Home / Banking Strategies / Customer retention is banking’s moment of truth

Customer retention is banking’s moment of truth

The coming months will be an important test for the banking industry, with the results determined by how institutions engage their customers.

Feb 6, 2023 / Customer Experience

A central issue in the current banking landscape is digital transformation and the capital expenditures associated with it. Moving banks from legacy or hybrid systems to digital platforms involves extensive technology changes, from new payment rails to new data analytics platforms to back-office automation. It’s expensive—and in a market where even commercial customers demand digital payments and online banking, it’s essential to compete.

Digital transformation is critical for growing the customer base. According to a report by FICO, 80% of customers prefer using digital channels such as text, email and bank apps to verify payments. Still, digital business payments and cash management are more complex for banks than for their retail counterparts. The need to get this right cannot be overstated. Banks that can’t manage the capital expenditures needed to modernize their payments systems are in a tough spot.

A second transformative issue is the pressure on midsize and smaller banks and credit unions. Some of that pressure comes from the widely different growth trajectories between smaller banks and larger ones, but it also comes from the cost of digital transformation. This was a point of discussion at the 2022 Governmental Affairs Conference of the National Credit Union Administration, where board member Rodney E. Hood said during his keynote session: “The reality is that there are some serious competitive challenges that credit unions will need to be addressed related to fintech. Right before our eyes, we are seeing the financial services model move from a retail delivery model to a digital delivery platform.”

If you don’t think fintechs are coming for customers of big banks, consider that mortgage lending by fintech companies grew 32.5% per year between 2016 and 2020; business lending grew 43.1% during that period. With their emphasis on user experience and targeted solutions to specific customer groups, fintechs have the ability to steal customers and the funds to pay for it.

With so much at stake, a recent report from Cornerstone Advisors shows a concerning statistic: Only 28% of bank executives responding to the company’s survey cited customer growth among their top priorities heading into 2022. Clearly, that number should be higher.

THREE PRIORITIES FOR BANKS

Data: Banks that withstand the current pressure on their customer relationships will have the most relevant data about those relationships. Customer data—the best behavioral indicator for any bank—can not only predict potential churn but also give banks a chance to get in front of it. A steady decline in a customer’s deposit levels is thus not just an interesting trend; it’s an opportunity to analyze the relative strength of other facets of the relationship.

Strategy: In the current environment, the most relevant customer strategy is engagement. Customer relationship expert Paul Greenberg defines engagement as the “ongoing interactions between company and customer, offered by the company, chosen by the customer.” The right engagement strategy will use data to make existing and new customer relationships even stickier by highlighting upsell opportunities or warning of potential customer churn.

Optimization: The operative outcome is improvement. In the digital advertising business, for example, an online ad is constantly optimized via real-time data to find the best customer in the best context at the right time in the purchase journey. Stretching the boundaries of customer experience means finding ways to improve the strong elements of that experience. A customer engagement optimization solution will deliver transactional behavior visualizations and predictive insights by leveraging payments and cash management data, third-party systems, analytics and online engagement metrics.

Market dynamics and an unstable economy have created a volatile environment for the future of digital commercial banking. Customers provide a centering principle within that volatility. Some banks are good at it; others need to improve. By remembering that data feeds strategy and that optimization makes that strategy actionable, banks can operationalize their information advantage and turn it into a competitive advantage.

Rodney Nilson is vice president of product management at Bottomline.

Explore digital banking topics to help you build your plans for 2023 and beyond with insights from leaders in the trenches and valuable BAI research in the BAI Executive Report, Plotting the future of digital banking