Stop Investing In Customer Retention

Target Marketing reported recently that marketers plan to shift their 2007 media budgets from customer acquisition to customer retention, relative to what they did in 2006.

If this is true for bank marketers, it’s a troubling statistic for two reasons.

First of all, media spending isn’t going to impact banks’ retention rates one single iota. Many banks report 15% to 20% annual attrition among their deposit accounts. Yet the percentage of consumers who intend to switch banks, by closing out accounts, is in the low single digits (Source: Forrester Research). The reasons for this discrepancy aren’t surprising: People move, get married, get new jobs — and, oh yeah, banks screw up from time to time. No amount of media spend is going to fix that.

But there’s another reason. When marketers say they’re refocusing on retention, I think what they’re really alluding to is cross-selling existing customers. But many of these efforts are doomed to fail as well.

Many bank marketers cite research from the BAI published that showed that bank customers were most likely to purchase additional products with their bank within six months of opening their initial account. If that’s true, then trying to sell more products to the vast majority of customers who have more than a year of tenure with the bank is destined to produce a disappointing ROI.

So what should marketers do?

Invest in customer engagement.

Many marketers consider engagement to be a buzzword. But engagement is a valid concept, if you use the term to describe the extent to which your customers interact with you in meaningful, emotional ways. Not just by checking their balances every day, but by relying on you for advice and guidance on how to manage their financial lives and make smart financial decisions.

The payoff is in increased purchase intention. Using market research data, I found that customers who are engaged with their bank are twice as likely to purchase more products from their bank in the near future than customers who aren’t engaged (click here to see how I defined engagement).


While the ROI may not be immediate, an investment in engagement is better than an investment in retention. The key to future profitability isn’t in simply keeping customers — it’s from deepening their relationships. And engagement is a necessary pre-condition for that to happen.

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The Economics Of Online Banking

Colin and Jim at Bankwatch and NetBanker recently commented on Forrester’s new online banking projections. Personally, I don’t care how many people bank online — I care what impact online banking has on a bank’s bottom line.

So I thought I’d share with you the results of an analysis I did using Forrester’s consumer research data. (Note: As a Forrester client, I have access to their data, but can’t cite specific numbers here).

What I discovered is that banking customers still:

  • Prefer human channels. While consumers prefer electronic channels (e.g., Web, IVR, and ATM) for account transactions like checking account balances and transferring funds between accounts, they overwhelmingly prefer human channels for service transactions like problem resolution, fee disputes, and address changes. This is true even among younger consumers who are more likely to use and prefer electronic channels.
  • Tend to use one channel. Although many different channels get used, across a range of common interactions, more than seven of ten consumers used only one channel. And, in general, the older the consumer, the more likely he or she is to use just one channel per type of transaction.

But compared to other consumers with online access, online bankers are:

  • Less branch-centric. Not surprisingly, online bankers are more likely to turn to the Web for the range of account activities. And although they still prefer human channels for service interactions, online bankers are more likely to use the phone for help, rather than going into a branch.
  • More multi-channel. Across a range of activities, online bankers were more likely to use multiple channels, particularly for checking balances, transferring funds, and getting help with account problems.

What’s critical here is that these tendencies hold true for each generation. This suggests that adopting online banking changes a customer’s channel behavior, regardless of age. [That doesn’t seem far-fetched, but it is debatable]. And so I set out to answer:

What impact would an increase in online banking adoption have on a bank’s cost structure if new online bankers had the same channel activity and preferences as today’s online bankers?

