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How exactly does customer loyalty translate into better financial results for a retail bank? And how much value is at stake? For many bankers, the link between loyalty and financial results is somewhat unclear. 
In Search of Customers Who Love Their BankWith banks facing increased competition from tech firms, our latest report examines how the banks can focus on what customers value most. With new customers more scarce, loyalty is half the battle In all 27 countries surveyed, banks formed new relationships—customers switching their primary bank plus customers altogether new to banking—at an average rate of about 3% in developed markets and 6% in developing ones over the past year. Earning high levels of customer loyalty definitely helps the cause: On average, a bank’s relative NPS explains roughly half of the variation in its relative win rate—a metric that shows whether a bank is winning more or less than its fair share of customers. Relatively strong NPS among existing customers thus allows banks such as DKB in Germany and Bankinter in Spain to win more than their fair share of new customers. Other factors that influence win rate vary by market, but the factors that customers cite most often include the level of fees, the convenience of the branch network and the ease of opening an account. Winning new relationships provides a lifetime of opportunity to sell people more banking products and earn their advocacy. Given the low rate of new relationship formation, however, this route alone will not be sufficient as a growth strategy. The missing payoff from existing customers Most banks currently miss a significant opportunity for cross-selling to their existing customer base. The steady expansion of the middle class in emerging markets, combined with digital channels making it easier to purchase products, has created a huge opportunity to cross-sell, but it has also become easier to buy from a bank other than your primary provider. About half of customers in developed countries and 84% in emerging countries opened a new banking product over the past year. And customers purchased fully one-third of those products, on average, from a bank other than the customer’s primary bank. Loyalty matters in cross-selling: For almost every product and in every country, customers who gave their primary bank a high NPS both own and purchase more products from that bank than customers who gave a low NPS. The unbundling of financial products has spread through some countries faster than others. In the competitive Hong Kong market, for instance, 77% of customers took a new product, but only 52% chose their primary bank. It’s a different story in Denmark, which has a highly-concentrated banking sector. There, 38% of customers took a new product, and fully 81% stayed with their primary bank. Competitive forces likely will increase over time, giving customers even more bank options. Yet unbundling does not necessarily limit a bank to only a certain share of its customers’ financial purchases. Product win rates—the share of products bought by respondents at their primary bank—vary even more by bank than by country. In the US, the rates range from 38% to 63%, with Huntington National Bank leading overall. Several years ago, Huntington (which had high NPS to begin with) began to consolidate customer data and build a unified view across all locations and business units. It replaced its manual sales process with an automated one that made it easier for employees to manage cross-selling and upselling opportunities. Huntington has gradually grown the number of products held by customers. Loyalty plays a key role. The difference in product take-up between customers who are promoters of their primary bank (those who give an NPS of 9 or 10) and customers who are detractors (those giving an NPS of zero to 6) is a healthy 14 percentage points on average for developed countries and 10 points in developing countries. The winning model: Loyalty plus five capabilities Our research and client work show that loyalty needs to join up with five specific capabilities in order to spur existing customers to buy more from their primary bank, attract new customers and reduce costs without damaging customer relationships. 1. Decide where you must win and where you’re willing to lose Banks in many countries have a long history of egalitarian treatment of customers, regardless of how much their marketers segment the customer base. But catering to the average means catering to no one in particular. Each customer segment has different priorities, expectations and lifetime value for a bank. Our US survey finds, for instance, that older customers care more about branch location and quality of branch staff, while younger customers place greater value on mobile device interactions and rely heavily on recommendations from family, friends and colleagues. Leading banks not only know such preferences and behaviors well, they act on that knowledge by taking distinctly differentiated tacks for each segment. Some loyalty leaders, for instance, have improved offerings for affluent, high-value customers and wrapped them in premium services. That’s how Citibank has become Asia’s largest wealth manager under the Citigold brand. Others have created entirely separate models for young adults. In Singapore, OCBC’s “FRANK by OCBC” branches could pass for a hip clothing store. They offer edgy images on debit cards and a simple savings account. What you don’t find at FRANK are tellers or cash. And some banks profitably serve segments such as pensioners or lower-income customers with good-enough products and service through light-branch formats. In Malaysia, Maybank serves a mass market with self-service kiosks open for extended hours. The kiosks allow customers to open an account with just their identification in 10 minutes, for seven product categories. 