Customer Experience and Credit Union Opportunities: A Collaboration with McKinsey & Company

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1 Customer Experience and Credit Union Opportunities: A Collaboration with McKinsey & Company Mark Meyer CEO, Filene Research Institute Ben Rogers Research Director, Filene Research Institute Foreword by Dorian Stone Partner, McKinsey & Company Filene Research Fellow

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3 Customer Experience and Credit Union Opportunities: A Collaboration with McKinsey & Company Mark Meyer CEO, Filene Research Institute Ben Rogers Research Director, Filene Research Institute Foreword by Dorian Stone Partner, McKinsey & Company Filene Research Fellow

4 Copyright 2010 by Filene Research Institute. All rights reserved. ISBN Printed in U.S.A.

5 Filene Research Institute Deeply embedded in the credit union tradition is an ongoing search for better ways to understand and serve credit union members. Open inquiry, the free flow of ideas, and debate are essential parts of the true democratic process. The Filene Research Institute is a 501(c)(3) not-for-profit research organization dedicated to scientific and thoughtful analysis about issues affecting the future of consumer finance. Through independent research and innovation programs the Institute examines issues vital to the future of credit unions. Ideas grow through thoughtful and scientific analysis of toppriority consumer, public policy, and credit union competitive issues. Researchers are given considerable latitude in their exploration and studies of these high-priority issues. Progress is the constant replacing of the best there is with something still better! Edward A. Filene The Institute is governed by an Administrative Board made up of the credit union industry s top leaders. Research topics and priorities are set by the Research Council, a select group of credit union CEOs, and the Filene Research Fellows, a blue ribbon panel of academic experts. Innovation programs are developed in part by Filene i 3, an assembly of credit union executives screened for entrepreneurial competencies. The name of the Institute honors Edward A. Filene, the father of the U.S. credit union movement. Filene was an innovative leader who relied on insightful research and analysis when encouraging credit union development. Since its founding in 1989, the Institute has worked with over one hundred academic institutions and published hundreds of research studies. The entire research library is available online at iii

6 Acknowledgments For their help with, and participation in, this important customer experience research, the Filene Research Institute would like to thank Dorian Stone, Filene Research Fellow and Partner, McKinsey & Company, San Francisco; and Kurt MacAlpine, Senior Engagement Manager, McKinsey & Company, Toronto. We would also like to thank the participants at each of our roundtables: Linda Armyn, Bethpage Federal Credit Union, Bethpage, New York Barbara Bass, Credit Union League of Connecticut, Meriden Michelle Bloedorn, Member Loyalty Group, Chicago Kathy Chartier, Members Credit Union, Stamford, Connecticut Jeanne Denton, Nikkei Credit Union, Gardena, California Brent Dixon, The Haberdashery, Brooklyn, New York Bruce Fafard, Ledge Light Federal Credit Union, Groton, Connecticut Rebecca Gerothanas, Summit Credit Union, Madison, Wisconsin Lisa Ginter, CommunityAmerica Credit Union, Lenexa, Kansas Lori Hall, American Airlines Federal Credit Union, Fort Worth, Texas Lucy Ito, California/Nevada Credit Union League, Rancho Cucamonga, California Steve Koenen, Altra Federal Credit Union, La Crosse, Wisconsin Randy Kohout, CUNA Mutual Group, Madison, Wisconsin Ken Landis, Pasadena Service Federal Credit Union, Pasadena, California Caroline Lane, Co-Op Financial Services, Rancho Cucamonga, California Jean-Albert Maisonneuve, Affinity Federal Credit Union, Basking Ridge, New Jersey Connie Mattis, Service 1st Federal Credit Union, Danville, Pennsylvania iv

