New customer churn is endemic to banks. Here’s how to reduce the number of customers who churn within the first two years.
Despite a sense of weakening bonds with customers, banking customer attrition rates are at historic lows in the neighborhood of 15 percent. The annual churn rates on new customers, however, still hover in the 20-25 percent range during the first year, half of which don’t make it past the first 90 days after opening their accounts.
The fundamentals of retail financial services, however, are based on a relationship model. In most instances, customer acquisition and maintenance costs are too high for fleeting, single-transaction purchases or for short-term dealings to be profitable. Loyalty, made tangible in the form of retention over time, is critical for profitability.
It is only through an ongoing relationship—minimally two years or longer – that customers begin to generate positive value for their bank. Premature churn destroys that value. While every company strives to retain customers, the upside-down economics of most banking relationships for the first two or so years makes retention an imperative in banking.
The Retention Hurdle
Estimates of acquisition costs for new retail banking customers vary widely, with most numbers at approximately $200—lower for customers acquired online, higher for those coaxed to walk into the branch. The typical customer, on the other hand, generates perhaps $150 in revenue each year. Given additional account maintenance costs, this means perhaps two years before the break-even mark. The math is inexorable: A substantial proportion–perhaps 40 percent or more—of new customers will churn before recovering costs and generate negative value for the bank. (Oh, and this does not include the cost of any cash or gift incentives offered to new customers or the cost of onboarding campaigns aimed at reducing the rate of churn.)
The large majority of customers that bail out within two years will bleed red on the balance sheet. In fact, as we know, many banking customers will never be profitable. The majority of retail banking customers, however, can be profitable over time. But customer profitability is heavily dependent on retention, the ability of the bank to keep customers over time, or at least the time it takes to recover the acquisition costs and operating expenses on basic, low value accounts.
Wireless carriers and cable companies face a similar economic model, but with two major differences: contracts (typically two years) and early termination fees. (Prepaid mobile users, BTW, which have no contracts or termination fees, historically churned at some three times the rate of traditional mobile accounts.) Lacking the luxury of contracts or termination penalties, with customers who have absolute total discretion regarding if/when/how they close their accounts and move elsewhere, banks need to actively work to reduce churn.
Despite industry consolidation, consumers typically have a wide variety of options for banking and related financial services, and those options continue to expand. Customer acquisition costs show no sign of declining, as the branch remains the primary magnet for new account openings. The most tangible expression of loyalty on the part of any customer faced with choices is that they continue to be a customer. All companies want loyal customers to fuel profits; banks, on the other hand, fundamentally need loyal customers to operate profitably.
What’s a Bank to Do?
Churn, especially new customer churn, is endemic to banks. With virtual information transparency, relentless competition, new market entrants and little friction in moving accounts, the problem isn’t going away. Perhaps the only saving grace, ironically, is that the continued general economic malaise has flattened out household mobility, one of the prime reasons for people switching banks.
While the problem isn’t going to be “solved,” banks need to manage the challenge to try to minimize churn, as plugging some of the leaks is better than plugging none. So, a few ideas.
• Identify, quantify, and prioritize. Lost customer surveys are fine. Far better, albeit more difficult and longer to implement, is the ongoing tracking of new customers as they progress through onboarding and throughout their first year. Measure which, where and when new customers defect, determine the relative importance of the why’s behind their departure and develop systematic plans for targeting points of vulnerability where the bank can have the greatest impact.
• Try to anticipate. Meld the survey data with customer transactional activity and third party data to build predictive models of those most vulnerable to churn and who might have the greatest potential lifetime value. Retention efforts spread equally across all new customers are inefficient. While customers don’t wear labels saying “defector,” modeling can score customers by their likelihood to defect. While such models always have errors, they provide an empirical criterion for targeting retention efforts to those most likely to churn. Overlay this with an estimate of potential lifetime value to further hone targeting to those most likely to defect that also have the greatest promise of profitability.
• Onboard. Yes, onboarding adds some costs, but it does generally have a net positive payoff, especially if synced with the suggestions above. Try to establish a relationship early, before the honeymoon wanes: Focus on cross-selling stickier services, such as bill paying, online banking and debit cards; then focus even more on activating the use of such services before the glue weakens; communicate regularly, but, more important, communicate meaningfully to the customer: Tailor messages, tone, and style to best resonate with the customer’s needs, wants, demos, generation, etc. Personalize the touch when you can: a follow up call from the associate who handled the account opening will be more meaningful (but more expensive) than a robocall or a call from an anonymous call center rep.
• Incent. Yes, acquisition is critical. But reducing churn almost always yields a more positive payoff. The focus should be on net growth in customers. Make that the incentive target.
The Customer Experience
Execution, as always, is the key: With the average branch seeing perhaps 350 customers every business day, ATMs handling 150 to 200 transactions daily and telephone CSRs each fielding 50 to 150 calls per day, banks have the opportunity to delight customers and reinforce relationships and they run the daily risk of underperforming and undermining relationships.
Relationships are shaped, either positively or negatively, by a spectrum of such customer experiences, ranging from transactional interactions at any of a number of customer touchpoints to more generalized experiences with the brand. These “touches,” moreover, happen in the trenches, the point of delivery. This is where the brand promise is made tangible.
But bear in mind that these experiences are functional, not end values. That is, customers engage with their bank because they need to do so to accomplish some other goal or life experience, whether it’s to get cash to spend, pay bills, save for a vacation, invest for retirement or any possible other countless reasons. They aren’t “going to the bank,” even virtually, for their enjoyment of “the banking experience.”
Loyalty isn’t something a bank “gets” from its customers. Loyalty is earned, and it is predicated upon an exchange of values between customer and bank. Laying the foundation for trusting, strong relationships is essential to reducing new customer churn, a key to customer profitability.