2. Design products that pop Retail banks find it difficult to keep their products distinctive, as product features get copied quickly. At a minimum, banks must at least keep up with the latest features that customers value. Banks also can differentiate products at the margin through innovative pricing or by bundling several products together in appealing ways. Customers obviously care about product features like interest rates and fees, rewards, ease of transaction and, for more complex products like wealth management, the quality of advice. Banks show a wide variation in how customers perceive their product performance. Among US banks, the share of customers who say their primary bank performs well or extremely well on home mortgages ranges from 62% for the lowest bank to 97% for USAA. In Australia, Westpac has differentiated its BT Super for Life superannuation account by allowing customers to apply online and to see the account online alongside their current account. St.George links its home equity line of credit to various interest offset accounts, making it easier for customers to manage taxes and investments. Whether with a current account, credit card or mortgage, the key is to strike the right price-value balance for the target customer. And there’s a minimum menu of offerings necessary just to have credibility in a category. 3. Accelerate the digital transformation As digital banking spreads, banks increasingly have opportunities to excel at moments of truth in the customer experience, such as resolving fraudulent account activity or giving expert advice. They can also use technologies to delight customers through transactions such as remote deposit capture. Conversely, slow or confusing digital interfaces will quickly annoy customers. Banks have made significant progress in the shift from a mostly analog world to an omnichannel world, where customers expect to be able to use the channel of their choice when and where it suits them. Yet we’re still in early days with a long way to go. More than half of customers’ interactions on average took place through online or mobile channels, ranging from 75% in Norway to 38% in Mexico. But many banks could make more of the technology or steer customers to adopt it. Globally, fewer than half of respondents in developing countries and just over one-third of those in developed countries used smartphones or tablets for their banking. The cross-country variation ranges from 60% in China to 17% in Belgium. In South Korea, fully 56% of customers engage in mobile banking. Hana Bank has consistently focused on digital innovations, such as the ability to withdraw cash from ATMs via smartphone, with only the phone number required, not an account number. Parents can also send money to their children via their smartphones, and the digital currency works at many Korean retail outlets. Mobile usage also varies within most national markets. Lagging banks and countries should be concerned, because mobility continues to spur customers to recommend their bank. Mobile users give an NPS 25 points higher on average than people who don’t use mobile devices, and that premium rises in countries such as China and Thailand. As banking moves to an omnichannel world, the future of the physical branch remains an open question. But two things have become clear. First, too many routine interactions, like making a deposit, take place in the branch in many countries. Banks can no longer afford the cost structure that supports such interactions, which could go through lower-cost, self-service digital channels. Globally, some two-thirds of branch interactions consist of the routine, with only one-third being sales or service. Second, branches in every market remain the dominant channel for starting relationships. Roughly three-quarters of new account openings happen in branches. During this omnichannel transition, success hinges on making digital channels convenient and defect-free, and on converting branches to more sales-oriented purposes. Nordea, one of the largest Scandinavian banks, has shrunk and modified its branch network so that only 45% of branches now manually handle cash, down from 85% in 2009, and they focus instead on advice and sales. 4. Loyalty gives you the right to win more business—but you do have to ask for the sale Banks with strong customer loyalty have an open door to win more of their customers’ business. For every financial product and in every country market we have analyzed, we find that promoters buy more products with their primary bank than detractors do. That doesn’t mean the business comes effortlessly—banks have to ask for it. For example, about one-third of banking products in the US are sold, not bought. That is, customers did not plan to buy a particular product, but they received an offer and then decided to get it. Returning to Maybank in Malaysia, the bank has chosen to bundle products in a way that make it easy to sell them. Customers apply once for all products and provide all necessary information at that time; they then can activate and access products as needed, through the channel of their choice. In Australia, Hong Kong and India, Citibank excels in onboarding and then cross-selling to customers, particularly in wealth management. Citibank mandates that every relationship manager raises his or her customers’ share of wallet each quarter. Some banks that are loyalty leaders score low on the sales metric, but the good news is that their customers accept the right kind of sales overtures. Other banks have high selling scores but lag on NPS. These players will want to concentrate on adjusting the tone of their selling and delivering a better experience after the sale. 5. Build branding that delivers more trust, less buzz The brand interacts with the other elements discussed here and either enhances or degrades each one. In fact, a bank’s NPS tends to be highly correlated with its brand strength. Banks’ standing among regulators, legislators and the broad public took a hit in the years following the