Attrition and Hidden Defection hurt customer value

All banks work hard to grow their customer numbers. When growth levels disappoint, the underlying causes are not always apparent. One of the more visible drivers is increased attrition: when customers leave the bank to begin a primary banking relationship elsewhere alarm bells should go off. However, there is also a second form of attrition, which is more insidious: hidden defection. When a bank’s relationship with its customers isn’t strong enough, competition creeps in. Banks don’t necessarily lose these customers completely, but they will not buy a second, third or fourth product from the bank. Instead they move to competing institutes and the primary bank loses an opportunity to grow share of wallet.

Engagement builds customer intimacy

As users increasingly migrate to digital channels, banks who haven’t invested in creating a strong digital presence run the risk of losing relevance amongst their customer base. Digital banking provides an opportunity to interact more frequently with customers, and with much higher customer satisfaction levels. Banks who successfully transform their operations become their customer’s trusted advisor. As a result, when that customer makes a financial decision the bank is part of the consideration set, getting the chance to provide additional services.

Conversely, when banks haven’t been able to keep pace with innovation they run the risk of becoming irrelevant and losing the customer relationship. If you are not present in the digital world where your customer chooses to do business, you will not sell. The worst-case scenario is that customers consider the bank a place that holds his or her money, but just for now.

Onboarding is a rate-limiting factor

Unless your digital onboarding is designed to be omni-channel and completely frictionless from the ground up, it is likely that you will experience 50% leakage. Onboarding customers is crucial to grow and maintain deposits. Moreover, it’s a precursor to the steps customers take in purchasing additional products, which make them more valuable to the bank. In short: you cannot grow share-of-wallet with people who are not your customers.

Improvements in onboarding, therefore, also improve origination downstream. Onboarding is one of the key activities a bank must perform well to sustain itself in a digital world.

The costs of everyday service

90% of the interactions that your customer has with your bank are routine tasks. The customer wants to get these tasks done quickly and the bank wants them to get done cheaply. Sadly, most banks achieve neither of these goals.

Banks still make customers come to the branch for transactions that should be fully automated. Even if transactions are automated, bad customer experiences cause calls to the call centre and increase cost even further. So, what is the value of a good customer experience? A good customer experience will move costly transactions from the branch and the call centre to online and mobile applications.

How can we forecast the cost reductions that a digitization of service interaction will bring? Actually, the approach is rather straightforward. We can compare how customers interact with their bank in a country that is at the forefront of digital banking, i.e., the Netherlands, with the interactions customers have with their bank in countries that are lagging in digital banking.

By costing each transaction we can show how digitization of routine interactions yields massive cost savings for banks. Of course, those savings cannot be realized overnight. Reducing your physical footprint takes time. But, even when a transition period is considered the savings are still considerable. Also, only a part of these cost savings is attributable to digital banking. This is a judgement call you must make yourself in your internal business case.

Total cost (USD) of the transactions of 1 customer per year. When US consumers adopt the usage pattern of Dutch consumers costs drop dramatically.