U.S. retail banks are caught in a painful growth squeeze. They're expanding into new markets, opening branches at a breakneck pace, and upgrading their ATM networks and online services, but they are reaping diminishing returns for their efforts.
With the flat yield curve, the industry's net interest margin fell to a 17-year low in late 2006.
Some banks are finding a way out of the vise. A survey commissioned by Bain & Company of roughly 3,200 account holders at more than two dozen major banks across the country has found banks that convert their customers into enthusiastic advocates post far higher rates of same-branch deposit growth than their regional competitors.
This link between customer advocacy and superior performance is easy to understand. Happy customers stay longer with the bank that treats them well. They purchase more products and services, and they refer new customers. Our research has found that a 5% increase in customer advocacy produces a 1.5% annual increase in same-store deposit growth.
But it's devilishly hard to create such promoters. Most bank executives seem unaware that they have a customer loyalty problem.
Fully 80% of the senior executives Bain interviewed at 362 companies across several industries said they provided a superior customer experience, but just 8% of their customers agreed. Behind that yawning delivery gap is a failure to recognize the many ways their single-minded pursuit of earnings targets undermines customer trust.
Too often, bankers end up trying to compensate for flat balances with hidden charges, penalties, and other lucrative—but insidious—sources of revenue from fees that alienate account holders.
Part of the reason is that the profit-and-loss measures bankers use to assess their businesses' financial health fail to pick up the damage caused by these bad profits. Attempts to gauge customer engagement through conventional, unfocused satisfaction surveys lack the rigor, insight, and top-management attention of internal financial reporting.
A metric that Bain has developed, Net Promoter Score, demonstrates how customer advocacy generates organic growth. The score is derived from customer responses, on a scale of zero to 10, to this question: How likely are you to recommend a company to a friend or colleague?
Respondents giving a score of 9 or 10 are counted as "promoters"—the most loyal fans. Those giving a score a 7 or 8 are "passives"—broadly satisfied but not enthusiasts. Scores from zero to 6 denote "detractors"—customers who are unhappy and not hesitant to tell others about it. A company's NPS is the percentage of its promoters minus the percentage of detractors. Ranked from best to worst, retail banks in our survey displayed the widest range of scores we found across more than a dozen industries we've examined.
What do the leaders do differently? They begin by homing in on the customers they are better equipped to serve than the competition, and they tailor distinctive offerings to exceed customer expectations.
These banks focus their marketing and sales efforts on the targeted customers, and once these customers are brought on board, the banks mobilize their entire organization to deliver an exceptional experience at every point of contact with the customers. As relationships mature, the banks listen to what customers have to say about their evolving needs and seek opportunities to cross-sell complementary products and services.
Banks that aspire to become NPS leaders face two challenges. They must first fix what's broken. Our research found that two problems in particular—common transaction-processing errors and nuisance fees—breed detractors. Only after meeting these "table stakes" can they refocus on delivering service that converts passive account holders into passionate advocates.
Customer service problems escalated at First Union Bank soon after it acquired CoreStates in 1998. Upon becoming First Union's CEO and, in 2001, buying Wachovia (taking its name in large part because of its superior reputation with customers), Ken Thompson recognized that service defects would have to be tackled at the branch level, where customers and employees interact.
Wachovia launched a multipronged program to conduct weekly surveys of thousands of customers who used its branches, call centers, and Web site. It followed up by phone to ask a subset of the customers to rate the quality of their experience, then ranked each branch by its customer scores. In the five years after the program's launch, annual customer attrition went from 20% to just 11% by 2004.
Our research finds that if stanching service glitches curbs detractors, a knowledgeable and friendly staff, along with quality products and convenience, create promoters.
It will be hard to buck today's competitive and economic headwinds to achieve sustained organic deposit, revenue, and earnings growth. Retail banks that measure and build the health of their customer relationships and instill a customer-focused discipline will be the ones that prosper.