Northern Rock: The Death of Customer Loyalty


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There have been traumatic events here in UK over the last 7 days that will ultimately have a profound impact on all B2C companies. It concerned Northern Rock, a medium sized building society (savings and loan) that became a bank.

Northern Rock experienced a run, that is all its customers wanted to remove their savings at the same time. This has not happened in the UK for longer than anyone can remember. The cause was a market rumour in the wake of the sub-prime collapse in the US.

On Friday the press first sparked concern and then fanned the flames by filming long lines of concerned customers outside Northern Rock branches and publishing in national newspapers and broadcasting on prime time national news. Northern Rock, we were told by the FSA (regulator), is financially solid but is experiencing a minor ‘short term liquidity’ problem.

The Bank of England and the UK government stepped in but both fell short of guaranteeing the safety of customer savings. This only fuelled concern and the lines grew. The website had long since collapsed under the deluge of customers wanting to move their money. Their anger at not being able to get at their money online was reported on the news and the spiral was now out of control.

On Monday morning the Chancellor of the Exchequer (Finance Minister) stated on national radio that the government would only guarantee 80% of savings above £35,000 ($70,000). Share prices began to tumble as the panic started to spread to all banks and building societies. On Monday evening the government had to make an embarrassing U turn and guarantee that all customer savings would be protected, not just for Northern Rock but for all banks. The implications of this announcement are highly significant and will have long term ramifications.

There are many casualties in the affair. The Governor of the Bank of England is not expected to remain in his post. Gordon Brown’s government seriously misjudged the crisis and did ‘too little, too late’ to avert it. The FSA maintained that its regulatory processes had worked but it was clearly evident that these were not designed to protect bank customers. And confidence has been damaged in the UK banking system which is not only the envy of the world; it is one of the pillars of the global economy.

But the real casualty in all this is the explosion of the myth that customers are loyal. Take a

David Rance
David Rance, CEO of Round, is a former customer care director for a national telco. Round is a leader in capability management models and software tools that enable organizations to align at their chosen level of customer centricity.


  1. David

    This is a great example of how the behaviour of others can very easily impact our own behaviour. The rational request by Northern Rock for a lender of last resort facility from the UK Govt to maintain liquidity as the 3-month interbank lending market dried up, first led to an irrational but understandable decision to withdraw money by a minority of customers and ultimately, to widespread irrational exuberance as panicked customers started a run on the bank.

    It reminds me a lot of the decline and fall of Long Term Capital Management in 1998, albeit on a much smaller scale.

    The worst seems to be over for now. But the future for Northern Rock seems very unsure. In its weakened state, despite its solid collateral-backed asset book, it is likely to become a prime takeover target.

    It just shows how we are all connected in unexpected ways in these globalised times.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  2. A very compelling case David. Companies who think that they can depend on customer loyalty “come what may” are in for a nasty surprise when the worst happens. Another sad example is Odwalla Juice, a company on the west coast that had both strong brand and huge customer (and channel) loyalty. Odwalla’s brand promise of fresh juice with no additives or processing, not to mention what was then unique packaging and state of the art distribution was a fast horse that the company was riding to national expansion. When a fruit supplier violated their agreement and sent Odwalla apples that had been on the ground, a day’s production of juices was partially tainted with e-coli. Several children were ill and 2 died.

    The event hit the company at its core. To their credit their focus was on making it as right as they could rather, than on spin. They were forced to change their processing to include a flash pasteurization, but the damage was done. Today, Coca Cola owns them and they are an also ran brand in a universe of competitors.

    I do not know that any company can engineer processes and invest in loyalty building at the level needed to survive a cataclysmic event like Odwalla or Northern Rock. I suppose that Dell did- but not without impact. But Dell survived in part because they had a direct connection with customers to exploit. It seems to me that both Odwalla and Northern Rock faced their one perfect storm for losing credibility with customers, right or wrong. In fact, what I remember at the time was the number of people whose lives were impacted (customers, vendors, employees, stockholders, etc.) because a casual labor fruit picker was behind on his quota and broke the rules- causing a windstorm of fear and blame.

