Time for banks to perform on customer experience?

Banks need to take a long, hard look at customer retention strategies, argues Ian Benn of Fidelity National Information Services.

Every year, industry analyst Gartner surveys bank executives to find out their strategy priorities for the next 12 months.

Unsurprisingly the Gartner Annual CIO Survey in 2007 found the top priority was competitiveness - in very large part, this means operating cost.

The second highest ranking strategic focus was new business development.

Like most customer service businesses, banks are great at managing the cost base to improve efficiencies, and they are increasingly imaginative in their drive for new business.

At first glance, this is no different to any other consumer service industry.

But wait: what about customer retention? Food retailers spend tens of millions on loyalty programmes.

Airlines are obsessive about building long-term relationships with their customers, while mail order businesses write routinely to those who have not placed an order in a set number of months.

Do banks really believe that all their customers are captives? According to Gartner, customer retention has been sliding down the priority list since 2005, so perhaps they do.

In developed markets, consumers expect to shop around for elements of their savings and loans requirements, especially medium-term savings plans and credit cards.

But switching current account is perceived as simply too much hassle.

In the UK, First Direct - part of HSBC and leader in the 2008 customer satisfaction survey recently completed by the BBC - launched a remarkably bold offer: GBP100 to switch to their current account and a further GBP100 if a customer should switch again after six months because they are not satisfied.

In any other market, we might expect to see the competing brands panicking as their customers stampede for the door.

While it is too early to measure the success of the campaign, the lack of comment in the industry suggests that even such a very generous offer is insufficient to cause a significant ripple.

The end of customer captivity? However, times may be changing.

Over the last three years in Western markets, most financially aware consumers have at least considered changing to a new credit card, tempted by new incentives or interest free offers.

In Ireland, at the end of last year, Halifax Bank was offering interest-free balance transfers and purchases for six months, plus euro100 of real money on top.

The problem for the banks is that the majority of people who have opened a new credit card account will have found the experience to be relatively straightforward and painless.

They may not have got the deal they thought they were getting, but they will have gained confidence in the process.

As a result, they may be thinking that switching current account would not be so hard after all.

Another problem is the apparent absence of a social contract in today's banking relationships.

There are exceptions, such as Handelsbanken, which proudly claims that the branch is the bank and where decision making is exceptionally devolved.

But for most, the drive for efficiency has depersonalised the relationship.

For customers of the majority of Tier 1 banks, there will have been a shift from friendly voice and from friendly team to neutral call centre in just a few years.

In comparison, the retail sector thinks differently.

Many years ago, Sam Walton introduced store greeters to the Wal-Mart customer experience.

Typically retired, these friendly people would welcome the shopper into the store and make sure they knew where to go if they needed any help.

Walton wanted to improve the customer experience for competitive advantage, while making sure that people did not walk out of the shop without buying things simply because they could not find them.

To Walton's surprise, the store greeters had a direct impact on the business in quite an unexpected way: theft fell by more than the cost of the greeter's salary almost immediately.

Not because these older people were a menacing presence that intimidated the potential shoplifter, but because nobody wanted to steal from someone who reminded them of a grandparent.

The greeter had effectively turned Wal-Mart from faceless corporation into everyday people.

As fraud and identity theft grow, more consumers will find themselves in disagreement with their bank.

The way in which such situations are handled is going to be a critical test of the relationship.

If this is through an unresponsive call centre that lacks empowerment, many will exit the experience with their loyalty seriously tested.

Economists are predicting a tough 2008 for most.

As money gets tight, consumers will look more closely at the costs of things that they previously took for granted, such as their regular coffee shop visits, their energy supplier - and their bank charges.

We are seeing a proliferation of one-product specialists geared towards simplifying finance.

ING Direct, one of the banking sector's great success stories has already taken a significant bite out of the European savings market.

In case this article comes across as a lone voice or a vendor sales pitch, it is worth considering the output of the BBC's February 2008 customer poll on attitudes to banks.

While the whole document makes for interesting reading, this was probably the most revealing statistic: What is the main reason you stay with your bank/building society? Happy with rates and products it offers 27.6 per cent.

Too complicated to switch banks 10.3 per cent.

Habit 7.2 per cent.

Do not believe will get a better service elsewhere 30.9 per cent.

Currently considering changing account provider 21.9 per cent.

Don't know 1.9 per cent.

So who is doing retention well? One example is Scottish Widows bank - a part of LloydsTSB - which realised that by targeting the right niche, they could build a competitive edge and lasting loyalty.

They focus on professionals in medicine, law and other sectors where their deep understanding of the market and their sophisticated products meet a well-defined need.

For example, whereas most banks would see a 27 year old earning GBP35,000, Scottish Widows sees a junior doctor who is three years from earning GBP100,000.

Wealthy professionals are demanding, so to retain their customer base, Scottish Widows has had to build in high levels of service and unusually sophisticated products, such as multi-currency home loans.

Interestingly, Scottish Widows capitalised on LloydsTSB's excellent data centre, but chose to run FIS's Profile product (core banking system) in that infrastructure to have access to the Profile product factory - the clever part that enables the bank to get new products and functionality out very quickly.

Scottish Widows made another smart move by co-locating its IT people, FIS's people and its marketing staff on the same floor, enabling small and large decisions alike to be made quickly.

What next? Most of us are focused on the implications of the credit crunch today, and this means looking at cutting costs in everything we do.

At FIS, we are seeing - on a global scale - an increasing demand from banks for core system software provided on a hosted, rather than a licensed, basis.

Although this is relatively new in Europe, it has been standard practice in the US for many years.

However, this growing demand is clear evidence that our clients are thinking far more about capital expenditure, cash flow and IT costs than they may have been a year ago.

There is always a balance to be struck between efficiency and effectiveness, and it is dangerous to run projects that ignore the impact on customer retention.

A few years ago, we in the IT sector could justify projects on the basis of new revenue opportunities alone.

Today, projects have to save money and make new revenues.

For the next couple of years, projects are going to have to do both of those things, as well as improve the customer experience - at least for sizeable parts of the customer base.

This is a demanding requirement, but it is certainly not impossible.

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