7 Angela McCathran, People s Trust Acknowledgments Federal Credit Union, Houston, Texas Tara McQuillen, Discovery Federal Credit Union, Wyomissing, Pennsylvania Robert Michaud, Mid-Hudson Valley Federal Credit Union, Kingston, New York Heather Nally, Purdue Employees Federal Credit Union, West Lafayette, Indiana Kerry Parker, A+ Federal Credit Union, Austin, Texas John Parsons, First City Credit Union, Los Angeles Pete Paulson, Corporate America Family Credit Union, Elgin, Illinois Carey Price, Baxter Credit Union, Vernon Hills, Illinois Daniel Ptacek, United Nations Federal Credit Union, New York Jon Reske, UMassFive College Federal Credit Union, Hadley, Massachusetts Cathy Rios, Travis Credit Union, Vacaville, California Lynda Savoit, Orange County s Credit Union, Santa Ana, California Patricia Shermot, CTCE Federal Credit Union, Reading, Pennsylvania Tansley Stearns, Connex Credit Union, North Haven, Connecticut Christopher Stevenson, Credit Union Executives Society, Madison, Wisconsin Joanne Todd, Northeast Family Federal Credit Union, Manchester, Connecticut Jennifer Ventimiglia, USA Federal Credit Union, San Diego Suzanne Walden, Chevron Federal Credit Union, Oakland, California Joni Walker, Missoula Federal Credit Union, Missoula, Montana Frank Weidner, Alliant Credit Union, Chicago Jason Werts, Unitus Community Credit Union, Portland, Oregon v

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9 Table of Contents Foreword Executive Summary and Commentary About the Authors ix xi xv Chapter 1 Chapter 2 Chapter 3 Stellar Customer Satisfaction: Opportunity or Achilles Heel? 1 Defining and Improving Customer Experience 11 Frontline Performance and Customer Experience 21 Chapter 4 Conclusion and Recommendations 37 Endnotes 41 vii

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11 Foreword By Dorian Stone, Partner, McKinsey & Company, and Filene Research Fellow Recently overheard: I have the best insurance agent; I even got money back from my insurer last year since it s a mutual. I ll miss them now that I m switching. This consumer s love-lost story is a common and pervasive one across financial services. Over the past 10 years, property and casualty mutual insurers have lost 2% of market share in premiums. That percentage could have been even bigger if the larger mutual players had not moved as aggressively as they did on price. Mutual life insurers have lost a full 40% of their market share (partly due to conversions to public companies). In that same time, credit unions have lost 3% market share of deposits even against banks smaller than $20 billion (B). In many of these cases cooperative members are voting not at their annual meetings, but instead with their wallets at the offices of forprofit competitors. For decades credit unions have done a lot for their members and deserve their place at the top of the customer satisfaction rankings. Today, as a segment, they have the highest ratings with small banks following closely. But top customer satisfaction ratings can be achieved in multiple ways, and different methods have profound impacts on consumer choices on deposits, loans, and investments and on the ultimate economic impact on the institution. In fact, credit union efficiency consistently fell short of even the smallest banks in the nation until the economic collapse last year. What we ve found at McKinsey is that banks and financial institutions that are winning market share compensate for good enough customer satisfaction relative to the top marks of credit unions by investing heavily in the convenience and functionality elements of their product and service delivery. By doing so, they have achieved a higher ROI on their customer experience performance that better reinforces their economic position relative to credit unions. Looking across the industry, high-performing banks have long driven functional improvements into and across offers and channels. They have invested in branches, sophisticated electronic delivery, and sales staff. They have, however, lagged in most cases on the emotional elements of the customer experience. Moreover, banks make explicit decisions about whom they are targeting and what measures they deem as successful in winning those customers. These banks know they can t please all of the people all of the time. As a result, they make better trade-offs and decisions about where to invest, who to prioritize in the use of those investments, and how to resolve complaints that arise. ix

