Financial Services POINT OF VIEW CUSTOMER LOYALTY HOW TO RETAIN CLIENTS AND INFLUENCE PROFITS. AUTHOR Dieter Staib, Partner

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1 Financial Services POINT OF VIEW CUSTOMER LOYALTY HOW TO RETAIN CLIENTS AND INFLUENCE PROFITS AUTHOR Dieter Staib, Partner

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3 1. Introduction In recent years customer retention has been a low priority for many financial institutions that have instead focused heavily on acquiring new customers. These institutions then tried often unsuccessfully to offset the high cost of new customer acquisition through cross-selling tactics. However, in our experience improving customer retention has a major financial impact on results through: Increased customer numbers: by increasing the ratio of customers gained vs. lost, and by building up a larger source of satisfied customers who refer products and service to others Longer customer relationships: by increasing the duration of product holdings and by allowing firms to anticipate and capture future needs through deeper understanding of their customer base Higher margins per customer: loyal customers buy more, are less price-sensitive and require less support, avoiding costs associated with account closure, etc. Exhibit 1: Economics of loyalty More customers Longer relationships Higher margins Improved net balance of customers gained vs. lost Larger pool of satisfied customers that will recommend others Longer time on book Increased likelihood of serving additional needs Increased product holdings Decreased price sensitivity Cheaper/more efficient to serve Acquisition costs are spread out over a longer time Lower closure costs In general, it tends to be more profitable to invest in prevention rather than cure: banks will get a higher return from keeping an existing customer vs. acquiring a new one. The last three years have put the relationships between banks and their customers under considerable stress (greater competition, reduced availability of credit, higher fees, etc.) and this has taken a heavy toll on customer loyalty, especially for the traditional, incumbent banks. Many financial institutions are losing the equivalent of over two-thirds of the customers they capture, eroding the net value created by the costs and investment associated with customer acquisition. This can quickly add up over a three-year period: many banks can lose more than a quarter of their existing client base and find that over a third of their customers are new to the bank. Such outcomes are of course highly dependent on the definition of an active customer: metrics vary Copyright 2011 Oliver Wyman 3

4 from bank to bank and from product to product, but simple measures such as minimum balance and volume of transactions are typically used. How banks measure customer loyalty is similarly important, and can lead to different conclusions and resulting action. For instance, if a customer is defined as disloyal purely by closing their last remaining account with the bank, then this leaves little scope for resolution. However, setting internal thresholds for when a customer is deemed loyal or not using simple measures alone can be counter-productive at a customer level, as depending on where the thresholds are set results can vary drastically as customers oscillate either side of the boundary. 2. Defining actions to enhance customer loyalty We define customer loyalty as (a) the reduction of the number of customers lost to a competitor and (b) the increase in the bank s share of wallet. Our approach to managing customer loyalty is broken out into six separate stages. 2.1 Quantify the problem Exhibit 2: Defining actions to enhance customer loyalty Determine Quantify the Segment and Identify alerts and problem analyse trends the key drivers actionable causes Design and implement action plans How/when is a customer defined as lost Segment customers by loyalty and value Challenge the conventional wisdom What are the early warning signals of falling customer loyalty Prevention initiatives How many customers are leaving Examine current trends within and across segments What are the underlying drivers of customer loyalty Why do customers leave Proactive retention strategies How loyal are those that stay Prioritise segments accordingly Identify causes on which you can act Reactive retention teams What products are abandoned Post-departure marketing Quantify and qualify opportunities/threats Develop and introduce loyalty, retention and win-back programmes 6 Measure success, learn and iterate 4 Copyright 2011 Oliver Wyman

5 Determining whether a bank still holds an active relationship with the customer will depend on the strategy chosen by the management. At a simple level, the relationship ends when a customer migrates their account from one bank to another. However, in practice the change is rarely so clear cut. Customers often have multiple accounts and may keep certain products with the original provider for convenience, shifting only partial balances and transaction activity from one institution to another. The different definitions of loyalty (such as by customer or product) can have a direct and substantial effect on the suggested scale of the issue. They may also impact the perceived causes of disloyalty that emerge from any analysis performed. In our experience, the best way to define loyalty is by using transaction volumes or balances for each different key strategic product, within the context of wider market trends and movements at a portfolio level. Such measures should be readily available to all institutions. 2.2 Segment and analyse trends In order to focus attention in priority areas, it is essential to establish a basic understanding of the relationship between customer value and loyalty, and how this is currently changing. For example: Is loyalty decreasing amongst high value customers? Are customers becoming more loyal as they become more valuable? How many high value customers are at risk of leaving? A detailed breakdown by segment will reveal the main sources of value and, in all likelihood, show pockets of customers where it would be unprofitable to invest in strengthening their loyalty. Even a simple segmentation that divides customers into four quadrants according to their loyalty and value can prove a useful map at an initial stage. Exhibit 3: Loyalty and value map Some key questions High III Low value/ high loyalty I High value/ high loyalty What percentage of bank profits comes from each quadrant? What share of value is linked to losing customers from each quadrant? Loyalty Low IV Low value/ low loyalty II High value/ low loyalty What is the trend between quadrants? Are customer value and loyalty increasing? What are the main reasons for leaving the bank in each quadrant? Low Value High Copyright 2011 Oliver Wyman 5

