Winning Customer Advocacy in UK Retail Banking

Nearly every bank can recognise the importance of winning loyal customers, but most find it difficult to mobilise to achieve it.

Winning customer advocacy in UK retail banking

By Barney Hamilton, Matt Symonds and Elizabeth Hogbin Barney Hamilton is a partner in Bain & Company’s London office and a member of the firm’s Customer Strategy & Marketing practice. Matt Symonds is a partner in Bain’s London office and a member of the Financial Services practice. Elizabeth Hogbin is a manager in Bain’s London office.

Nearly every bank would be an enormous hassle with little to be gained. The best Anne could look forward can recognise the to would be taking a small measure of revenge importance of winning by telling others how poorly her bank had loyal customers, but treated her and going elsewhere for her new mortgage. most find it difficult to mobilise to achieve it. In the 21st-century world of 24/7, have-it- your-way customer convenience, sorry tales like Anne’s are played out day after day in Leaving town for an eagerly anticipated week- bank branches, call centres and ATMs across end getaway abroad, Anne, a longtime cus- the UK. Retail banks have long been more tomer of a leading high street bank, stopped preoccupied, appropriately, with countering by her local branch to make an ATM with- threats of fraud and satisfying regulators than drawal. When her card did not work, she went focusing on the damage that their me-too inside to report the problem. The service products, hidden fees and indifferent service representative could not immediately diagnose have done to undermine consumer trust. what had gone wrong, but suspecting fraud, They now face unprecedented customer unrest cancelled the customer’s debit card and, in at a time when regulatory scrutiny is ramp- the process, suspended her credit card as well. ing up under the aegis of the newly created Unable to rely on convenient plastic to pay Financial Conduct Authority (FCA). The FCA for her trip, Anne asked to buy euros, so she will have a delicate role to play erecting new would at least have cash. Sorry, the service customer safeguards while not throwing up rep replied. He explained that to purchase barriers that could hinder banks from deliv- the foreign currency Anne would have had to ering a better customer experience. call ahead to ensure that the branch had an The world of UK banking is also being rocked adequate supply on hand. by a feisty new crop of competitors. Some, Well, then, how about withdrawing cash from like Tesco, the supermarket chain, or Metro her current account? Surely, with £6,000 on Bank, a new bank patterned on the successful deposit and her account set up to be replen- model pioneered by Commerce Bank in the ished automatically with her monthly pay- US, come armed with the customer-friendly check that should be possible. Of course, techniques of modern retailing. Other nimble the rep answered, but no more than £200. newcomers are racing to compete for sales Bank policy! of banks or parts of banks, such as the upcom- ing sale of 600 branches by Lloyds Banking Ultimately forced to borrow from a compan- Group. Many of the new entrants are unen- ion to cover her travel costs, Anne spent her cumbered by the legacy infrastructure and holiday weekend fuming over how much she processes that burden the industry incumbents. would like to dump her unhelpful bank. But as she reflected on the horror stories her This combination of economic, regulatory friends had told her about their own banks, and competitive factors threatens to make UK she reluctantly recognised that switching retail banking a significantly less profitable

1 Winning customer advocacy in UK retail banking

business than it was pre-crisis. But it also and the big high street banks, in particular— opens up a new competitive “white space” for are a long way from being able to capitalise banks—both the big high street incumbents on the attractive economics of customer and the new entrants—to capture market share advocacy. To determine what sets banks that and lift profitability by rebuilding customer are earning customer loyalty apart from ones relationships. The implications for how retail that are not, Bain collaborated with Research banks compete are already disruptive and will Now, the online polling firm, to survey people be transformational. To seize this new oppor- best able to render a judgment—the banks’ tunity, leading banks will set themselves own customers. Research Now asked 9,064 apart from the competition by designing bank customers to rate on a scale of zero to products and services and delivering experi- 10 how likely they would be to recommend ences that provide real benefit to their cus- their principal bank to a friend or relative. To tomers. By doing so, they will be able to stand derive a measure of the strength of a bank’s out in a category where most customers think overall customer advocacy, we subtracted from their bank is nothing special. the percentage of its customers who gave top scores (nine or 10) the percentage of respon- In this environment, banks will need to focus dents who identified themselves as clear on converting customers from frustrated detrac- detractors (with ratings between zero and six). tors into loyal advocates. Bain & Company’s work with banks in markets around the world As the results in Figure 1 show, customers has consistently demonstrated the power of are largely unhappy with their banks, with customer advocacy. Loyal bank customers in fewer than one in three earning positive scores. the UK buy more products, maintain higher Indeed, each of the advocacy leaders—First balances and usage in the products they own, Direct, the Co-Operative Bank and Nationwide and cost less to serve. They also recommend Building Society—is a niche player, operating their bank to their friends and colleagues, a customer-focused business model that is becoming, in effect, a highly credible volun- strikingly different from the one traditional teer salesforce. Our analysis has found that banks are pursuing. Especially worrisome for customers who give their principal bank top incumbents, the most-profitable affluent cus- marks are worth 35 per cent more over a tomers with annual household incomes top- five-year period than those who are only luke- ping £100,000 gave higher scores to the win- warm about the treatment they receive and ners and lower scores to the laggards than fully 60 per cent more than detractors who less affluent respondents did (see Figure 2). give the lowest ratings. In other words, banks that invest in winning advocates can generate Where do the largest retail banks fall short? more attractive returns than rolling out an Our survey found that they are unable to design ambitious new marketing plan or adding offers or deliver experiences that delight their new branches. customers. Fully half of the respondents who self-identified as detractors told us there was Some incumbent banks and most new ones simply nothing at all special about their bank are already embracing the challenge—others (see Figure 3). The failure to give customers will be left behind. However, most UK banks— a reason to feel a modicum of enthusiasm