12 In contrast, many credit unions make explicit decisions to please every member every time, to support every community as best as possible, and to hold on to every employee as long as possible. As a result, credit unions launch offers with high degrees of built-in compromise, keep the wrong employees, and succeed in diverting resources from critical functional operations. Today, creating a stronger emotional bond and a more personal frontline experience is a key differentiator for banks but it is not a differentiator for the average credit union. Why? Because credit unions have forgotten to build the basic quality of service and offerings that create fundamental value in consumers eyes. Credit unions and mutuals more broadly underperform on that functional value across most industries. Exacerbating the situation, most credit unions are building additional goodwill through a continued emphasis on emotional elements like consumer trust and personal touch in the customer interaction rather than on consistently getting the basics right. Moreover, many credit unions often target customer experience excellence as a goal in and of itself rather than as a means to an end. Customer experience is a means to greater share of wallet, greater efficiency in serving that customer and, ultimately, greater institutional value. This report shows that in transitional times like these, credit unions may survive by maintaining that historical goodwill but they cannot win without a focus on delivering functional as well as emotional value to the consumer, and doing so in a more effective manner. In the last 12 to 24 months, many credit unions may have been lulled into believing that the windfall of deposits they have experienced is a sign of longer-term shifts in consumer preference for the average credit union. However, as we shared at a number of credit union system conferences last year, our research suggests that this is a short-lived window of opportunity. Depending on the near-term stability of the banking sector, that window may close too quickly for the typical credit union to make use of it. x

13 Executive Summary and Commentary By Ben Rogers, Research Director Every high school has a Tom. He s a decent student, and he ll attend an OK college. He s on the cross-country team but finishes most races out of the top 10. His pants are a few years past the going style. Tom is earnest and sincere, and actually pretty fun once you get to know him. His sincerity has won him the confidence of many of the girls. But Tom has one big hang-up. When it comes to serious dating, Tom always strikes out. He can get a date to the dance, but long-term, steady relationships are where he falls short. It annoys Tom to watch his friends fall for the wrong guys time after time the jerk with the nice car or the slacker who lives to party. Tom knows those guys aren t right for his friends, and deep down his friends usually know it, too. Every girl likes Tom well enough, but none of them will commit to him. Credit unions seem to be like the guy who s best friends with every girl in school but can t get a date, says Brent Dixon, a young adult advisor at the Filene Research Institute. Credit unions are like Tom. What Is the Research About? This report, a collaboration between the Filene Research Institute and global consultancy McKinsey & Company, explores the mystery of Tom: Why do consumers consistently give credit unions their highest satisfaction scores and yet take their business elsewhere? And, just as importantly, what can credit unions do about it? To address the issue, Filene and McKinsey convened three regional roundtables in which participating credit unions were asked to review McKinsey s customer satisfaction and customer experience research. Then they were asked to consider how credit unions can leverage their phenomenal satisfaction levels among members. In the roundtables, representatives from 31 credit unions ranging in size from $27 million (M) to $7B in assets discussed the research provided by McKinsey and suggested best practices that credit unions can adopt to track and use customer satisfaction to their strategic advantage. The primary material for this report comes from McKinsey s indepth research on customer experience, employee engagement, and customer satisfaction. McKinsey relies on regular, proprietary surveys of consumers to inform its advice on a broad range of industries from grocery stores to airlines, and from hotels to Internet service xi

14 providers. The 2009 customer experience survey on which most of the report is based draws on 3,900 respondents who offered their views on retail banking. The survey measures satisfaction, asks what matters most for driving satisfaction, and seeks to validate the relationship between satisfaction and value creation. Three McKinsey consultants shared their deep expertise with the credit union groups, and their names show up throughout the report as subject matter experts. They are: Dorian Stone, partner, San Francisco. Kurt MacAlpine, senior engagement manager, Toronto. Joshua Kanter, associate principal, New York. Much of the additional material and best practices in this report come from the three credit union roundtables and will be cited less formally than in Filene s traditional academic reports. The best practices and ideas that emerged from the roundtables are credited where possible. The words customer and member are used interchangeably throughout the report to reflect the original McKinsey research. What Did the Research Reveal? Credit unions clearly and consistently garner high satisfaction scores, but it s also clear that satisfaction doesn t necessarily bring growth or market share. In fact, it may disguise underlying credit union challenges. The report s key findings may be uncomfortable for credit unions that embrace member satisfaction and empowerment at any cost. For those credit unions, cost is the key word. Credit unions as a whole are at the top of the customer satisfaction heap, which means that few additional satisfaction gains are possible. Therefore, continued investment in improving customer satisfaction will deliver little or no marginal benefit. Instead, the report suggests that credit unions should try to maintain their preferred status but redirect management efforts and resources toward improving crucial functional areas, such as remote delivery, member wait times, and problem resolution. In addition, the report finds that: Credit unions outperform banks handily on emotional factors, like trustworthiness and member pride in doing their banking there. But they have fewer advantages in functional categories, like online tools and convenience. The type of customer satisfaction metric an institution uses is less important than consistent analysis of changes in satisfaction scores. xii