To answer that, I made some assumptions regarding:

  • Adoption. For the purpose of the analysis, I assumed a bank had about 1.5 million customers, 67% of whom are online (access to the Internet, that is). I assumed that these customers mirrored the overall online population in terms of age distribution and, by generation, the percent that bank online. I assumed that 10% of the non-online bankers in each generation would become online bankers.
  • Channel costs. I assumed the following channel costs per transaction: $6 in the branch, $3 for the call center and mail, $1.25 for IVR, $1.10 for ATM, and $0.25 for Web transactions (I didn’t pull these out of the air — a bank shared this with me a few years ago). I ignored the costs to build new online functionality and any costs that would be incurred to provide technical support for new online banking customers.
  • Transaction volume. I assumed annual transaction volume of 24 account balance inquiries, 12 funds transfers, 4 general account problems, 1 fee dispute, and 1/2 of an address change.
  • Transaction migration. For each of the activities, I assumed that new online bankers would shift their channel activity to mirror the channel behavior of current online banking customers.

The bottom line: Based on these assumptions, a 10% increase in online banking adoption could reduce support costs by about $4 million, or about $70 per new online banking customer.

Interestingly, potential cost reductions don’t occur equally across all channels or activities. The model forecasts:

  • Significant branch cost reduction. Reduced branch activity accounts for 73% of the potential cost reduction. The lion’s share of that impact comes from the decrease in balance checking, funds transfers, and address changes that come out of the branches.
  • Lower call volume — but not for all activities. Similar to the branches, a shift in account balance inquiries, funds transfers, and address changes from the call center to the Web help bring costs down. But for activities like problem resolution and fee disputes, call center costs actually rise because some new online bankers will shift their activity from branches to the call center.

What does it mean?

Who banks online is more important than how many people bank online.
A bank’s ability to migrate their older customers (i.e., over 40) will have a greater impact on short-term cost reduction than sitting around waiting for the wired youth — who won’t need to be persuaded to bank online — to open bank accounts.

The ROI has to be realized. I recently took Forrester’s Charlene Li to task for her ROI of blogging projections, because, as I argued, unless firms made staffing reductions or eliminated certain market research expenditures, they wouldn’t actually see the ROI of blogging. Same concept applies here. If banks continue to build and staff branches, the cost reduction potential of online banking will never hit the bottom line.

If you email me at, I’ll send you the spreadsheet I used to do the analysis. But you have to include your name, company, and title, and your email has to come from your business — not personal — account. In other words, no Yahoo, Gmail, AOL, MSN, etc. accounts.

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Loyalty Programs’ Impact On Online Sales — Part 2

John Dawson commented on the last post, wondering if the greater online sales activity on the part of loyalty program members was due more to their underlying demographics than to their program membership.

While more affluent consumers are more active online, even within income bands, loyalty members are more likely to have shopped online this past holiday season than non-loyalty program members.


So why would this be the case? My theory:

1) Loyalty members are more engaged with the firms whose loyalty programs they’re enrolled in. And as a result, they interact with those firms more often, and in more channels.

2) Firms right-channel their loyalty members’ behavior. Through frequent communications, retailers with reward programs communicate more often with program members, call attention to online capabilities, and steer program members online.

(And btw, 1 to 1 magazine’s claim that right channeling “got its start through the thinking of Scott Neslin, a Dartmouth professor” is wrong — Cathy Graeber and I first wrote about right-channeling in 2002).

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You Should Only Hope For Frequent Contact With Your Customers

As part of a special section on “Building A Better Customer Experience,” American Banker re-published an article (pw req’d) yesterday that reported the extent to which consumers viewed financial firms as acting in the customer’s best interest (in contrast to acting in the interests of its own bottom line). A quote from the managing director of a New York-based consulting firm, explaining why banks scored lower than other types of FIs, caught my eye:

Most people interact with their banks more often than they do with an insurer or a brokerage, so there is more opportunity for error. People have more frequent contact and more types of contact with their bank, so things like hours and fees seem onerous.”

My take: Frequent contact with customers is a blessing, not a curse.

A few years ago, I was speaking at a conference about the impact of online banking on customer loyalty, and I presented the results of a study that Bank of America did that showed that — all else being equal (e.g, demographics, tenure with the bank, starting balances) — over time, online bill pay customers grew balances and number of products owned faster than other customers.

