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Converting to a Relationship: Banks Need to Tap Young Service Seekers to Add More Loyal Customers

New research shows large banks are paying price for scarcity of loyal customers.

Customers who feel they have a personal relationship with their bank are rare breeds for large banks, and that is translating into a significant impact on profitability, according to a study released at the BAI Retail Delivery Expo on Nov. 15. A new category of banking customers — service seekers — is ready and willing for a banking relationship, making the group a target audience for large banks, according to the study, "The Relationship Experience" from BAI, in conjunction with Accenture, SAP, NewGround, Unisys and ARGO Resource Data Corp.

By converting these young, brand-conscious service seekers to valuable relationship customers, banks can realize a significant boost in profitability. Bank customers who feel a strong tie to their bank bring a larger share of their pocketbook to their primary banks — 12 percent more deposits and 20 percent more consumer loan balances than the national average, the study found.

"Due to the accelerating pace of commoditization in the retail banking industry, 70 percent of customers have limited or no emotional connection with their bank. They simply want to receive retail banking products at the best possible price and at the greatest convenience with decent service; they want a mere commodity in other words," said Paul McAdam, senior managing director of research at BAI. "While large banks are doing well competing on the commodity end with mass-market, transactional customers, there needs to be more attention paid to the highly profitable, loyal customer segment that thrives on relationships."

Reducing Customer Sacrifice? To strengthen customer relationships, banks need to minimize "customer sacrifice," says McAdam. Customer sacrifice is a method developed by Strategic Horizons (Aurora, Ohio) that gauges the benefits that a customer desires from a company. Customer sacrifice enables an institution to discover the customer experiences that will convert merely satisfied customers into loyal relationship customers by assessing the gap between what a customer really wants and what he has to settle for today. The top reported customer sacrifices include: Being rewarded for duration and size of your accounts with the bank. Branch hours. The ability of branch staff to make rate/fee decisions. Decisions regarding accounts made locally.

Two of those areas of sacrifice—staff decision making and localized decisions—work in favor of community banks and credit unions, which often have decentralized banking structures and more autonomy. Larger banks have the advantage of offering a plethora of bank hours and locations and several have launched customer rewards programs within the past year, according to BAI. By identifying the areas of customer service, banks can define the areas of change that need to occur to move people from satisfied customers into relationship-seeking loyalists. Some of these will pose greater challenges, as banks grow larger from consolidation and transition from local to a mass-market perspective.

The Local Bank Prevails The research found that relationship-oriented customers display a strong preference for community banks or credit unions because of their local market presence and customer attentiveness.

"With additional focus on customer relationships and improving the banking experience, banks of any size can capture customers that want a 'relationship' and find significant returns," McAdam said. "But it involves knowing your specific customers' goals and shifting from a mass-market viewpoint to a customer experience perspective."

Only one-third of bank executives interviewed defined their strategy as marketing specific products to specific customers, meaning that the vast majority of banks tend to lump their customers together into generic product/service offering or market-based offering. And yet, more than half (53 percent) describe their business as "relationship-based." For large banks, the challenge will be creating a true relationship based on minimizing customer sacrifice, versus offering a generic mass-market model, according to the report. By differentiating to the customer level, banks will be better positioned to create more loyal customers.

The study surveyed more than 2,400 consumers and incorporated data from 450 bank executive interviews.

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