15 Frontline employees, especially branch managers, are the most important link in good or bad customer experience. The McKinsey research used as the basis of this report is available to registered members of the Filene Research Institute. To view the data, please visit mckinsey. What Are the Credit Union Implications? Credit unions basic structure impels them to consider the needs of members before anything else. This report suggests that those needs are not always best served by better and better personal service. If they were, credit unions advantage in satisfaction would become an advantage in market share. Credit unions should treat member satisfaction and improved member experience as means to an end never as ends in themselves. The right satisfaction-driven goals will be different for every credit union, but they should include concerns about long-term viability, market share growth, wallet-share growth, and sustainable profitability. Member satisfaction efforts that do not consider ROI inflate expenses. With margins thin, and likely to remain so for the foreseeable future, credit unions can t afford satisfaction at all costs. On the same note, credit unions already score at the top in customer satisfaction, so most credit unions will find little marginal benefit in trying to improve scores even more. A more sustainable strategy for high-satisfaction credit unions is to monitor member perceptions closely while introducing high ROI initiatives like improved sales channels and streamlining delivery systems. If the members don t balk, credit unions stand to gain. Finally, this report suggests that credit unions build on and trumpet what leads members to be more satisfied in the first place: high levels of trust, the eagerness of existing members to speak well of the credit union, and good overall value. In other words, this report is designed to help Tom get more dates. And then maybe a steady girlfriend. xiii

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17 About the Authors Mark C. Meyer Mark C. Meyer is the CEO of the Filene Research Institute. Mark joined the Institute in January 2003, starting an open-source revolution in credit unions. He founded the prestigious Filene i 3, a group of next-generation credit union leaders focused on identifying and launching transformative financial products, services, or business models relevant to consumers. An internationally recognized credit union expert, Mark s opinion and research have been cited in dozens of publications including the Wall Street Journal, and he has contributed to National Public Radio. He has lectured to hundreds of audiences across North America, Asia, and Europe. He has served as an advisor to the U.S. Department of the Treasury. Mark has authored market-leading reports on innovation, consumer behavior, and the financial services needs of young adults. He also serves as secretary on the board of directors for Summit Credit Union, the largest credit union in Wisconsin. Prior to his work at Filene, Mark served as an attorney at Montgomery, Little & McGrew in Denver, Colorado; as vice president and legal counsel at Arizona State Credit Union; and as assistant vice president at the CUNA Mutual Group. Mark received his JD from the University of Nebraska College of Law and his BS in business administration from Northern Arizona University. He is licensed to practice law in Arizona and Colorado. Ben Rogers Ben Rogers is the research director of the Filene Research Institute, where he manages and edits a large pipeline of economic, behavioral, and policy research related to the consumer finance industry. He previously served as director of the Institute s CU Tomorrow project, as editor of the CEO Report, and as chairman of the National Directors Convention. Ben has been cited in the Wall Street Journal, American Banker, the Credit Union Times, and the Credit Union Journal. He earned a master s degree from Northwestern University and a BA from Brigham Young University. xv

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19 CHAPTER 1 Stellar Customer Satisfaction: Opportunity or Achilles Heel? Credit unions are rightly famous for putting members first and keeping them happy. For continued growth, happy may not be the right focus.

