Bankers invest so much time and attention toward driving “share of wallet” (SoW) that many tend to treat it as the de facto metric for measuring return on investment (ROI) in digital technology. But this constitutes just part of the story.
Banks often miss another piece that’s just as important—if not more. It happens before share of wallet, continues afterwards and can ultimately make a much more significant impact on future growth. It can influence and guide the development of a bank’s next best product, along with retention costs and even share of wallet itself. Increasingly, bankers now look beyond SoW to consider one factor in their growth strategies: the true, lifetime relationship value of their customers.
To be clear, SoW is important to track but based on the assumption that the bank has the wallet in the first place (and thus does not give much thought to this part of the equation). It should also focus equally on how to boost the number of wallets. If a bank really wants to grow its overall business, it must figure out how to do both. The key to moving the business forward lies in knowing where to make strategic investments and how to measure ROI year-over-year.
While banks do a better job these days of knowing when and where to market to their customers, the critical and often overlooked step lies in maximizing that relationship before (and after) it’s established. This can have a significant impact, especially when looking to the long term (which banks should do). Unfortunately, many banks find it hard to adapt in this area. Yet much is at stake, as a recent BAI Banking Outlook report shows; for those ready to choose a new bank, best products and rates finished among the top three responses (30 percent).
Stickiness matters: Build, measure customer relationships for the long haul
Bankers have recognized the value of “stickiness” for a long time and understand that the more products customers have, the less likely they are to switch institutions. As a recent report from Fiserv suggested, customers with only one bank product will stay on average for 18 months; with two products this increases four years; and three or more products with a bank raises the average to 6.8 years.
Yet attrition remains a big problem. Long gone are the days when customers stayed loyal to their bank for years or decades—but a relationship value approach can combat this. For example, if a bank aims for its customers to have at least three products—a proven total to extend stickiness with a customer—how then do they add more customers? If the goal is to grow, a bank must first establish those relationships before it can increase share of wallet. And once it has those customers, how does it get them to that second and third product?
Many banks today build relationships through cross- and/or up-selling fairly well. Most have a well-defined customer matrix and product line in place. Yet they may still miss how to use this: to not only help create new relationships but also nurture and grow them long term. For starters, banks tend to place products in different silos they track and review separately. Because of this, banks often struggle to look across these silos to find the overall household profitability.
For example, a household relationship might prove unprofitable for a checking account but wildly profitable for a mortgage or credit card. Metrics also pose a problem. That is: How do banks measure the value of these relationships? Banks need to create a clean metric that ideally measures progress on an annualized basis. From there, they can extrapolate and start to monitor over the lifetime of the customer relationship.
From an ROI or cost of sales perspective, a bank may realize that it tends to have a lower cost of sales to increase share of wallet when it adds a product to an existing relationship. However, the cost of creating a new relationship in the first place should be amortized over cross-sell and up-sell costs. So if it costs $1,000 to forge that new relationship, it may cost just $100 more to up-sell a new product a year later. Based on this, the bank could develop an ROI model that accounts for these figures. From a relationship value perspective, and by cross referencing existing customer data, a bank could determine when to add the right product at the right time. And the relationship will likely extend another five years—which better supports long-term growth planning.
This level of analysis and detail may seem intimidating to manage on a large scale but there is good news. Today’s modern digital platforms help banks do exactly that: scale up. Many bankers already do a good job recommending their best products to customers. They likely work from a matrix that their staff leverages to suggest the right product, at the right time, for the right customer.
Scaling that knowledge through technology across all customers using all data—and doing so consistently—would more profoundly impact the whole organization. With the right mindset and metrics, banks can onboard more customers, more efficiently. In turn, they’ll reduce attrition by two or three times through improved up-selling and cross-selling.
Here’s the bottom line: To grow customer base consistently, bankers must consider the true, lifetime value of each customer relationship. For all the talk and attention on attrition rates and customer acquisition costs, banks must ultimately answer this question: What does this relationship mean to us? And: What’s the customer’s annual impact if we keep them a given number of years?
Once bankers adopt more of this “long game” mindset, they can measure it and use it to intelligently scale performance moving forward. Banks that apply such best practices to their best products can make a difference—and provide customers with what’s best for them.
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David Eads is the CEO of Atlanta-based Gro Solutions Inc.
For some additional insights, join us for our upcoming webinar: BAI Banking Outlook: Leading Indicators in Customer Retention