6 2.3 Identify the key drivers The next step is to identify the key drivers that increase or reduce customer loyalty. This is an opportunity to challenge conventional wisdom and ensure that the known factors underpinning customer loyalty actually stand up to quantitative scrutiny. Two preconceived notions in particular often fail this test: Increasing loyalty is not the same as increasing the cross-sell ratio. Customers that have multiple needs met by a product are typically more loyal than customers with multiple products focused on addressing a single need. Some products have a negative effect on loyalty (e.g. deposits from customers that were captured with aggressive offers). In any event, the relationship is not immediately clear: are customers who buy more products more loyal, or is it that loyal customers buy more? Targeting a sales push at unsatisfied customers could provide the required impetus to make them leave the bank. Other factors are likely to be of greater significance to loyalty than simply sheer number of products held. For example, young customers tend to be less loyal than older customers with a similar product portfolio. Satisfaction is not the same as loyalty. Customers must have a minimum level of satisfaction, but levels above this do not necessarily promote loyalty, or even profitability. Further, the reasons customers give to justify their dissatisfaction are rarely the same as those that prompt them to leave. Leading banks invest in detailed and differentiated analysis of customer satisfaction and the root causes for leaving. We have observed at different banks how equally important issues for satisfaction, such as price and quality of advice, had a very different impact on loyalty (poor advice ranked far higher than price as a driver for account closures). Root cause analysis is often used to investigate the reasons for dissatisfaction, yet many banks fall into the trap of concentrating on small issues that are easily resolved rather than the bigger ticket items that are harder to crack. In our experience, factors that distinguish the linkage and proximity between customers and banks have a strong impact on customer loyalty: The intensity and depth of the customer s transaction activity The combined portfolio (as opposed to simply the number) of products held by the customer The initial product and channel used by the customer The level of personal contact the bank has with the customer (communication channels used, the relationship management model, face time with a Branch Manager, etc.) 6 Copyright 2011 Oliver Wyman

7 2.4 Determine alerts and actionable causes Identifying the specific reasons for a customer leaving the bank is a challenging task, especially if sufficient advance warning is desired in order to rectify the situation. However past experiences can prove a useful source of learning. In many cases, this information will not support immediate resolution of the problem, but it will instead provide insight to help retain customers in the future. As a first step, banks must identify the trigger points that signal a deteriorating relationship with the customer. One way to do this is through the creation of a loyalty score, focusing on those clients that are easily identified as at risk of leaving the bank. This can be done in a relatively cost effective and time-sensitive manner by taking advantage of automated technology such as a SMS campaigns, bringing much needed immediacy to client feedback. Exhibit 4: Customer loss cycle Situation Relevant action Comments Points of deteriorating relationship Points of gradual desertion Points of recovery/ Reactivate Deterioration can be gradual or sudden Gradual deterioration allows bank to anticipate and boost loyalty Sudden deterioration may be hard to predict and usually requires retention/ recovery and learning Loyalty building: avoid a reduction in linkage Retention: increase the level of linkage Win-back: recover customer High marginal cost Hard to accurately predict the loss of a customer There is already an explicit sign of reduced linkage Balance between the accuracy in selection and the effectiveness of the actions Opportunity to learn Harder to retain Opportunity to learn What was happening months ago to customers leaving us now? What events or actionable causes have occurred? What lessons can we learn from past desertions and apply to the current customer base? In order to create an appropriate system of alerts and subsequent actions, banks need to distinguish between two different types of reasons for customers leaving: External events for which the bank has little or no responsibility, but which can still be well or poorly managed by the bank, e.g. offer from a competitor, change of circumstances, etc. Actionable causes for which the bank has direct responsibility, e.g. uncompetitive terms and conditions, mistakes, poor complaint handling, etc. A key point here is to distinguish between the key reasons and convenient excuses, and in the process obtain a degree of detail that allows the bank to take corrective action. This often requires the use of detailed research questionnaires. Copyright 2011 Oliver Wyman 7

