Customer Experience in the Canadian Retail Banking Sector

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1 STRATEGIC ACCELERATION SERVICES Customer Experience in the Canadian Retail Banking Sector By Donnovan D. Simon This document examines the Canadian retail banking sector and the impact of investments in customer experience on the market. The initiatives implemented by different companies are analyzed relative to the overall financial performance of the different companies in the market.

2 The Canadian Retail Banking Sector Canada s retail commercial banking sector is dominated by five major national, full-service banks. The Big 5 are Royal Bank of Canada (RBC), TD Canada Trust (TD), Scotiabank, Bank of Montreal (BMO) and Canadian Imperial Bank of Commerce (CIBC). There are other small regionally focused institutions that complete the banking landscape. The sector is very mature with the first commercial bank being almost 200 years old. The Bank of Montreal leads the history charts having been established in All but, TD Canada Trust, of the Big 5 were established prior to The growth of commercial banking began in Eastern Canada and moved with population centres across the country. Today, the banks serve millions of customers globally as many of the banks expanded their operations globally. The maturity of the Big 5 has not limited vibrancy in the market place and the focus on gaining and maintaining customers is a constant part of the strategy of all the financial institutions in the sector. The recent results of the Big 5 reflect buoyancy, growth and continued financial value. Revenue continues on the growth path while market confidence, as reflected by the performance of the institutions on the markets where they are listed, remains high. As Table 1 summarizes, all of the Big 5 banks growth have seen their top-line revenue increase over the last five completed financial years. Table 1: Total revenue by Big 5 banks (CAD$ billions) Royal Bank TD Canada Trust Scotiabank Bank of Montreal CIBC Total As overall revenue increased, the distribution of revenue has remained consistent (see figure 1 below) with RBC being the dominant player with CIBC steadily holding the number five spot. Figure 1: Revenue distribution among Big 5 banks (CAD$ Billions) Royal Bank TD Canada Trust Scotiabank Bank of Montreal CIBC Based on data from annual financial reports filed by these institutions with regulatory agencies and listed on the investor section of their websites. Strategic Acceleration Services 2013 Page 2 of 7

3 Over the period, Scotiabank and BMO have shown the greatest gains although the overall market category percentages ranking have not changed materially. The steady growth in the sector, despite the many economic waves from other jurisdictions is indicative of the stability and positive health in the sector. It also reflects that relative stability in the Canadian economy in the face of recession and other negative economic headwinds impacting major trading partners such as the United States and members of the European Union (EU). Customer Experience Measurement in the Sector As done for other sectors, JD Power conducts an annual survey on the perception of customers regarding companies in the sector. 2 All institutions are rated out of a score of The survey assesses customers experience based on the following: 1. Account activities 2. Account information 3. Facilities 4. Product offerings 5. Fees 6. Financial advisor 7. Problem resolution The results from the last three surveys are depicted in Figure 2. TD Canada Trust has been the organization rated as delivering the best customer experience for three consecutive years. CIBC has been the organization rated last of the Big 5. Figure 2: JD Power Retail Banking (Big 5) Customer Satisfaction Scores TD Canada RBC BMO Scotiabank CIBC The graph also shows that the 2013 ratings have shown an increase for all companies with CIBC, BMO and Scotiabank making material strides. With its 2013 rating, BMO eclipsed RBC as the bank with the second best CX rating. As shown in Table 2, some banks have been making steady increases in these 2 The 2013 Canadian Retail Banking Customer Satisfaction (CSat) Study is based on responses from more than 21,000 customers who use a primary financial institution for personal banking. The study includes the largest financial institutions banks and credit unions 2 in Canada and was fielded May 7, 2013, through May 24, Strategic Acceleration Services 2013 Page 3 of 7

