show that the combination of poor service coupled with a change in fees becomes the “last straw.”
For customers whose in-person service at their bank fell below 600 on a 1,000 point scale, 45% of those with a change in fees said they would probably or definitely switch banks in the year ahead, compared to just 25% of those with poor service but whose fees stayed the same. Delivering a good in-person service experience mitigates the changes in fees, as only 16% of customers whose fees changed but had in-person satisfaction above 600 said they were likely to leave according to the J.D. Power 2011 Retail Banking Satisfaction Study.
The most influential drivers of in-person satisfaction are simple actions such as consistently acknowledging customers entering the branch, thanking the customer by name and ensuring frontline personnel are well-trained on routine questions.
Ensure customer needs align with the right products and services. Customer retention and deeper share-of-wallet begins with the first primary interaction the customer has with their bank: account initiation. A complete assessment of customer needs identifies the right products and services up front that fit the customer’s lifestyle and budget. Customers who indicated their needs were “completely assessed” reported higher overall satisfaction with their new bank and half expressed a desire to use the bank for additional products and services in the future. Only one out of four had that same willingness if they felt the assessment of their needs fell short of what they expected.
Achieving that level of assessment is also about the quality not quantity of the questions asked. Rather than jumping directly into a dialogue about accounts and services the new bank offers, more customers who felt their needs were completely assessed referred to discussion around their experience with their prior bank. These questions did not just focus on the reasons why they were switching, but also on the products and services they liked. Furthermore, 60% of customers with complete needs assessments received additional financial advice for future planning compared to 38% with partial needs assessment.
Provide alternatives for low branch and ATM density. Branch convenience is the top driver when customers are considering and selecting a bank. This is particularly true for customers of smaller institutions who report the highest incidence of switching due to life events that pull them out of the footprint of their current bank. Thirty-four percent of customers in the study who went from a community bank or credit union did so because of the absence of convenient branches.
While this is clearly a formidable challenge for smaller banks or credit unions, any bank that has low density in specific markets can address this disadvantage without having to build de novo branches or install additional ATM units. First, the relatively few branches that the smaller banks do have in a particular market must exceed customer expectations. Findings show that 40% of facility satisfaction is associated with the appearance of the branch – versus just 20% for extended branch hours, for example. A fresh coat of paint, abundant lighting, clearly visible signage and clean premises are absolutely imperative for keeping customers happy. In other words, having competitive branch hours is very important, but customers will not come to a branch at any time of the day or night if that branch does not feel safe, secure and professional. Customers need a strong and compelling reason to drive a few extra miles past other bank branches just to visit a smaller bank’s single office.
Next, with customers more dependent on real-time information and access at their fingertips, community banks and credit unions cannot afford to cut corners on online and mobile application development. Offering online account access with uncluttered web pages, helpful financial planning tools and fast access to live service not dependent upon brick-and-mortar are all critical ways that smaller institutions can level the playing field. Additionally, competitive pricing and promotions for offsetting the costs associated with foreign ATM usage offers many smaller bank customers access to their funds across the nation without paying a penalty for that convenience. To offset low density, however, community banks and credit unions need to ensure that the physical offices they do provide are above reproach as most customers do still want and often need access to live representatives.
Mr. Beird is director of banking services practice at Westlake Village, Co.-based J.D. Power and Associates and can be reached at Michael_Beird@jdpa.com. Ms. Licker is an independent financial services consultant at J.D. Power and Associates and can be reached at email@example.com.
Stay connected to Expert Perspectives, Research and Intelligence — subscribe to BAI Banking Strategies now!