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Customer Retention in Retail Banking Why Customers Leave and How to Keep Them: Customer Retention in Retail Banking Phil Jarymiszyn, Managing Partner Adam Isler, Client Services Director October, 2006 Industry: Banking Segment: Consumer, Small Business, Retail Pub. No. 2006004 Tags: Attrition, retention, loyalty, banking, Isler, Jarymiszyn, PNT Abstract With the rapid growth in deposits of the last several years beginning to taper off, banks are now competing for one another’s deposits, putting a premium on retaining customers relative to seeking new ones. Measuring customer retention in banks is more difficult than it might at first appear. It requires an evaluation not just of individual account retention but of the full customer relationship. Furthermore, a variety of data issues can distort the picture, significantly overstating the problem. Banks need to develop accurate customer retention and attrition measurements. Having done so, they need to be able to predict future attrition risks and put programs in place to alleviate them. Often overlooked, a reduction in the balances of retained customers is an important cause of customer “diminishment” and reduced profitability. Understanding the sources of customer attrition is equally important in crafting effective counter measures. While customer service improvements and loyalty programs can work, the largest segment of lost customers is comprised of customers whose financial services needs have changed without the bank having anticipated or even noticed it. Effective customer retention programs include both metrics and tactics, or programmatic, components that work together to measure, target and act on potential customer attrition. © PNT Marketing Services, 2006 page 2 of 16 Customer Retention in Banking For the last several years, banks have been capitalizing on high liquidity and low rates to attract profitable deposits and new customers. As interest rates have begun to rise, that liquidity has diminished and competition among banks to gather new deposits has grown more intense, particularly with the near-universal spread of “free-checking.” Banks are now competing aggressively for one another’s customers and have returned to the idea that retaining existing customers is at least as important as acquiring new ones. In most businesses keeping an existing customer happy is both easier and less expensive than acquiring new customers. Even the basic corner pizza store is a case in point as demonstrated by the seminal 1994 article in the Harvard Business Review by Heskett, et al., “Putting the Service-Profit Chain to Work,” which introduced the world to the lifetime value of a loyal pizza customer. When you consider that the average acquisition cost of a new bank customer is estimated to be between $350 and $3,500, according to the American Banker’s Association1, it’s apparent why holding on to each of those hard-won customers is so important for profitability in banking. If you’re concerned with maximizing your customer retention and minimizing attrition you are immediately faced with two important challenges that we’ll seek to address in this paper: 1. How do you measure attrition and retention? 2. What do you do about it? Why conduct a retention study of my customer base? Whereas retail and manufacturing businesses largely track the retention of their customers through repeat purchases, services firms, and particularly banks, have a far richer set of data to draw on when evaluating customer loyalty. Since bank customers make continuous use of their bank accounts, these on-going transactions provide detailed information on the use of specific bank products, services, and channels. The data also provides information on the “recency” and frequency of these transactions. A retention study pulls together all of the data available for each customer: accounts held, opened and closed; balances, revenues and fees; transaction volumes and types, transaction channels. Then an analysis is performed of these factors over time to determine if the customer is growing or shrinking their relationship with the bank. The individual customer results are further aggregated by customer segment or geography (or other important characteristics) to characterize customer retention across the bank. This provides critical insights into areas of strength and areas for concern. When is it most critical for banks to evaluate their retention/attrition situation? Large numbers of customers change relationships during the following situations over which banks have limited, if any, influence but which likely affect most of the customer base: general economic downturns periods of rapid changes in rates By contrast, there is tremendous value to having a tracking system in place during the following, bank-controlled events to ensure that there is not an unacceptable exodus of high-value customers. © PNT Marketing Services, 2006 page 3 of 16 Mergers Before the merger’s closing date, to focus retention efforts on key target segments to retain. Around the closing date: tracking tied to a retention-oriented