It’s been almost 250 years since Adam Smith penned “The Wealth of Nations,” helping set off an industrial revolution now in its fourth iteration. What would Smith think of today’s “Exponential Age,” defined by its breakneck speed of change? Perhaps he’d be overwhelmed, for indeed: Disruption is everywhere. Firms of all types go out of business every day. With the consumer as king, the wealth of nations has given way to a wealth of options.
To survive the Exponential Age, every financial institution must recognize the unexpected changes in how its competitors are defined. In this era, no financial institution competes against a class of competitors, a peer group or even the fintech sector. Rather, each financial institution competes against a single, identical force.
And this common competitor is time.
Therefore, survival in the Exponential Age centers on slowing down the clock. Each financial institution is confronted with this shared challenge and opportunity. The question is this: How to arrive there in a way that makes logistical and bottom-line business sense?
Expectations challenges in an Exponential Age
The Exponential Age marks the intersection of digital technology and changing consumer behavior—the new expectations rapidly influencing banking. Based on more than 25 years of surveying consumers and businesses, we’ve found that today’s consumers expect faster, easier, more convenient and less expensive interactions with their financial institutions than ever before. In other words, today’s consumer wants it all. They expect more for less. These changing expectations challenge the viability of every financial institution. Furthermore, unmet needs introduce new competitors into the client relationship and promote churn.
Attacking the ‘attrition tax’
How do financial institutions slow down the clock? By improving retention.
Attrition is the tax that every financial institution levies on itself. It compromises growth; the average financial institution closes 12 percent of its account base each year. As a result, the average financial institution expects to replace its entire client base every eight years—and that necessitates an aggressive sales focus to replace volume lost to attrition. Yet there is opposite law at work: By halving attrition, the longevity of a client relationship doubles, and that slows down the clock in the Exponential Age as it accelerates growth. Consider this list that correlates attrition rates and account time length:
- 12 percent, 8 years
- 11 percent, 9 years
- 10 percent, 10 years
- 9 percent, 11 years
- 7 percent, 12 years
- 6 percent, 15 years.
From retention mystery to mastery
Improving retention is not a mystery. It’s simply a function of the size of a client relationship. A dichotomy in every client file exists, representing those who purchase on a transactional basis and those who maintain a relationship with the financial institution. Each group behaves differently.
Consider this: 80 percent of client churn is produced among transactional clients with one or two accounts with the financial institution. In contrast, those who maintain a relationship define the balance sheet and earnings of a typical financial institution. In other words, you can halt the transient nature of a client simply by building a relationship with them.
The greater gateway to survival
For decades, the expansion of client relationships has advanced at glacial speed. The average financial institution needs more than ten years to acquire the third account relationship. Today, three in five clients maintain a causal connection to the average financial institution—and that increases the risk of churn in the Exponential Age. Developing these at-risk client relationships by compressing the sales cycle opens the gateway to survival in the Exponential Age.
Today, incremental gains in market share are less a function of acquiring new clients and more focused on building stability into the relationships acquired. Knowing the precise conversation to have—personalized, relevant, meaningful and consultative—improves customer experience, drives revenue and extends the tenure of a client relationship.
A starter to working smarter
As unprecedented risks and opportunities confront every institution, slowing down means decisive action. Closed accounts and lost relationships compromise growth. Competing requires that financial institutions of all sizes must transform data into information, translate information into knowledge, convert knowledge into strategy, and pivot strategy into action.
Smart work, not hard work, changes growth trajectory. Success in the Exponential Age depends on relationship management to create a retention advantage and build customer stability. But this target will not stand still; nothing in the Exponential Age does or will. In the final analysis, slowing down the clock on customer churn boils down to quick, decisive action.
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Tom Long is the principal at The Long Group LLC, which provides tactical guidance and insights to financial institutions.