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Loyalty the secret weapon for incumbents taking on challenger banks

The FinTech revolution is well and truly underway, and nowhere is this being felt more in Europe than right here in London. It’s been an incredibly busy few months over the summer as challenger banks set their sights on incumbents, and agile new start-ups create single-service solutions that further chip away at banks’ traditional revenue streams.

Atom gained a banking licence in July and is working to build a bank that operates entirely on your smartphone. Just think, all those operating costs associated with branches – gone. Mondo is also attracting big investment and will target current accounts and basic savings initially. Fidor, an online only bank already a success in Germany with over a hundred thousand customers has now arrived in the UK, focused on those accustomed to doing everything on social media. Banks need to be thinking very carefully about the customer experience, and that means placing greater impetus on technology and digital channels.

It’s clear that banks are being attacked head on, and that’s before we consider companies like Transferwise going after foreign exchange fees, and retail behemoth Amazon making in-roads into small business lending. But traditional banks have something that all these new entrants will need to develop, and that’s trust and loyalty.

Even with the financial crisis and resulting banking scandals like Libor, the majority of customers still stick with the bank they have been with for years. One could make the case that people are apathetic, but the truth is that traditional banks are aware of their position and are making moves to directly address customer concerns.

Customer loyalty is something that should be moved higher up the boardroom agenda. Consumers are now more aware and willing to consider alternative options. Armed with these new expectations, banks should place loyalty at the core of their banking strategy. And this should be more than just for attracting new customers, but instead a concerted effort to drive customer devotion with existing customers across their branch networks and digital channels.

Encouraging loyal behaviour from customers can have a real impact for a bank. We recently conducted some research into the affluent middle class, a highly desirable segment made up of the top 10 to 15 percent of earners. We found that they expect greater recognition and rewards for their loyalty. Get this right though, and the results speak for themselves; 72 percent are more likely to purchase an additional banking product in the future, and 70 percent would recommend their bank to friends and family, if they feel sufficiently rewarded by their bank. We also found that if a customer purchases additional banking products, 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. In the main, banks have yet to capitalise on this opportunity to tailor these added value products. We found that those in the UK are still more willing to purchase these services directly from providers, while those in the U.S. and Singapore look to credit card companies.

For the time being, banks need to do some bridge-building with customers. Our research shows 83 percent of UK retail-banking customers do not feel as though their bank knows or understands them, and less than a third believes they receive a high level of personal service. This is something that could be exacerbated by the growing discontent about packaged accounts, another argument that banks need to offer more transparent, personalised benefits. 

As it stands, banks across the world are missing out on the opportunity to create powerful advocates and attract repeat business from loyal customers. Virgin Money, a challenger bank in the UK, could be a notable exception. The company has launched a number of lounges around the country that offer free Wi-Fi and refreshments but, perhaps counter-intuitively, no banking services. Instead visitors are offered material on Virgin Money’s portfolio through printed and interactive material. According to the company, sales at its actual bank branches increased 200 percent if there was a lounge in the vicinity. An initiative like this not only helps differentiate Virgin Money from the competition, but also provides detailed customer insights to the company. More banks need to think about how they can evolve their approach, and that could mean investing in data analytics to learn more about their customers’ needs and behaviours.

We found that people are more motivated by altruism and money-can’t-buy 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, also 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. And who knows, it might even hold off the challenger banks long enough for incumbents to bring their own brand of innovation through.

 

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