I wondered out loud why that would be — after all, what was it about paying bills online that made someone more loyal to his or her bank?

I found that there are (at least) two possible answers. The first has to do with consumers’ motivations and expectations. For some consumers, the strength of the relationship they have with their bank is predominantly driven by factors relating to convenience. As a result, the convenience that they experience by paying bills online strengthens their emotional connection to their bank.

But the second explanation — the one most relevant to this post — came from someone sitting in on my presentation that day. Neal Burns, a University of Texas at Austin professor of advertising, told me that according to research he’s done, “repeated, positive interactions with a brand strengthen a customer’s connection to that brand.”

Insurers get few chances to create that positive impression — but when they do, they’re usually good opportunities, since insurance claims are typically high emotion interactions. Brokerages — particularly discount brokerages — may get that chance even less frequently, especially if they don’t have an advisory relationship with the customer.

Banks should be thankful for the frequency of contact they have with their customers. That their scores in the survey are lower than other FIs isn’t because of “opportunity for error”. It’s better attributed to:

  • Organizational conflict. The product-centric nature of most banks creates conflicting goals and incentives that make it difficult for those firms to always act in a customer’s best interest. Can we really expect a mortgage specialist to tell a checking account customer that he might get a better deal on a loan by going across the street?
  • A focus on the wrong experiences. I don’t mean to downplay the importance of customer service interactions, but I believe that the scores reported in American Banker reflect the dissatisfaction and missed expectations that consumers have with their sales experiences. It’s in these interactions where they receive product recommendations that they perceive to be best for the bank and not for them, and where their expectations of what it’s like to do business with the bank are established. Expectations that, in some cases, are not lived up to.

Banks that build trust with their customers earn forgiveness when (and if) they do make a mistake. Having the opportunity to build that trust through frequent interactions is a bank’s advantage — not handicap.

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The Stories Loyal Customers Tell

Becky Carroll’s post on Stories and the Personal Touch reminded me of the stories I’ve heard from loyal financial services customers:

#1: A man in his late-50s, when asked by his bank in a focus group interview
why he was a loyal customer, hemmed and hawed for a few moments before saying “it’s because of Jenny, the branch manager where I bank.” When asked what made Jenny so special, he replied, “I don’t know. But one time I came into the branch to make a deposit, and the pen at the counter was out of ink. Although Jenny had a customer in with her, she somehow knew that pen was out of ink, and came out with a batch of new pens. That’s Jenny for you.”

#2: A magazine reporter and her partner were trying to adopt a child, and had
received word from the adoption agency that a child was available for adoption. But they needed a short term loan in order to make the trip to China to pick up the baby. According to the reporter, her bank “bent over backwards to approve the loan and get her the money in 24 hours” and for that she would “never leave them.”

#3: An IT executive traces his loyalty to USAA back to a single phone call. He called the firm to cancel a credit card and insurance policy. The rep said “I hope I’m not overstepping my boundaries, but we’ve found that many customer often cancel products because of events that aren’t related to USAA like a divorce or other family matter. We’ve set up a special department to help customers with these kinds of matters, is this something we might be able to help you with?” Since he was in the middle of the divorce, he took USAA up on that offer and has been a loyal customer since.

These may sound like unrelated stories, but there are lessons to be gleaned:

  • It takes more than just “great customer service”. I recently commented on the expectations that consumers have of the firms they do business with, one of them being “interpersonal excellence.” The man in story #1 is an example of this. It wasn’t any single interaction that drove his loyalty to the bank — it was the personal attention he received from Jenny and the connection he had with her.
  • Convenience isn’t enough. For banking customers, the added convenience of late branch hours or multiple ATM locations may be important, but the produce the stories that customers tell. In story #2, it was the bank’s operational excellence — its ability to turn the loan app around in 24 hours — than helped produce the story that woman tells.
  • It’s the high-emotion interactions that count the most. Examples #2 and #3 highlight the fact that stories are more likely to be formed during highly emotional situations — like a loan application or divorce. [Colin: This is why the JetBlue response to its Valentine’s Day travel disaster is so much more important than WordPress’ handling of down time. Sitting around an airport is much more stressful than waiting for your blog site to come up]. McKinsey calls these “moments-of-truth”. The challenge many banks — and other firms — have is recognizing these high-emotion interactions when they happen.