20 Banks are hurting, and not just on their balance sheets. One effect of the financial crisis that began brewing in 2007 and exploded in 2008 is that banks saw a quick and significant decline in their customer satisfaction ratings. From a starting score of 8.29 in 2006, banks dropped 19 points overall to 8.10 while other industries like grocery stores, Internet service providers, and pay TV won modest to significant gains. From the six other industries in a McKinsey comparison, only one other auto insurance companies suffered satisfaction losses (see Figure 1). Figure 1: Banks Have Experienced the Largest Decline in Customer Satisfaction Industry average customer satisfaction (CSAT)* Change 2009 vs. 2006** Auto insurance companies Grocery stores Banks*** Hotels*** ISPs Pay TV Airlines*** * CSAT was measured on a scale of 1 10; all data is weighted; 2006 is adjusted 0.06 downward to account for minor change in methodology ** Neutral unless change statistically significant with a 95% confidence interval *** Primary and secondary company data included in CSAT score Source: McKinsey Cross-Industry Customer Experience Surveys. 2

21 It s unclear from the data whether banks suffered satisfaction declines because of tangible operational changes over the three-year period or as a result of consumer sentiment that turned against financial institutions perceived as being responsible for the recession. Regardless of the source of their discontent, customers have clearly become disillusioned in recent years, which should present opportunities for smaller, responsible organizations like credit unions. Opportunities, yes; change, no. While total satisfaction with banks declined from 2006 to 2009, credit unions market share of deposits saw few gains, non-revolving credit merely stabilized, and revolving credit continued to decline (see Figure 2). Halo Effects Size matters. Credit unions and small banks share the best scores in customers overall satisfaction and their willingness to recommend. Satisfaction and willingness to recommend scores go down as assets grow. Credit union and small bank customers are 10% more likely than those at regional banks to be satisfied and 14% more likely than customers at large banks. Similarly, credit union and small bank DEFINITIONS This report refers often to consumers and members, but especially customers. These terms are used interchangeably despite the fact that credit unions serve members. This is because the original McKinsey research and data use customer language, which is retained here for consistency and clarity. Where the word member appears, it should be considered synonymous with customer. There are several discrete terms that hold specific connotations throughout the report. Each is separate, but all are related. Customer experience: total set of elements (from promises and messaging to execution) that determine the value delivered to customers and drive specific customer behavior that benefits both the customer and the business (e.g., repeat purchases, referrals). Customer satisfaction: measures a customer s overall satisfaction with the business; a commonly used metric of quality of customer experience. Employee engagement: extent to which employees commit to the organization and, as a result: (1) how hard they work to please customers and drive sales, and (2) how long they intend to stay with the organization. Functional value: describes tangible benefits like proximity of branches, good online delivery, and overall convenience. Emotional value: comprises intangible factors like trust and feeling good about telling others you bank there. 3

22 customers are 10% more likely to recommend their institution than customers at regional or large banks. In addition to the emotional connections customers have to local institutions, one possible explanation of the large vs. small split is the prevalence of small banks and credit unions in smaller communities, argues Kurt MacAlpine, a senior engagement manager at McKinsey. In cities and large towns, options abound and consumers Figure 2: Credit Union Market Share are likely to be more aware of alternatives to their existing financial institutions, leading them to expect more from their current relationship. Credit unions perform better than banks. We also know that small banks perform better than big banks, and we know that medium banks perform better than big banks. There s this natural trend toward something I feel more personally tied to. It s in my community, or because I feel like I m an owner of it, I automatically get a lift, says Dorian Stone, a partner at McKinsey s San Francisco office Revolving consumer credit Non-revolving consumer credit Savings Sources: CUNA Operating Ratios and Spreads and Filene analysis. Best Practice In at least one sense, small is great. In the McKinsey analysis, institutions smaller than $20B in assets count as small, and they consistently garner the highest customer satisfaction ratings. The research doesn t prove this, but it may well be that small institutions garner extra satisfaction simply because they re small. Counteract the potentially misleading halo effect of being a small institution by tracking movement in customer satisfaction over time. Rather than taking great pride in a score that is numerically superior to big banks, argues McKinsey s Kurt MacAlpine, credit unions should focus more on trends and direction in their own satisfaction scores. Importance of Emotional Connection Several emotional connections drive customer satisfaction in retail financial services. Company I can trust, with a 19% score, is the most important underlying factor out of 15 customer satisfaction drivers identified by McKinsey s surveys. That is followed by two functional drivers: Provides good overall value (17%) and Service in branch (15%). The fourth, Feel good about telling people that I bank with them, garners 13% and is also an emotional driver. 4