8 2.5 Design and implement action plans Once the bank has developed its understanding of customer loyalty and retention, it is then in a position to positively influence these by designing and implementing specific action plans. These should be closely monitored to measure their impact, in terms of both effectiveness and value for money. We distinguish between four types of activity: 1. Prevention: this can cover a vast array of initiatives focused on improving customer loyalty, e.g. higher value offers, upgrades to key services, better complaint handling, increased share of transactions, raised real or psychological barriers, etc. Well designed loyalty schemes that reward target customer segments with prizes and preferential offers have proven extremely successful in other industries (e.g. airlines and supermarkets), serving not only as a mechanism to retain high value customers but also to deepen customer insight and relationships. 2. Proactive retention: implementation of a system of alerts that makes it possible to act on individual customers that exhibit a heightened risk of leaving the bank. Certain customer actions will be more predictive than others at identifying the risk of losing a customer to a competitor. For example, at a Spanish bank, the combination of a customer paying off their loan and reducing their deposit balance was shown to be twice as powerful as the combination of the loss of a salary mandate and a similar reduction in deposit balance. For banks that offer different channels for customer interaction it is critical that a single, multichannel view of the customer is developed so that valuable warning signals are not lost within channel silos. 3. Reactive retention: responding to customers that are cancelling products, typically through a specialist task force, by offering arguments to remain with the bank and pre-approved counter-offers based on the customer s value. In a recent survey we have noticed than 50% of interviewed banks could not provide key operational metrics for their retention units. One third used no segmentation in the retention unit and in other cases the retention process ended with a promise to the client rather than effective action. Leaders in this field use their retention units to significantly improve their understanding of customers reasons to leave and thus help prevent problems recurring upstream. 4. Win-back: marketing campaigns to recapture high value customers whose relationship has ended, or to recover specific product holdings. In the deposits space, for example, it is relatively easy to target previous customers who have transferred funds out to another institution once the initial offer has expired. 8 Copyright 2011 Oliver Wyman

9 2.6 Measure success, learn and iterate Finally, improving customer retention and loyalty demands a continuous process of learning and improvement. Day to day responsibility for customer loyalty and retention may be spread far and wide across the bank s operations, presenting a considerable logistical and analytical challenge to gather and interpret the available information. However accountability for customer loyalty and retention should be clearly assigned to a single team to ensure that it receives appropriate focus, best practice is shared across the organization and a coordinated approach is achieved. Exhibit 5: Areas for learning and continuous improvement Changes to the bank s value/positioning offer Attack the causes of desertion and low linkage Proactive actions Reactive actions Changes in systems for evaluation/ remuneration Multichannel integration Consideration Decision to leave Recovery with/without contacting bank Desertion winback Learning Specific team focused on retention Information support systems and measures used Best practice programmes: changing behaviours Changes in systems for evaluation/recommendation Multichannel integration Copyright 2011 Oliver Wyman 9

10 3. Conclusions Managing loyalty is highly complex and involves dealing with concepts that need to be aligned with wider strategic issues; the modelling of customer value and loyalty indicators; the creation of alert systems based on events and actionable causes; the design, implementation and measurement of action plans; and the integration of the model within a system of continuous learning and improvement. The expected benefits are significant: not only due to the consequent rise in customer numbers, but also from the resulting improvement in overall economics by building more enduring and profitable customer relationships. 10 Copyright 2011 Oliver Wyman

11 Customer loyalty and retention executive checklist The following 10 point checklist and associated challenge questions have been designed to help executives navigate the issues discussed in this paper and benchmark their customer loyalty and retention capabilities. I. Quantify the problem how do you currently measure customer loyalty and value? II. Segment and analyse current trends how dynamic is customer loyalty at your organisation? III. Identify the true factors that drive loyalty does conventional wisdom apply to your customers? IV. Design an alert system what are the leading indicators that can predict the loss of a customer? V. Determine the root causes of desertion that are actionable what counter measures are within your control? VI. Enhance loyalty through prevention what initiatives will increase the loyalty of your high value customers? VII. Streamline multichannel processes does each channel contribute to a single customer view of retention? VIII. Benchmark your retention unit do you retain profitable business and provide upstream feedback? IX. Run win-back campaigns do you market specifically to prior customers with tempting offers to return? X. Measure success, learn and iterate who is accountable for improving customer loyalty and retention performance?

12 Oliver Wyman is a leading global management consulting firm that combines deep industry knowledge with specialised expertise in strategy, operations, risk management, organisational transformation, and leadership development. For more information please contact the marketing department by at info-fs@oliverwyman.com or by phone at one of the following locations: EMEA NORTH AMERICA ASIA PACIFIC ABOUT THE AUTHOR Dieter Staib is a partner in Oliver Wyman s Retail & Business Banking practice. He is based in Madrid. His main areas of expertise are enhancing sales productivity through channel and customer information management. You can contact him at or by dieter.staib@oliverwyman.com Copyright 2011 Oliver Wyman. All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not a substitute for tailored professional advice on how a specific financial institution should execute its strategy. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisers. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. This report may not be sold without the written consent of Oliver Wyman.