So what should Marketing do?

1) Strategerize its “test and learn” agenda.
That’s what USAA did. It posed the question: Why do customers leave? (NOT: What can we do to try and salvage a defection — when it’s probably too late to do so anyway)? Analytics execs should reexamine their group’s test and learn agenda to determine if they’re really asking the important strategic questions — or just refining their knowledge of campaign-level results. (This is a good example of Marketing focusing more on the “macro” and less on the “micro”).

2) Better integrate.
The advertising folks use the term “integrated marketing” to refer to ad campaigns that are coordinated (or the same) across channels. That’s all well and fine, but for many marketing departments the bigger challenge is internal integration — and one prime example is the need for integration between analytics and market research. The two groups need to work a whole lot closer to develop and test theories about customer behavior.

3) Redefine customer segments.
The stories that customers tell are clues into their expectations and the drivers of their satisfaction. Firms that continue to define customer segments by products owned or profitability miss these clues — clues that are more valuable to understanding how to sell and service customers than product propensity models that predict what to sell.

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ING Direct’s Emotional Connection With Customers

I have believed for some time now that financial services firms had to earn customer loyalty by making emotional connections (just like we do with our own personal relationships). In a Forrester report I wrote in September 2004, I said:

To earn the loyalty of customers, banks must do more than offer the best rates and fees — they need to connect emotionally with customers…by demonstrating customer advocacy in service and sales interactions.”

Since then, I’ve encountered many skeptical financial services execs. They don’t believe that a checking account can engender the same kind of emotional involvement that an iPod, a car, or clothing can.

They might be wrong. This morning, I came across this post from Justin, a 24-year old blogger from Asheville, NC:

I can’t believe it! I am so stoked it’s not even funny. It’s finally here!

I have been a loyal ING Direct customer since January 26th, 2005. I have never had a problem and have always enjoyed fair interest rates and great customer service. My local bank, on the other hand, has been nothing but problems. In fact I have been saying for weeks that I was going to have to switch banks because I just kept getting so upset every time I had to go to the local branch to fix this or fix that. Well not anymore! Introducing Electric Orange from ING Direct! A checking account from ING Direct!

I probably just opened (like 15 minutes ago) one of the first ING Direct checking accounts ever and I am thrilled! It comes with free online bill pay, a MasterCard Debit card, $250 overdraft protection (pay interest not fees), direct-deposit capability, and some “electric check” feature where I can send electronic checks to other people’s accounts via email. Weird but it sounds cool.

I have to tell you, over the past couple of months I have looked into quite a few online checking accounts and just never found anything that was convincing enough to uproot my setup here with my local bank. But just the fact that ING Direct is the name behind the checking account was reason enough this time. I’ll be getting my debit card within a week and I am going to be calling my payroll folks at work to setup my direct deposit tomorrow.

Is this just the ranting of a lone lunatic? Does his uncle work at ING Direct? Maybe. But maybe not. Marketers at the big banks have to take notice of this. Granted, the 24-year-old Justins of today don’t need sophisticated financial advice, 529 plans, or mortgages. But they will — and soon. In fact, most of today’s Gen Yers are already thinking about saving for retirement.

Justin’s post says a lot about who’s going to win these customers when they are in the market for more financial products — as well as saying a lot about the future of the branch.

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Why Wesabe Matters

I realize that I’m a little late in commenting on Wesabe, the money management community (?), which launched this past November, but…

It’s a shame that most banks will ignore this site. A former colleague of mine said “…interesting concept, but I don’t see how they make it into anything real.”

