Based upon extensive research by the Bank Administration Institute (BAI) in the USA of bankers and consumers, there is a major disconnect between bankers, who say their number one driver is to create relationships with their customers, and customers who apparently do not want relationships with their banks. What are the implications of this schism for retail banks and retail bank operations asks Chris Skinner.
At this year’s Retail Delivery Tradeshow a range of topics were discussed, with the critical focus being upon how retail banks can more effectively compete in our world of cut-throat competition. As part of this programme, the BAI conducted research with 3700 US retail bank customers and discovered an interesting nuance that 69% of bank customers do not want a ‘relationship’ with their bank. Apparently, only 31% of customers are receptive to a relationship, 29% are indifferent and 40% are actively sceptical.
This contradicts previous figures where 520 senior retail banking executives were surveyed and 90% said that relationship banking and service quality were their primary value proposition. How can a bank emphasise relationships as their value proposition if that is not what a customer wants?
In fact, the research really raised a different question for me. If 69% of consumers are indifferent or sceptical about a relationship with their bank, is that because they are happy to be stuck with a nameless, faceless institution that treats them as a number? And are the 31% who are receptive to relationships with their financial providers, or even actively seek such relationships, the same customers who visit branches and talk to the branch staff regularly?
This is not researched in depth yet, but it does strike a chord. For example, the sceptic probably feels that they put up with their bank, for all of their vagaries and irritating habits, because they cannot be bothered to switch to someone else. After all, if all banks are the same, what’s the point? The indifferent is likely to stay with their bank because, although they might get a better deal elsewhere, is it worth the effort? Whilst the receptive is actively seeking to find a bank that makes them feel valued and special.
That means that the sceptics and indifferents are swathed in inertia and explains why most retail bank customers are more likely to leave their spouse than their bank. That inertia has so far been the backbone of the industry. So long as banks can be trusted to safely transact payments, customer care goes out of the window.
Back to the receptives – the 31%. These customers are different. They are actively seeking more than just transacting securely. They want advice. They want to talk. They think their bank has credibility and they want staff at the bank to show them what they could do better. They want to walk into the branch and be called by name and they want to telephone the contact centre and know that the person at the other end will not only know their name, but their last transactions and contacts with the bank. The more their bank delivers on those expectations, the more they trust them, the more they seek advice from them, the more business they give them and so on. A virtuous circle.
The issue for the banks at the Retail Delivery Show this year is that doing that relationship stuff is hard and expensive. Especially if you are a big bank, a national bank, an international bank or a global bank. That is why most of the community banks and credit unions were sitting smiling smugly during all of these discussions, because these financial providers – like the small UK building societies – pride themselves on being local, community oriented and friendly. They pride themselves on branches with managers who know each of their customers by name. They pride themselves on the fact that they can pretty much talk about the town or city in a way that demonstrates they are part of that town or city, rather than part of a brand or operation. That is the unique value proposition of the local operator.
Meantime, the large banks, the universal banks, the megabanks are institutions who thrive on dealing with the indifferents and sceptics who are happy to have a nameless, faceless relationship because they do not want a relationship,. They just want a transaction done safely and securely.
Now maybe this distinction is a little harsh on our major, proprietary bank operators who focus upon shareholder value and cost-income ratios, but it is meant to be. After all, that focus upon the bottom-line is often at the expense of the top-line. That is why the mutual organisations, who focus upon their members rather than the shareholders, prosper in a world of receptive relationship banking.
The real message is that a bank has to make strategic choices. As the major keynote at the conference this year stated, "You’ve got to see strategy as something where you make choices." The keynote presenter in question is a gentleman called Michael Porter. If you do not know his work, Porter is a Harvard Business School professor and is the recognised authority on business strategy.
The focus of Porter’s keynote was that most banks compete in the same territory and on the same turf and that is wrong. Most banks have ‘me-too’ strategies that do not differentiate, except on rates and channels, and that is wrong. That is not strategy, it is just tactics. It is not differentiation, it is just competition.
Michael Porter reckons that retail bankers will continue to do this at their peril as the years of bank M&A’s providing growth and size are over, and the industry will soon be entering a re-defining period of "strategic positioning," where banks will need to differentiate or die.
As Porter remarked: "Just bulking up and being big and having lots of branches is not going to be any sort of advantage. Ultimately, you are going to have to deliver something distinctive."
I agreed with a lot of what he said, after all he is a Harvard business professor and recognised guru of strategy. I particularly agreed with his conclusion that banks get it wrong because they blindly try to serve all customer segments. You cannot please all of the people all of the time. As a result, rather than investing in customer segmentation and targeting all segments with different service levels which simply confuse and distract frontline staff, banks should instead determine which particular customer segments they want to serve and excel in, and then just invest in retail delivery to those segments with differentiation and dump the rest.
That means deciding whether you want the sceptics, the indifferents or the receptives. You cannot have them all and you cannot serve them all the same. That is a losing strategy. Whichever ones you go for, just create a compelling and unique value proposition for them and forget the rest. That may mean losing a third of today’s customers or even more, but in the long-term it will be worth it. After all, trying to serve all of the customers in all of the ways all of the time that they want to be served is just dumb.
Bottom-line: differentiate or die.Chris Skinner is a director of TowerGroup and founder of ShapingTomorrow.com.
Web links: www.towergroup.com
Author's email: Chris Skinner