2 Winning customer advocacy in UK retail banking

Figure 1: Leading and lagging UK banks and finance companies

NPS® (June 2010)

The Winners The Rest 40% 33% 27% 20% 20

1% 0 Average 3% 6% 9% 11% 15% 20 17% 18% 18% 20% 21% 24% 28%

40 36% 40%

60 First Co Nation Direct Op wide

Note: Average lines represent a straight average of relevant banks and consumer finance companies where N>30; Net Promoter® and NPS® are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc. Source: Bain/Research Now UK Net Promoter Research, June 2010, N=9,064 responses

Figure 2: Loyalty leaders earn higher scores from affluent customers

NPS (2010) 60%

40 Higher income Lower income

Note: High income is £100K+ per household per year, Low income is <£100K per household per year. Amex high income sample is small (N=29) and therefore potentially unrepresentative Source: Bain/Research Now UK Net Promoter Research, June 2010, N=3,370

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Figure 3: Detractors find UK banks “nothing special”

Percentage of comments

100% Don’t make recommendations

“Nothing special”

Personal brand relationship

40 Product/Price

Service

0 Detractors

Note: N=6,046; Responses weighted by profit pool Source: Bain Financial Services practice

for what is fundamentally a relationship busi- petitive “white space”, inviting competitors to ness overshadowed all other reasons respon- pick off prized customers eager to defect for dents cited for giving their bank low marks, a better deal. including product quality and price. Certainly the big-bank laggards are burdened Banks are not alone in struggling to deliver by more challenges than are faced by adroit superior customer experiences. Our research competitors like First Direct, Co-Op Bank indicates that just one company in eight gets and Nationwide with their far simpler busi- it right, despite the obvious business case for ness models. Our survey reveals that customer delighting customers. But that shouldn’t give advocacy is won or lost based on how banks bankers comfort that the implications of deliver a few critical factors. Overwhelmingly, mediocrity are anything less than profound. customers told us that outstanding and con- It condemns organisations that cannot rise sistent service is the quality they most value. above it to being mere commodity providers, With nearly half of all respondents willing sapping them of the ability to command to make recommendations citing it as their premium prices from customers unwilling to most important reason for giving a top score, pay more because they perceive they are not service showed up three times as often as the getting precisely what they need and want. It bank’s brand and twice as frequently as price demoralises customer-facing frontline employ- and product. Among detractors, poor service ees, reinforcing a vicious cycle of a disengaged along with deficient products and high prices workforce further alienating a disconnected were root causes of their dissatisfaction. client base. Finally, it opens up a large com-