Reading about Wesabe reminded me of a report I wrote in December 2000 when I was at Forrester called “Personalizing Financial Services”, in which I said:

[Financial] firms will create a virtuous cycle of trust with customers through: 1) Preemptive customer service: Fulfilling service needs before customers ask for them; 2) Peer comparisons: Showing how customers how they compare with their peers; and 3) Contextualized advice: Explaining the differences between consumers, and offering advice that leads to a decision.”


Bank marketers that ignore Wesabe are missing the bigger picture. Account aggregation hasn’t taken off because its benefits are skewed toward the firm — not the customer. Yodlee promised firms the ability to target customers with relevant marketing messages. Tell me again how that benefits the customer?

Wesabe’s value proposition rebalances that. While social media proponents talk about the community-building aspects of this new movement, the Cranky in me says that it’s still about me. Letting my voice be heard, validating my opinion. Wesabe holds out the promise to help consumers validate their financial decisions based on what other people like them are doing (sounds a lot like what Amazon’s been doing for nearly 10 years, no?).

What’s sad is that established financial firms already have the data to do what Wesabe plans to do. But they don’t spend their money to build the capabilities to do it, because they don’t see the direct ROI. That’s simply short-sighted.

Here’s my prediction: If Wesabe is successful at signing up (and engaging) a critical mass of customers, it will make more money from selling its data than through subscription fees. WAIT — DON’T CLICK AWAY. I’m not talking about selling personal information about their customers. I’m talking about selling macro-level behavioral data back to the FIs and other firms.

If successful, Wesabe holds out the promise of becoming a virtual market research laboratory on consumer’s financial behavior. Understanding how consumers react to advice, changes in rates, special offers, etc.

Yodlee might have been able to do this, but it’s business model isn’t going in that direction. And neither are too many financial firms.

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One Loyalty Program’s Impact On A Bank’s Customer Relationships

The Aite Group recently published an excellent report on reward/loyalty programs in financial services. I can’t share their analysis and forecasts here, but they did give me permission to share the following chart, which shows the impact that Banco Popular’s loyalty program, Premia, had on the depth of their customer relationships.


[Note: The point of comparison with the plan’s 250k members wasn’t just all other customers, but a control group with demographics similar to the plan participants. In addition to the product growth, attrition among Premia members was 4% versus 11% for the control group and 13% for all customers]

A couple of thoughts on this:

  • In addition to the loyalty program, which rewarded members for their relationship across a range of products (not just credit or debit card), Banco Popular must be doing something else right — those are impressive cross-sell statistics even for the control group.
  • My bet is that plan members (and thus, the control group) skew towards younger adults, who are more likely to: 1) be in the market for credit cards and auto loans, and 2) consider doing business with one firm (us Crankys don’t like to put our eggs in one basket).
  • There’s another benefit here: The impact on employees. Richard Davis, of US Bank, said in Banking Strategies: “…[our] program has grown into a full suite of rewards including cash, miles, or merchandise. For the first time, the employees, en masse, said, “I like this program. I’m finally giving something to my customers that they may want.”

Results like these, coupled with the loyalty program efforts of high-profile firms like Citigroup and Bank of America, point to increased deployment of cross-product loyalty programs within financial services. Smart firms, though, won’t just rely on a loyalty program to build long-lasting relationships. They’ll use loyalty programs to:

  • Increase engagement. A loyalty program can be effective at creating economic loyalty. But to create emotional loyalty, customers need to be engaged with the bank in meaningful interactions. A loyalty program can be instrumental in creating these opportunities beyone simply balance checking and problem resolution.
  • Glean customer insights. Doing market research is expensive and potentially time-consuming. Highly engaged loyalty program members will prove to be a timely (and cheap) source of customer behavioral data as well as attitudinal data.
  • Compete. Large banks will face some internal organizational structure hurdles when trying to create cross-product reward programs. I expect to see a number of large and mid-sized credit unions to capitalize on this and aggressively pursue loyalty programs to compete with these firms in their marketplaces.
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What Smart Marketers Will Focus On In 2007

You didn’t think I was joking when I suggested that the Crankys were a new emerging consumer segment, did you? I wasn’t.