4 ratings which has resulted in the closing of the gap between the banks (at least from a CX rating perspective). For 2013, the lowest scores (750 for CIBC) was above the average score from the previous year. This reflected, not only how much improvement was occurring in the trailing companies but also how the sector overall was perceived by customers. Table 2: JD Power Retail Banking (Big 5) CSat scores % change 2012 % change 2013 TD Canada % 1.56% RBC % 1.60% BMO % 2.14% Scotiabank % 2.57% CIBC % 3.88% What Companies Have Done The Big 5 have taken different routes to address customer experience. These range from strategy reviews to discrete programs aimed at promoting customer experience as a competitive differentiator. All but RBC, of the Big 5, have listed customer experience as part of their key corporate strategies and vision. The public statements are contained in mission and vision statements and customer promises. TD Canada Trust is the only bank to have listed customer focused goals as part of its performance scorecard. Its goal was to improve its customer experience index in 2012 which it exceeded by 3 percentage points. 3 Based on feedback from the 2012 survey, all banks addressed customer education on fees and process simplification. Some of the institutions also focused on the strengthening of relationships and listed programs or goals related to that. CIBC for example stated Deepen Relationships with Clients as one of three strategic priorities which applied to different business units. To fulfill that strategy, the implemented specific programs Total Banking Rebate and Next Best Offer. 4 There has also been focus on improving operational processes that appeal to customers desire for greater access and simplicity. Several banks have implemented extended opening hours, Sunday banking as well as mobile banking. The offerings augment the investments already made in automated teller machines, branches and online banking tools. In all cases, the Big 5 have made reference in their annual reports for 2012 of recognition they have received for customer experience excellence. While not reporting on any customer experience metrics or listing any specific CX program, RBC mentioned the Keynote Systems award for having the best Overall Customer Experience in the Canadian retail banking sector. TD Canada Trust noted its continued leadership of the JD Power customer experience ratings. All the organizations received numerous awards for different categories of their operations. Understandably, each uses chosen sources to highlight their focus on customer experience and the validation provided by the awards. 3 From the 2012 TD Canada Trust Annual Report, it stated a target of 29.8% for its customer experience index. The organization reported that it achieved a score of 32%. 4 Information on these programs was available from the CIBC website. Strategic Acceleration Services 2013 Page 4 of 7

5 CX Investments and Benefits The results from the investment made in focusing on and bolstering customer experience can be analysed in many different ways. Overall, it could be concluded that all banks have been winners based on the overall improvement in customer perception year over year. All banks had improved ratings (based on the JD Power survey). The fact that CIBC, BMO and Scotiabank saw larger improvements could also speak to greater impact from their efforts relative to the other banks. This could be a result of the impact of other initiatives such as media advertising, corporate contributions and community involvement. It is reasonable however to accept that the benefits derived includes greater consumer confidence, increased consumer spending with banks and also increased customer loyalty. These benefits would have solidified further the sound footing on which the Big 5 operate and validate the strategies applied by the different banks to recover from the declined ratings of the previous year. The benefits would also extend to the global perception of not just individual banks but the entire retail banking sector especially in a climate that has been challenging for other financial systems globally. With the improved confidence, the stage is also set for banks, not just the Big 5, to be more aggressive with programs focused on new segments and products. Many of the Big 5 will be able to capitalize on what they have learnt in the Canadian market as they navigate new markets as part of their international operations. The confidence shown in the Big 5 will also benefit other small regional and niche players in the sector who are able to follow the trails established. While it does not mean mass entry of large players as the regulatory framework will likely not facilitate that, it does however send positive signals to those in specific categories. Deductions 1. Market leadership provides CX advantages It is reasonable to conclude that being a market leader provides some advantages in terms of how customers will rate their experience with your organization. The results of RBC have remained solid and in stride with the major competitors without any significantly different investment than that of other banks. Its size has provided some cushion to the challenges mounted by other banks and its results suggest no material attrition. It can be concluded that with the limited differentiation in products, rates and account management, the chances of a major deterioration of market leadership position is highly unlikely. 2. CX ROI not always proportionate to financial performance As captured in Table 3, the rate of change in financial performance may not be proportionate to changes in customer experience rating. While there is some correlation, it can be concluded that it is not linear. To that extent, which CIBC had the largest improvement in CX rating (based on the JD Power ratings) it is not translated to the increase in revenue experienced by the banks in the same year. There could be a lag factor but the trend does not suggest that either. There are other factors that are likely to affect the CX rating which do not translate into the ultimate financial performance Strategic Acceleration Services 2013 Page 5 of 7