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Nearly every banker can recognise the impor- customers’ begrudging endurance of the ill tance of winning customer advocacy, of course, treatment they receive with “loyalty”. They but their banks find it difficult to mobilise to will need to earn their loyalty—by offering achieve it. A Bain survey that asked senior consistently outstanding service to capture a executives whether their company delivered larger share of wallet. They will also need to a superior customer experience revealed that make switching a more convenient option in 80 per cent believed they did. But when we order to poach their competitors’ “hostages”. asked their customers the same question, just 8 per cent agreed. A second reason why banks fail to make delighting their customers the priority it Digging deeper, we found that the “believers” ought to be is that they are unable to isolate— fail to measure up to the “achievers” across or correctly put a value upon—the near- and several critical dimensions. First, they either longer-term benefits they create through their lack reliable metrics that help them under- efforts to build advocacy. What bank has not stand where they stand with their customers launched an initiative to spur customer-led or they misread what customers are actually growth by instituting a loyalty program or by telling them. For example, companies are often recognising frontline employees who project lulled into a sense of overconfidence by high a “friendlier” image only to have those efforts scores from customers who say they are “sat- give way once senior management is dis- isfied” or “very satisfied”. Yet, Bain’s cross- tracted in the next round of cost-cutting? industry analysis has found that as many as The patience needed to define and deliver a 80 per cent of these self-proclaimed satis- desirable customer experience is sacrificed fied customers end up defecting to another to expediency. company or remaining with their current company but taking their most profitable More insidiously, banks find it difficult to business elsewhere. wean themselves off “bad profits” generated by luring customers with “free” services, then In UK banking, where the barriers to switch- hitting them with penalties, fees and other ing are high, unhappy customers end up as charges for a wide variety of account trans- disgruntled “hostages”. Their fear of missing gressions. They let their drive to hit short- a mortgage payment while transitioning to term profitability goals overwhelm longer- another bank, for example, may lead them to term efforts to build advocacy. retain their current account with their principal bank. But they are unwilling to buy Finally, instead of taking an integrated view additional products and services and typically of how to strengthen the customer experience, do not hold high balances or exhibit other their initiatives tend to be separated into profitable behaviour. Banks with customers functional silos that render them ineffective like these not only miss out on profitable or, worse, work at cross-purposes. For example, cross-selling opportunities. Increasingly, attempts by many banks to strengthen their competitors are wooing them with “guaran- relationships with affluent clients typically teed, hassle-free” switching services. Incumbent overpromise and underdeliver. banks no longer have the luxury of confusing

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The process of transforming a retail bank to Products that deliver real value Banking has achieve superior customer advocacy starts by seen plenty of defining the base case for change, articulating Banking has seen plenty of product innova- tion over the years—much of it working to product inno- a vision of what the destination looks like and the disadvantage of bank customers, for exam- vation—much drawing a road map to reach it. To build momentum for change, an organisation needs ple, “free” current accounts and “teaser” intro- of it working to align its operating cadence to what its ductory credit card and savings rates. Banks to the disad- customers confront on a daily basis. In our that aim to win customer advocacy turn that vantage of experience, the most effective way to do this self-serving approach on its head with prod- bank customers. is by gathering direct customer feedback at ucts that are straightforward, transparent frontline contact points, identifying the highest- and predictable. priority sources of pain and opportunities to Nationwide is one loyalty leader that is reap- delight and taking actions that yield high- ing benefits by bringing customer-friendly return quick wins. Leading banks and other products to market. The bank describes its customer-focused companies are putting their goal to offer “a broad range of great value… frontline in direct touch with customers financial products, while charging a little as using a closed-loop feedback process that possible for day-to-day services”, and it empow- enables employees to listen and learn directly ers frontline employees to waive a customer’s from the customers they serve. Direct cus- fees at their own discretion. Its distinctive tomer feedback also lets frontline employees credit card does not charge users exchange “hear the applause” when they go above rate commissions when they use the card and beyond. when traveling in Europe, winning praise Banks can draw inspiration from successful among more-affluent target customers. new approaches adopted both by their financial services rivals and by pioneers in other indus- Brands that live up to their promise tries, such as retailing. They should also Banks create dissonance and undermine their look within their own organisation to uncover credibility with customers when their com- hidden customer assets, undervalued business munications, advertising and marketing are platforms and underutilised capabilities they at odds with how they run their businesses. can mine for new sources of growth. Brands that are built on a foundation of cus- Where will the journey to the customer-centred tomer trust, in contrast, communicate that bank of the future take UK banks? Short the bank’s values are aligned with its cus- answer: into territory far from where they tomers’ and convey what the bank is doing stand today and following a trail that is already to further them. being blazed by innovative competitors. Efforts Co-Op Bank, the full-service community bank, to construct a positive and distinctive retail has built affinity with its customers around banking proposition need to address all ele- its branding as an “ethical bank”. An indus- ments that create advocacy—product, brand try innovator, Co-Op was one of the first UK and customer experience. Let’s examine each banks to offer comprehensive online service in turn.