There are millions of relatively well-to-do, highly-educated Boomers (and some Seniors and Gen Xers) who are dissatisfied with many of the firms they interact with. Why? Because few firms understand what the Crankys really want.

The geeky consulting term for this unmet need is “operational excellence.”

This isn’t the same thing as convenience. Convenience is having a branch on every corner, or giving customers the ability to check their account balances online at 11pm while they’re wearing their bathrobes.

Operational excellence is something different. This story (from a participant in a market research study) will help describe the difference:

In addition to the checking account I have with my primary bank, I have a brokerage account with a few stocks (it’s not my primary brokerage account). About two months ago, I received a check for $50 from the bank, with no description of why.

When I called the bank to ask why they sent the check, I was told that some brokerage accounts were erroneously charged a $50 custodial fee.

After a brief pause, the rep said that he didn’t see the charge on my account. He concluded that the check was erroneously sent. He told me to rip it up and we’d be square. I said fine.

About a week later, I got a call from the account manager at my branch (the guy who calls every three months and asks “is everything all right?”). This time he asked me if I wanted to schedule an appointment with an investment advisor to discuss my portfolio allocation.

My immediate thought was “if you guys can’t keep $50 straight, how the hell are you going to keep $500,000 straight?” But I said “no, thanks” and hung up. Oh, by the way — I cashed the check anyway.”

Is this an example of poor product quality? No. Is it poor service quality? Not exactly. The Crankys are tired of doing business with firms that make mistakes, don’t have their act together, and aren’t coordinated across their LOBs — firms that take too much effort on the part of the customer to deal with.

You may be thinking: “OK, but this isn’t marketing’s problem.”

Yes it is. The customer experience IS marketing’s job. And when back office issues touch the customer, and diminish the customer experience, then smart marketers (who want to stay employed) will get involved.

To the Crankys, a superior customer experience isn’t about friendly, helpful people (they didn’t want to have to talk to them in the first place), or engaging, interactive ads. It’s about fast, seamless, problem-free, defect-free execution.

Commenting in Ad Age on the departure of some high-profile CMOs, Robert Passikoff, CEO of BrandKeys, said that “awareness does not mean profitability.” And in my opinion, improving profitability will require a renewed focus on process improvement — not only within marketing, but across the organization.

The implications: In 2007, smart marketers will spend less time and money on media-related branding efforts, and focus on process quality and integration.

Their rewards: 1) The Crankys’ business and loyalty; 2) A CEO who thinks that they’re focusing on the right things; and 3) Another year in the job.

A bonus reward: Improved brand rankings from customers that experience the operational effectiveness that many other firms lack.


Email’s Impact On Customer Loyalty


Relevance is the mantra for today’s email marketers. But it shouldn’t be the only consideration.

The emotional level of the interaction or transaction that an email message pertains to is an important factor in understanding how an email message will impact a customer’s relationship with a product, brand, or company.

Irrelevant email about things a customer doesn’t care about might not impact their loyalty. Example: The emails from credit card providers to “transfer my balances.” I don’t have any balances to transfer, so I don’t really care. Although some might find this annoying, it’s unlikely that few will actually stop using the card or go searching for another as a result.

But irrelevant emails in high-emotion situations can be detrimental. Example: A couple waiting to hear back from their bank about their short term loan application (for the money they need to travel to China to adopt a baby that’s waiting for them) gets an email from the bank with a home equity loan offer. Doesn’t exactly leave them feeling positive about the bank.

Relevant emails (especially pro-active, unexecpected ones) in high-emotion situations are the holy grail. The trick isn’t figuring out the email message — it’s recognizing that a customer is in a highly emotional situation.

How will you identify these situations? By developing a sense-and-respond marketing capability.