    I. Barry Goldberg
    Executive Coach/ Team Catalyst

  3. Barry

    I think the two examples are subtly different.

    Odwalla Jiuce, like Dell, Tylenol, Perrier and most of the car companies in the past, and Mattel today, face problems when unexpected low quality somewhere in their supply chain or design faults triggers a problem that has a direct impact on customers. In today’s connected world, with YouTube just a camera phone away, that means customers plus pretty much everybody else in the western world. But fixing each of these problems is within the power of the companies affected because they control the processes that caused them in the first place.

    In contrast, Northern Rock’s problems are an indirect consequence of its business model; it preferring to raise capital for retail lending from the commercial interbank lending market, rather than from retailer customer deposits. The problems with US mortgage-based assets that, thruogh the complex ramifications of the globalised market for asset based securities, that eventually triggered a run on Northern Rock was not within its direct control, indeed, not within any organisation’s dierect control.

    Northern Rock is a great example of the differenvce between retention and loyalty. Retention is a cognitively calculated behavioural state (I am retained because it make sense logically to me to be so), whereas loyalty, (for a lack of a better description late on a Sunday afternoon!), is an non-cognitively emotional state (I am loyal because I really like this company and what it stands for).

    It is interesting to note that Northern Rock is asking customers and non-customers in Newcastle, Gateshead and Tyneside (have to be geographically careful here) to open new deposit accounts in a direct appeal to the loyalty of its fiercely proud Geordie homeland. Now that’s real loyalty.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  4. The ultimate irony in the Northern Rock debacle is that they should be surprised by any lack of loyalty.

    The term “loyalty” has been slowly degraded over the last 10-15 years to the point where it is a hollow, negative image of what it used to be.

    “Loyalty” used to have overtones of “semper fi,” or “’til death do us part,” or “greater love hath no man than this.” When it was originally applied to customer relationships by Frederick Reichheld and Bain in the 80s, the term still carried with it these connotations. “Loyalty,” the way Reichheld used it, represented a fierce, emotional passion of connectiveness with a company, driven by an outstanding level of customer focus by the company. And back then, “customer focus” actually meant “customer focus for the sake of the customer,” not “customer focus for the sake of the producer.”

    Look at how those terms have become used now. A vulture is “customer-focused,” and it’s precisely that sense in which the word has come to be used. And “loyalty” has come to means simply repeat purchasing behavior–devoid of any emotional connection, and “induced” by such powerful emotional connectors as price and promotions.

    The result is beyond cynical. The very meaning of those words has been stripped and hollowed out, and, in an almost mocking way, turned into the very opposite.

    The ultimate irony is that any company might actually still believe that the result of this relentlessly self-serving, internally focused, cynical pandering should leave any vestige of connection with the customer. The customer figured out this game long ago; why in the world are financial institutions still deluding themselves about the power of the connection.

    Loyalty in the airline business, they say, lasts about 30 minutes–the time lag to the next flight. Loyalty in the financial services business is cheaper than that; loyalty looks likes a few free points to be redeemed for pretty worthless crap.

    What kind of a relationship do you think you can get for that kind of behavior?

    For all the important things in life, there’s still real connection and sincerity. For the remaining crap, there’s Mastercard and other “loyalty” programs.

  5. Charles

    I agree with you wholehertedly. We all know the difference between economics-based retention and trust-based loyalty.

    Similar to the SAAB story in your recent blog post, Veronica Liljander looked at retained vs. loyal customers in an automotive dealership. She found that only about 5% of the customers were loyal to the dealership in her (and your) definition and mostly because of a personal relationship with a member of the dealership’s staff.

    The challenge for many transaction-based businesses today is to develop the authenticity, trust and relationships to them that has long gone from the industrialised products & services which they generally provide.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager


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