6 of the organizations. It is important for organizations to accept and acknowledge that causality may not exist between the factors influencing both (i.e. CX rating and financial performance). Table 3: % change in total revenue of Big 5 banks Royal Bank 20.9% 1.4% 3.7% 8.6% TD Canada Trust 21.7% 9.5% 10.7% 6.7% Scotiabank 21.8% 7.2% 11.7% 13.8% Bank of Montreal 8.8% 10.0% 12.3% 17.4% CIBC 167.7% 21.7% 2.9% 1.0% 3. Operational excellence and customer experience rating are independent All of the Big 5 banks have been able to post acceptable results that satisfy financial markets and shareholders. As Table 4 shows, all banks have been able to generate meaningful return on capital despite varying results over the same period related to customer experience. While the focus on customers as a key strategic priority is important to all businesses, there is also the need to produce results that are acceptable to the market and shareholders. The fact that all the banks have been able to do that is an indication that their focus on operation excellence is based on different principles, many of which are not related to customer experience. Ultimately, customer experience does factor into some elements of the operations but is not always the driver. Table 4: Return on Equity for Big 5 banks Royal Bank 18.0% 11.9% 14.9% 18.7% 19.3% TD Canada Trust 14.4% 8.4% 16.5% 20.3% 19.5% Scotiabank 16.7% 16.7% 18.3% 20.3% 19.7% Bank of Montreal 13.0% 9.9% 14.9% 15.1% 15.9% CIBC -19.4% 9.4% 19.4% 22.2% 22.0% 4. Competitive advantage from customer experience is limited yet important The retail banking sector is clearly very competitive. Like other mature sectors e.g. telecommunications, the likelihood to materially differentiate products is low as market forces create barriers to gaining advantage in those ways. In some cases, the first mover advantage is significant and the legacy of those benefits trumps new initiatives. The fact the TD Canada Trust was the last of the Big 5 to be established may have had some impact on its ability to unseat RBC. That said, it is clear that TD Canada Trust has made strides in closing the gap at the top while banking on a superior customer experience as a key strategic pillar. To that extent, the leverage of superior customer experience is part of a success equation for a journey which is likely to take many years to realize all the desired results. The same could be said for all the other banks who are trailing on the size of their installed base. Strategic Acceleration Services 2013 Page 6 of 7

7 5. Simple factors may affect CX ratings The JD Power summary for the 2012 attributed the decline in ratings to the changes in fees implemented by the banks. In 2012 BMO and Scotiabank were the only banks to experience improved ratings. While the fee structures did not revert to previous levels, banks invested more in public communication and education to ensure customers had better understanding of their fee structures. Interestingly fees increased again in 2013 and may have an impact on the 2014 ratings. It could be argued that there is market sensitivity within the financial sector which could easily adversely impact customer experience ratings. With this understanding it is critical for banks to be aware of customer sentiment and apply quick, where possible proactive, steps to limit the potential impact of simple factors on their CX ratings. About Strategic Acceleration Services Strategic Acceleration Services is a Canadian training and consulting practice focused on Customer Experience. We assist organizations in assessing the state of their customer experience and implementing solutions to achieve desired results from investment in customer experience initiatives. The principals utilize over 25 years of experience in customer facing management roles complemented by strong academic qualifications to deliver programs, ideas and solutions that help teams and companies achieve, and exceed, desired results. Check our website for more information Strategic Acceleration Services 2013 Page 7 of 7