financial crisis. In response, many banks have increased their advertising and other forms of explicit marketing over the past few years, with the hope of restoring their image. Although building awareness can be useful, a new brand campaign by itself merely applies a fresh coat of paint on a rusty ship, rather than repairing the engine and hull. Rebuilding trust involves a slow, steady process. Credibility comes by telling the story of what a bank has to offer, not what it wishes to be. And that story also gets shaped by the daily interactions with customers. Hang Seng in Hong Kong, for example, promotes the attributes of a friendly, service-oriented local bank. Hang Seng reinforces these brand attributes not only through activities with local neighborhoods and universities, but also through convenient branch locations in the local transit system and through staff training. A customer-led, not marketing-led, perspective on the brand leads bank managers to spend their time differently. Instead of asking brand questions (“Should we rebrand?” “What logo and tagline should we use?”), managers will find it more effective to start with customer questions (“What do our best customers say about us?” “How can we amplify that?”). * * * A few large incumbent banks have made meaningful progress on several of the five elements. Consider JPMorgan Chase in the US. Of all the national banks, Chase posted the biggest NPS gains in 2013, moving from the third quartile to the second quartile and opening a lead over other national banks. That’s due to such factors as select investments in mobile technology, a concerted effort to improve the customer experience and effective marketing to tell people how the bank can simplify their financial lives. Those factors also combined to help Chase perform well above average in winning new relationships and cross-selling to existing customers. Every bank can benchmark against competitors in its home market and the best performers globally. This report introduces the relevant framework and metrics to do so, with an eye toward making focused investments that will generate superior growth, and make loyalty pay. 1. Loyalty trends around the world
     2. Leaders and laggards in the shift to omnichannel
    3. Mobile banking expands its mainstream appeal
     4. The battle for scarce new customers
      5. Cross-selling: The golden opportunity
       6. Five ways to realize the fruits of loyalty
           Appendix: Methodology Bain & Company partnered with Research Now, the online global market research organization, to survey consumer panels in Argentina, Australia, Belgium, Chile, Canada, Denmark, Finland, France, Germany, Italy, Japan, Mexico, the Netherlands, Norway, Poland, Russia, Spain, Sweden, the UK and the US. The survey’s purpose was to gauge customers’ loyalty to their principal bank and the underlying reasons they hold the views they do. Conducted in the summer of 2013, the survey polled 177,937 customers of national branch network banks, regional banks, private banks, direct banks, community banks and credit unions in these countries. We included in the individual bank analysis only those banks for which we received at least 200 valid responses, though in many countries, sample sizes exceeded 200 for each bank included. Bain worked with GMI to survey a further 12,251 account holders in China, Hong Kong, India, Indonesia, Singapore, South Korea and Thailand. Similarly, individual bank Net Promoter Scores are based on the responses of at least 200 participants. Survey questions Respondents were first asked to identify their primary bank, after which they were asked the following three questions to assess their loyalty to that institution:
If respondents had been with their current primary institution for less than a year, they were asked to identify whether they were new to banking or if they had switched from another institution. We subsequently asked about their prior primary banking relationship, why they switched banks, what influenced them in their choice of a new bank and which channel they used to open their new account. For all survey respondents, we asked what major products they hold with their primary bank and other banks, and which of these products were purchased in the last year. We also asked which channels they use to do their banking. The remaining questions elicited demographic profile information on household income, investable assets and region of residence. We followed up with 5,200 US respondents to ask more detailed questions about their purchase of specific products, including their product NPS, the methods they used to research their purchases, the channel they used to purchase the product, the major factors that influenced them in the purchase of the product and how the bank performed on those factors. For those people who did not purchase from their primary bank, we asked reasons for purchasing elsewhere. On the question of statistical significance, the results of our data analysis are robust both for the measurement of bank NPS by country and for respondent NPS for each demographic category. The NPS measured for each bank included in the US regional rankings is statistically significant to an 80% confidence level, with a two-tailed test of the confidence interval ranging from plus or minus 1.5% (n=4,500) to plus or minus 6.8% (n=201). In countries where sample sizes were smaller, confidence intervals are wider, with a maximum of plus or minus 7.5%. Countries classified as developed are based on the World Bank’s high-income category; the developing countries are based on its middle- and low-income categories. Acknowledgments This report was prepared by Gerard du Toit and Maureen Burns, partners in Bain’s Financial Services practice, and a team led by Christy de Gooyer, a practice area manager. The authors thank Bain partners in each of the countries covered in the report for their valuable input and John Campbell for his editorial support. |