U.K. Banks Are Failing To Keep It Personal

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Despite the banking industry’s consistent effort to improve customer loyalty, the level of trust that customers have in their banks is waning. Today the relationship between banks and customers is less intimate, creating less incentive for customers to remain loyal. If banks want to regain their customers’ trust—and, therefore, their loyalty and patronage—they need to reconsider how they interact with them.

The personal relationship that people used to enjoy with their bank manager has disappeared, as banks move their customers toward Internet banking and call centers. This has created a real trust vacuum.

In a recent survey conducted by ICM research, on behalf of Cincom, 1,000 individuals where asked to rank whose advice they trust the most: their bank manager; doctor; newsagent; or hairdresser. Only 9 percent of consumers said they trust their bank manager the most. More people trusted their hairdresser than their bank manager, with 12 percent stating they trust their hairdresser the most. This is concerning news for banks who consistently rate customer loyalty as one of their biggest aims.

I believe the results of this survey should act as a wake-up call to banks that customers are becoming increasingly distanced from them. Banks and insurance companies need enhanced ways to understand their customers, take into account their particularities and reward their existing loyal customers accordingly.

A key element to consider is Customer Lifetime Value (CLV), which focuses on the long-term potential value of customers. Until you identify and understand exactly how much combined profit a customer represents to a business, now and in the future, you can’t begin to know how much time, effort and expense you should invest to acquire that customer in the first place.


Life-stage


Whereas in the past a bank manager would know the “life-stage” of the vast majority of the bank’s customers by fostering individual relationships, it is now the CLV model that will allow banks to better understand their customers and rebuild trusting relationships.

In the banking sector, it can be usefully employed to reduce the risk involved in marketing programs and also to bring real benefits to the customers, in terms of value-adds, facilities and abilities, all the while improving customer loyalty and profit for the organization.

CLV involves the calculation of current and potential customer profitability. For example, any two accounts holding £25,000 are equally profitable, but a 25-year-old customer with £25,000 in a savings account has a higher CLV than a 75-year-old customer with the same amount; therefore, the potential for profit is much higher.

The majority of financial service providers do not have an accurate sense of customer value. Those banks that can identify current and potential customer profitability can better align marketing, sales, service resources and expenditure to optimise long-term customer value and ultimately add to organization profitability.

Credit Agricole, a Belgium financial institution, introduced CLV methods to segment its customers according to profitability, activity and life-stage receptiveness to a particular product. Previously, virtually 100 percent of the customer base had to be contacted with every offer. Now, Credit Agricole can contact just 10 percent of its customer base and still reach 60 percent of potential buyers. By selecting 20 percent of customers, the bank reaches 80 percent of potential buyers. Because this represents significant increases in efficiency and savings, it finally enabled the bank to increase its revenue by more than 15 percent with the same customers and significantly reduce expenditures and costs.

Without using CLV, banks encounter a number of problems that inhibit their profitability and minimize their ability to retain clients. These include: low or no profit-making customers; high turnover and low loyalty; low response rate to direct marketing; and difficulty in predicting ROI or allocating budget.

CLV is the key to helping financial services providers overcome these issues. By treating “bad” customers as good customers, because they have the potential to improve, the customer is stimulated into greater loyalty and profitability. For example, debt-carrying medical students will most likely become high-earning doctors with time; making a small loss in the short term will pay dividends if the customer remains loyal. People tend to stick with a few suppliers throughout their lives, but their needs change with the years— creating opportunities for cross-selling and up-selling.

Similarly, by predicting what customers will need and when, marketing can ensure that the organization’s product is front of mind when the customer is most receptive.

Although much talked about, CLV is seldom implemented in the financial services sector despite the tangible benefits it can bring. However, it has proved its value in other industries, and the financial sector mindset is now evolving to bring this topic to the forefront.

Trent Fulcher
Cincom
Trent Fulcher is senior management consultant at Cincom, a provider of business consultancy services. Fulcher has consulted for a number of financial services clients, including UBS Wealth Management, ASB Bank, Tuatara Foreign Exchange and Bank of New Zealand.

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