Around the world, the pressure on banks remains high. Still plagued by the memories and repercussions of the financial crisis and recent public scandals, regulation is increasing, and agile new FinTech players are aggressively entering the world of retail financial services. In response, large retail banks are reshaping their operations and racing to modernise and adapt legacy systems to compete with these digital upstarts.
Banks born in the digital age are winning market share by basing their operating models on innovative IT platforms, which carry a fraction of the cost of “conventional” retail financial services. For example, Fidor Bank uses social media to overcome the cost and complexity of traditional banking while increasing customer trust through an open, online community. This bank has already built a base in Germany and Russia, and has just opened its doors for business in the UK. Other new challenges such as Atom, Mondo and Starling are also entering the market.
Investment in IT is essential, not only to drive efficiency and cut costs, but also to reach new customers as increased competition and technology change the nature of the sector. Recent research by Collinson Group echoes these findings, but raises an important question: are banks at risk of channelling their investment in the wrong direction?
Our study has uncovered a clear mismatch between what board members and senior management see as key priorities in terms of investment and focus in financial-services organisations. In the UK, nearly half of senior managers say that the top priority for the year ahead is to improve the customer experience, but this view is held by less than a third of the board. For many in the boardroom, discussions remain centred on margins, competition and growth targets.
The customer question
Without a doubt, customer loyalty discussions should be moved higher up the boardroom agenda. Consumers are driving the change in the financial-services industry, as their expectations of banking services evolve, and they demand more. A forward-thinking approach should place loyalty at the core of banking strategy, both for attracting new and retaining existing customers, whether through the branch network or via digital channels.
Customer loyalty has been based on rewards attached to accounts, yet even these benefits are under threat because of new regulation. Banks have traditionally funded account perks such as Air Miles and cashback through interchange fees levied on merchants. The European Union is now mandating that these fees are capped at 0.3 percent for credit cards and 0.2 percent for debit cards, a significant fall from the previous 2 percent average. Interchange is today worth about 20 percent of card revenue to banks, and four-fifths of this revenue stands to disappear over the next two years. This means banks need to think about how they demonstrate the value they offer to customers and how they compete with other non-traditional banking brands that offer a wider range of personal experiences and rewards.
The key, then, is for the financial-services industry to identify how they can deliver the same, or increased, level of loyalty to their customers while still protecting profits. There are two ways to do this: reduce the cost of the loyalty solution while maintaining its value, and securing additional revenue streams that minimise reduction in profit.
Firms can reduce the cost of delivering the loyalty programme by managing their own proprietary end-to-end solution with less reliance on third-party tipping, such as more expensive airline programmes. There is, however, the need to acknowledge that whilst a proprietary programme has financial advantages, it can also create a balance sheet issue with the liability of unredeemed rewards impeding investment.
Additional revenue streams can be secured by raising card fees beyond that of owning the card. These could be statement, annual percentage rate or foreign exchange fees, for instance. To avoid any potential customer dissatisfaction, this needs to come with tangible benefits such as lounge access, card assistance, insurance solutions and a better earning and redemption model.
Banks could also look into delivering relevant and personalised customer offers funded by merchants and partners, using the wealth of customer data and spend data. This requires sophisticated use of data and a robust CRM system, but has been shown to drive increased spend and traffic to merchants. Customers will vote with their feet if they feel they are not being recognised by banks for their loyalty. According to the latest Current Account Switching report, more than two million UK current account customers have used the Current Account Switch Service since its launch on September 16, 2013. They have no doubt been tempted by more targeted, differentiated bank account offers, which speak to raising consumer expectations of rewards and loyalty.
Within each investment choice a bank chooses to make, from new technology to streamlining services, customer needs should be prioritised, and effectively addressed.
Work harder for loyalty
Loyalty remains something that banks have to strive for. We recently researched the banking motivations of the affluent middle class, 4,400 of the top 10 to 15 percent of earners in Brazil, China, India, Italy, Singapore, the United Arab Emirates, USA and UK. When it comes to this highly desirable segment, nearly two-thirds expect greater recognition and rewards from banks for their loyalty. We found that those who feel loyal to a bank are 72 percent more likely to purchase a product from them in the future, and 70 percent would be prepared to recommend a banking brand to their friends and family. Furthermore, if a customer purchases additional products through their bank, over half are less willing to switch providers.
These insights show the potential for monetising existing customer relationships, and driving future business. This could take the form of tailored packaged accounts, offering additional value-added products and services from insurance and assistance, to airport lounge access or concierge. Enhancing packaged accounts with more choice on selected benefits is cited by consumers as more appealing than standard products largely available today. Banks have yet to capitalise on this opportunity to tailor these added value products, as shown by UK customers preferring to purchase directly from providers, and American and Singaporean customers opting to buy via their credit cards.
For the time being, banks need to do some bridge-building with customers. Our research shows that in the UK, 83 percent of retail-banking customers do not feel as though their bank knows or understands them, and less than a third believes that they receive a high level of personal service.
Driving customer devotion
Our research found that not being rewarded for loyalty is the biggest frustration for consumers, as cited by two-thirds of respondents globally, ahead of poor interest rates and charging unnecessary fees.
As it stands, banks across the world are missing out on the opportunity to create powerful advocates and attract repeat business from loyal customers. They need to understand what motivates their customers, and that means investing in data analytics to learn more about their needs and behaviours.
We found that people are driven by experiences, so offering a range of aspirational and lifestyle rewards will have a far greater impact than pure discounts or cashback. Access to exclusive events, destinations, restaurants, hotels and services are increasingly important for affluent middle-class consumers. Banks that provide these value propositions will engage with their customers on an emotional level, too, and achieve brand differentiation.
Strategies geared towards long-term customer goals, rather than short-term business ones, will have a greater impact on sustainable growth. For instance, a large proportion of affluent middle-class consumers are focused on saving for the future, and are unlikely to redeem points quickly, opting instead to save for the higher value rewards. This audience will be far more engaged if they feel banks are helping them achieve their longer-term goals—such as securing a mortgage, saving for their children or planning retirement.
Focusing on behaviour and attitudes, and offering more tailored, personal experiences and rewards, are key to winning customer hearts and wallets. Boardrooms should take note of this evolving and increasingly challenging market for retail-financial services.