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Downturns — when customer experience really matters.

Five economic outcomes for financial services

We are in a watershed moment for financial services.

Following the abrupt failure of Silicon Valley Bank — the largest collapse of a U.S. Bank since 2008 — and the extraordinary sell-off that brought Credit Suisse to the brink,  it is increasingly clear the tumult of recent years is not yet over. Indeed, the one thing that seems certain, amid all the uncertainty, is that the economic outlook will continue to darken through 2023. And the road ahead brings with it unprecedented challenges for financial institutions.

According to PwC, 39% of CEOs globally believe their businesses will not be viable within ten years unless they change course. There are multiple reasons for this — lagging technology, a global skills shortage, and historic underinvestment in people, to name but three.

But, ultimately, the root cause is entire industries that have failed to keep pace with changing customer expectations.

After Lehman Brothers’ collapse, one might have thought the words “too big to fail” would strike fear into the hearts of bankers, insurers and wealth managers alike. But the financial sector has been complacent. Firms would do well to remember the lesson of Sears: once the largest retailer in the world, it failed to keep up with its customers, failed to evolve its strategy, failed to innovate or digitalize — and filed for bankruptcy in 2018.

Still, it can be challenging for financial institutions to unlock customer-focused investments when, frankly, many are struggling just to keep the lights on. That’s why leaders in financial services need to understand the economic value of customer experience (CX).


Customer-focus wins during recessions

During the global financial crisis (2007-2009), organizations that delivered superior customer experiences saw a cumulative return of 6% despite the recession — while organizations that scored poorly for CX saw an almost 60% contraction, according to Watermark Consulting.

Qualtrics research further highlights this — across 400 financial institutions, CX leaders were almost 70% more likely to see significant financial return from their customer-focused investments. 

For budget holders with less CX exposure, the reasons for this may not be self-apparent. So, when making the business case to invest in CX, it helps to understand the data. 

Let’s take a data-driven look at five cases that highlight the primary ways CX can impact that most critical of metrics — return on equity (ROE).


1. Growing revenue through differentiated CX

When calculating ROE, the starting point is generally income. Calculated in different ways depending on the sector, the objective is the same: you want to maximize revenue by driving conversion and repeat purchase.

When key journeys, like account opening, aren’t designed with the customer in mind, they are more likely to drop out of the conversion funnel part-way through. Moreover, even among customers who do convert, these negative experiences impact share-of-wallet. After all, today’s customers willingly engage in pick-and-mix relationships with a wide range of providers, in stark contrast with previous generations. 

So, if a customer had a high-friction experience when first onboarding, what is the incentive for them to take out a second product with the same provider, when agile competitors can fulfill their requirements in three clicks?

A great illustration of this is ‘closing the loop’. When customers provide feedback — whether positive or negative — reaching out to discuss that feedback provides an opportunity not just to surprise and delight, but also to understand their needs better. In the case of one Canadian credit union, when a branch manager closed the loop with a customer whose advisor was leaving, the conversation helped identify new financial needs, such that the customer ultimately invested an additional $0.5M with the institution.


2. Harnessing CX to reduce costs

The next step, when calculating ROE, is to subtract operating expenditure. This can rapidly eat away at income, and should be kept as low as possible. The challenge is to do this while still delivering a suitable level of customer support.

Many firms have legacy processes that push significant cost into operations: from manual quality assurance protocols in contact centers — like having managers listen to a sample of calls each month — to requiring customers to get in touch to fulfill tasks that other organizations enable via self-service. Consequently, customer support can be hugely expensive for heritage financial institutions.

Fortunately, CX can unlock some significant quick wins.

In the case of one North American banking organization, when the pandemic caused a spike in call volumes, wait times surpassed 70 minutes. In response, the bank embedded digital feedback forms on its website, to enable customers to solve their issues online and divert traffic from its contact centers. This reduced wait times by 70%. The bank was able to help over 100,000 customers online in just two weeks, saving $750,000 in frontline unit costs.


3. Reducing attrition with good CX

After subtracting operating expenditure from income, the next step is to multiply the difference across as large a customer base as possible. This requires both attracting new customers — but also minimizing churn.

Fortunately happy customers are less likely to leave. According to JD Power, customers who rate their insurance experience highly are more likely to stay with their carrier than those who do not. This makes CX a powerful profitability lever, in an industry where it takes carriers multiple years to reach break-even point with a customer and recoup acquisition costs.

The financial benefit of engaging an entire organization with this effort can be enormous. One major US carrier used Natural Language Understanding (NLU) to identify improvement opportunities from text-based customer feedback across seven lines of business. Implementing those improvements, drove a three-point improvement in retention, equivalent to $500M in incremental retained revenue annually.


4. Fuelling acquisition through customer referrals

The other side of the coin to reducing attrition is attracting new customers. That CX can help with this will be no surprise to CX professionals — after all, it is the founding principle behind the widely used Net Promoter System (NPS): if you deliver good experiences, customers not only give you more of their business, but also help drive acquisition through referrals. 

An interesting case study is asset-lite bank Illimity. The bank analyzes all customer suggestions in relation to their predicted impact, and then translates them into actions. In year one alone, 50 significant enhancements to the overall experience drove the bank’s customer perception score to 48 versus a banking market average of 9. Notably, over the same time period, the bank reported a 35 per cent increase in net customer loans and investments.


5. Leveraging CX to shore up equity

Finally, we divide all of the metrics above by a firm’s equity to calculate ROE. One of the variables that can most impact equity is how a firm manages its regulatory burden-related operational risk (for example, its complaints management processes, or other compliance-mandated workflows).

Again, leading-edge CX practices can help.

Take call dispositioning, where too many firms take a legacy approach, requiring agents to manually flag reasons for customer contact for reporting and monitoring purposes. One U.S. carrier saw an opportunity to improve contact center operations by using NLU to understand call drivers automatically. Automating the dispositioning process saved agents 10-15 seconds per call, resulting in a 22% reduction in frontline unit costs.

The value of CX in downturns

The evidence disputes the notion that customer-centricity is a ‘nice-to-have’, for buoyant markets only. Indeed, the opposite is true — it is precisely in recessionary markets that CX is most valuable. 

Executive sponsorship will always require a robust business case, and this is especially true when macroeconomic conditions are challenging. But the data are clear. In turbulent times, the financial institutions that outperform the market will be those that understand their customers best.

 

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