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and was a pioneer in 24-hour telephone require First Direct to offer premium rates banking. Yet, it hews close to its century-old on its savings products, further increasing Customers are tradition of building durable relationships its bottom line. willing to sacri- with old-fashioned personal service. Co-Op’s fice a better But zero-defect execution is not the only projection of its ethical brand image resonates deal provided with customers. “They are an ethical financial criterion by which customers evaluate the they are treated provider…different from any of the other interactions they have with their banks. The banks”, said a savings account customer. “The emotional reaction their experiences elicit with respect and only high street bank with an ethical policy can be every bit as important as their rational genuine caring. and one that they abide by!” echoed a mort- assessment. Indeed, Bain has found that gage customer. customers are willing to put up with a fair amount of inconvenience or sacrifice a better Among the big banks, NatWest Bank, part deal, provided they are treated with respect of the Royal Bank of Scotland Group, has and genuine caring. launched a campaign, called “helpful banking”, to align its brand image with its promise For example, Metro Bank, a high street new- of superior service delivery. Through documen- comer, is bringing mould-breaking empathic tary-style advertisements that show NatWest change to the customer experience it delivers. staff consulting with clients, the bank empha- Applying practices that made its American sises the one-on-one relationship it aims to cousin, Commerce Bank, a loyalty leader in build with customers. The marketing campaign US retail banking, Metro Bank overinvests is NatWest’s down-payment on its renewed, in staff recruitment and training and adds long-term commitment to differentiate itself customer-winning amenities to its branches. from the competition by delivering expert For instance, each Metro outlet features a personal financial advice. coin machine, free pens and even bowls of water for customers’ dogs. Under a policy the

Customer experiences that delight bank calls “one to say yes, two to say no”, every frontline employee is empowered to Opportunities to create a promoter or detractor act on his or her own initiative to help cus- accumulate transaction by transaction—at tomers. Metro is confident that these high- teller windows, on the website, through call impact customer-focused features will fuel centres or via ATMs—over hundreds of inter- its UK growth as they did in the US, where actions customers have with their banks. any operating cost disadvantage was more First Direct, the online bank, focuses on than offset by a 75 basis point lower cost of delivering 24-hour convenience through its funding. With several branches now up and website and phone channels with service and running in London, Metro aims to grow organ- a community focus that emulates a local ically to 200 stores and capture 10 per cent building society. In the Bain survey, 79 per of London deposits by 2020. cent of First Direct’s customers cited outstanding service as the principal reason why Barclays Bank is putting the “shock and awe” they are promoters. The reputation it has advantages of scale to work in a new initiative established with its core customers does not to wow customers. Last summer, the multi-

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national giant announced it would spend competition by breaking down barriers that £1 billion to boost customer service across its customers perceive in contemplating switch- retail network. It is upgrading its branch ing banks. “We are going to act unilaterally— network and investing heavily in new tech- whether the rest of the sector follows or not…” nology to support mobile banking, among Lloyds’ CEO said. other features that Barclays hopes will rein- force customers’ perception of the bank’s At this critical juncture for the UK financial service leadership. services sector, the pressure for banks to change will only intensify. Many are taking While no mainstream bank has yet to break action, but the effort requires laser-like focus away from the pack by assembling all of the on what matters most to customers and a elements needed to transform the experience sustained commitment reaching from the it offers customers, some are beginning to very top of the organisation to frontline employ- embrace changes calculated to earn advocacy. ees. For those institutions that embrace the Targeting affluent customers, for example, challenge, the race towards creating a cus- HSBC has redesigned its “Premier” and tomer-centred bank will be an exhilarating, “Advance” accounts to forge personalised profitable voyage. For laggards that fail to win global relationships. Recognising that cus- customer advocacy, however, the journey will tomers in this high-value segment combine be a painful forced march, as they steadily lose personal and business banking needs on an customers and profits to fleeter rivals. international basis, HSBC is capitalising on its worldwide reach by providing global travel assistance and enabling account holders to transfer funds cost-free between HSBC accounts. To guard against service fragmen- tation that can undermine customer trust, the bank has built a globally integrated account management platform to provide a uniformly high-quality customer experience across channels and geographies.

Lloyds Banking Group, too, is launching a major drive to differentiate itself from the competition using a customer advocacy approach. Last December, Lloyds’ chief exec- utive announced the bank would take the lead in 2011 to bring greater transparency to the bank’s financial products. The bank aims to make it easier for customers to track rates paid on their checking and deposit account statements. Lloyds also intends to address regulators’ complaints that banks supress

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