communications program. Post-merger analysis provides an opportunity not merely to track outcomes, but to prepare for future mergers armed with a better understanding of at risk segments. Re-Pricings, Tracking during roll-out tied to both communications and retention De-Waivers sales programs. Also, identifying in advance those most impacted by planned changes to prepare pre-emptive efforts (for example, scripting a service conversation to help a customer select a more suitable account that is cheaper for them and more profitable for the bank). Branch Tracking during program tied to both communications and retention Closings sales programs. This can provide critical learning about “psycho- demographics” for future branch site selections and closings. Product Tracking during communication and conversion phases to support both Conversions communications and retention sales programs All of the situations just described are within the control of the bank and will place 100% of affected customers “in play.” By contrast, the changes in economic conditions cited earlier are not controllable by the bank and will not typically put more than 15% of the customer base into play so it’s clear how much greater the risks and opportunities are for the bank for the latter. The outcomes are more manageable because the schedule and logistics are under the control of the bank which can be proactive rather than merely reacting after the national (or local) economy has shifted. In our practice with large regional and national banks we can reduce attrition in target segments by 40% to 90%. For example, ─ We have seen merger attrition rates of 5%-7% reduced to 1%-3%. ─ We have seen attrition rates of 7%-10% fall to 1%-2% in repricing and “de-waivers” with appropriate programmatic action Four Key Customer Retention Issues The most critical point is that discovering a customer is defecting when he or she closes their account (or afterwards, when reviewing monthly account closing reports) is too late. Also, it’s not just about accounts closing. Over the course of a long relationship, most bank customers will open and close several accounts as their needs change. It’s important to understand the difference between changing needs and changing loyalty. We’ve seen the following four key points emerge time and time again in all our retention work with bank clients: It’s important not to mistake “account closings” for “attrition.” Attrition is not well Attrition is not measured in net closed accounts per month, but understood or in lost customers or households. Accuracy in defining attrition consistently defined will lead to more effective solutions. The most important loss is customers who keep their (low- Reduced balance) transaction accounts with the bank, but move their relationship depth is savings and investments to other financial institutions (brokers more serious than like Schwab for instance, or mutual fund managers like account attrition Fidelity). These look like retained customers, but the economic loss to the bank is severe. © PNT Marketing Services, 2006 page 4 of 16 Too many banks Up to 75% of account closings are driven by changed don’t know enough customer circumstances that have escaped the bank’s notice – about their not by dissatisfaction with specific service events or issues. customers Our work with clients shows that while total customer attrition Focus where you runs as high as 11 – 14%, the scope of controllable attrition is can have measurable typically in the range of 2 – 3% of all retail customer impact households. Making an effective impact on that small but very targeted group can have a huge net effect for the bank. 100 17 - 19% 11 - 14% 3.7 - 4.7% 2.4 - 3.1% ?% 95 90 85 80 75 70 % of Customer Households % Customer of 65 60 HH Attrition, HH Attrition, HH Attrition, HH Attrition, Impactable HH High range "Raw" "Clean" "Controllable" "Impactable" Attrition, Low range Profitable HHs Retained HHs The total size of the Figure 1: Different measures of customer attrition manageable attrition in volume terms is small, and implementation programs should be scaled and prioritized accordingly. When we analyze customer attrition we look at a number of measures and it is important to be sure everyone is speaking the same language when discussing the subject. As the chart makes clear, while the “raw” level of attrition may appear high (that is, relationships that appear to be “lost” before cleaning up various data anomalies), deeper study usually reveals a more nuanced picture. From the initial “raw” figures, subtract the “noise” (see Prime Suspects for Attrition Noise,” below) to get at the actual relationships lost. This will usually reduce the apparent scale of attrition from the high teens percent, to the low teens. Then look at how much of that “clean” attrition is from potentially “controllable” sources, driven by manageable causes Recognize that bank programs and actions can only impact a portion of the apparently controllable attrition Finally, remember that some customer attrition may not be worth overcoming.
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