23 Figure 3: Emotional Factors Are Key Drivers of Customer Satisfaction (CSAT) Derived importance of drivers of satisfaction (percent) Company I can trust 19 Provides good overall value 17 Service in branch 15 Feel good about telling people that 13 I bank with them Products and services meet my individual needs 8 Fees and charges are reasonable 6 Online tools 5 Service on phone 5 Bank sends me helpful information Company Web site 2 Call center employees able to handle complex questions 2 Branches are easy to use 1 5 Overall, CSAT in retail banking is largely driven by emotional factors and other intangible elements that affect quality of customer experience (e.g., friendliness of staff, customer expectations) Friendly and enjoyable branch atmosphere 1 Reasonable waits at branches 1 IvR use 0 Emotional factors Sources: 2009 McKinsey Customer Experience Survey; team analysis. Best Practice Sometimes the timing of member outreach is as important as the content, says McKinsey s Dorian Stone. In an effort to improve customer experience while reducing costs, one insurance company asked agents to make 10 unsolicited calls per day to let customers know they appreciated the business. The calls were deliberately timed so that the agents would usually just leave messages and customers wouldn t perceive the call as a solicitation. Because it was unexpected, because no insurance company does this, it actually had a major pop, Stone says. A Chicago roundtable participant shares a similar story: The last couple weeks of the year, we just called members to say, Have a great holiday, and we love you, and that s it. Our whole purpose is the call; we never mention a product. That s the one thing that triggers the most positive feedback from our members of anything we do. Credit unions, along with other mutuals, enjoy an emotional advantage because of their structure, says McKinsey s Dorian Stone. People do consistently like mutuals more than they like others because there s an emotional bond, he says. 5

24 However, Stone says, people also feel that mutuals do not actually provide the value and the functional basics, the functional performance that s needed, that they get from the for-profit, non-mutual companies out there in banking. So, despite the preeminence of trust and the importance of feeling good, factors like overall value, products that meet individual needs, and online tools weigh into consumers decisions about financial institutions. This is especially true for new and potential members, who have no history of an emotional bond. Further, to many consumers financial service decisions are much more about economic value (real or perceived) than they are about emotion. A credit union that resonates emotionally but fails to convey its fundamental value to consumers is in danger of losing the relationship. Best Practice Credit unions have historically felt leery about introducing sales into a culture that garners such high member satisfaction. But credit unions can actually convey fundamental value to members by ramping up sales initiatives. An institution that offers products and service that are good for consumers has nothing to fear from emphasizing cross-sells, Stone says. But a credit union culture that is too nice to assert itself stands to lose market share and lose out at a key step in the marketing funnel. One way to capitalize on local, emotional connections is to emphasize products that are hyper-specific to your market. Jon Reske of UMassFive College FCU in Hadley, Massachusetts, volunteers the example of the credit union s farm share loans. In western Massachusetts, members often buy farm shares that entitle them to a season of fresh produce, but some members don t have the $900 necessary to pay the upfront cost of the share. UMassFive loans the small amount and then takes payments as payroll deductions over the course of the season. Most local loans are not profit centers, but they build goodwill and positive customer satisfaction. Other local loan ideas from UMassFive: energy loans to pay for energy costs like heating oil deliveries, fuel-efficient transportation, or Energy Star certified appliances; and bike loans for students. Customer Satisfaction in the Funnel The classic marketing funnel imagines customers moving through several stages before they commit to a product purchase, whether of sneakers or a checking account. First comes awareness, then familiarity, then consideration and deliberation, and finally purchase. At each step the potential customer might opt out, and only a few arrive finally at the point of purchase. What satisfaction is particularly powerful in doing is getting [customers] to the consideration step. It gets you into the consideration set, but you don t actually see it in the performance set, Stone says. High satisfaction doesn t necessarily make you appear more advantageous compared to competing product offerings. Having a 6