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Transcript of 1 THE ECONOMICS AND EXECUTION ELEMENTS OF RETENTION A PRESENTATION FOR RYAN, BECK ANAT BIRD.
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THE ECONOMICS AND EXECUTION
ELEMENTS OF RETENTION
A PRESENTATION FOR RYAN, BECK
ANAT BIRD
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• The economics of retention• Changes in customer behavior and
expectations• Why customers defect• Execution elements• A peek into the future• Takeaways
Agenda:
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The Economics of Retention
The Economics of Retention
Profit from Price Premium
Profit from Referrals
Lower Operating Costs
Increase Number of Accounts
Increase Account Balance
Base Profit
Substantial attention being devoted to task of quantifying benefits of increased customer retention; early research in area suggests at least six potential benefits of improved retention performance. 1. Increased retention lengthens customer lifetime, 2. Individual account balances grow across time, 3. Number of accounts grows across time, 4. Cost servicing may drop, 5. Customer’s conversations yields referrals, 6. Loyal customers less price sensitive. Source: Bain & Company
($2)
$0
$2
$4
$6
$8
$10
$12
$14
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Pro
fit
Scale
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What is 1% Retention Improvement Worth?
• Allstate $1 Billion income improvement per 1% increase in retention*
• Industry 27% NPV improvement per 5% increase in retention **
• $100B Bank $22 million profit improvement per 1% increase in retention ***
• $9B Bank $1.2 million profit improvement per 1% increase in retention ***
The Economics of Retention
* Source – Reichheld, "The Loyalty Factor"** Source – Advisory Board*** Source – Internal Company Analysis
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The Economics of Retention
Cross Sell and Retention
Customer Retention Based on Services Used
Checking account only 2-1 50%
Savings account only 3-1 33%
Checking and savings 10-1 10%
Checking, savings and investment 18-1 8%
Checking, savings and mortgage 50-1 2%
Checking, savings, loan and safe 200-1 ½% deposit box
Source: Bank Marketing Association
Chance of First YearBanking Service Odds Customer Loss
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Cross-Sell and Retention Profitability
The Economics of Retention
$391
$245
$174
$113
$41
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2 4 6 8 9+Acct/HH
Household Annual Profits
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Household Profitability and Cross-Sell Success
Are Linked
The Economics of Retention
Why 8+ Products per Household
Profitability Tier
Premier (>$1,000)
Excellent ($200 - $999)
Moderate ($0 - $200)
Potential (<$0)
Average Cross-sell
7.64
5.61
3.73
3.33
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Cross-Sell and Profitability One Bank's Story
The Economics of Retention
• 8+ Product Households Represent 10.5% of Total Households and Contribute 31% of Total Retail Household Profits
• 35% of Premier Households Annual (profit $500 - $1000) have 8+ Products
• 58% of Premier and Excellent Annual (profit >$1000) Households have 8+ Products
• Only 7% of Unprofitable Households have 8+ Products
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Cross-Sell and Retention
The Economics of Retention
83%80%
74%
58%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2 4 6 8Accounts Per HH
Product Per HH
Retention
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Where Is The Opportunity?
• Average Households Have 8 Different Financial Service Providers
• Households With Income Greater Than $100,000 Have 12 Different Financial Service Providers
The Economics of Retention
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Life Cycle Profitability in Credit Cards
The Economics of Retention
-100
-50
0
50
100
150
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
$ of Profit
Age of Accounts (years)
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Customer Satisfaction Scores Do Not
Predict Defection
Customer Behavior
Most of the customer (86%) who recently closed an account, appear to be somewhat or very satisfied with Bank's services overall, giving the Bank a score of 6 or higher on a 1-10 scale where 1 means Extremely Dissatisfied and 10 means Extremely Satisfied.
On average, these customers rated their overall satisfaction level at 8.5 on a 1-10 scale.
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
9 - 106 - 851 - 4
Overall Satisfaction Average Rating: 8.5
Source: Internal Bank B Analysis
Index Scale: 1 = "Not At All Satisfied" to
10 – "Extremely Satisfied"
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Changes in Customer Behavior and Expectations
Customer Behavior
• As more customers use the internet, the branch's role in building retention diminishes
• Internet per se isn't a solid retention tool; bank sites need to be enhanced to achieve improved retention results
• Customers' definition of convenience is shifting from physical facility to a portfolio of channels; implications to future branch expansion and staffing levels need to be considered
• Current mystery shops generally are not aligned with retention results
• Current banker behavior expectations are not aligned with customer expectations, particularly regarding problem resolution
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Primary Reason for Closing Account
Why Customers Defect
Customer Tenure
TotalRespondi
ng(n=434)
Less Than
1 Year(n = 105)
1 – 5Years(n = 191)
6 or MoreYears(n = 112)
Don't Need the Account 12 % 13 % 15 % 4 %Consolidated Accounts at Other Bank
6 % 4 % 7 % 6 %
Consolidated Accounts at Community Bank
6 % 7 % 5 % 5 %
Service Charges / Fees too High 6 % 2 % 6 % 8 %Marital Status Changes 6 % 1 % 7 % 9 %Legal / Trustee / POA / Deceased 5 % 0 % 4 % 13 %Moved In or Out of State 5 % 6 % 5 % 4 %Needed the Money 4 % 9 % 4 % 1 %Lost Job 3 % 3 % 2 % 3 %Bank Error 3 % 7 % 2 % 2 %Location Is Not Convenient 3 % 3 % 5 % 1 %
Account Opening Ethics
Personal Status Change
Accuracy
Price
Convenience
Source: Bank C Analysis
• Not Needing the Account was the most frequently mentioned reason for closing an account at this Community Bank
• Most reasons do not show response rate differences based on customer tenure
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Factors in Account Closing
Why Customers Defect
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
ATM Malfunctions/Problems
Number or Location of ATMs
Number or Location of Bank's Branches
Any Changes That May Have Resulted From Merger
Mininum Balance Requirement
Better Interest Rate/Rate of Return Elsewhere
Monthly Fee
Miscellanous Fees
Web Banking Issues
Experience With Telephone Banking Center
Change in Account Features
Personnel Changes
Error/Problem Experienced on Account
Experience With Bank's Branches or Branch Personnel
Importance of Factors in Decision to Close Account
(Top-2-Box Scores on 7-Point Scale)
Source: Bank A Internal Analysis
Bank Experience
Price
Convenience
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Why Customers Defect
Factors in Account Closing
30%
15%
0% 5% 10% 15% 20% 25% 30% 35%
Open (0) (n=37)
Closed (C) (n=41)
Problem Resolution Experience(Among those who had a problem)
Satisfaction with Problem Resolution
(Top-2-Box Score on 7-Point Scale)
Mean # TimesContacted Bank
to Resolve Problem
4
3
Source: Bank A Internal Analysis
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Why Customers Defect
Reason for Moving to Other Financial Institution
37%
29%
26%
25%
25%
22%
0% 10% 20% 30% 40%
Had an Account There
Good Service
Convenient Locations
Friendly / Pleasant
Lower Fees
Good Reputation
Adds to more than 100% due to multiple responses allowed n = 171
Nearly four out of ten (37%) of the respondents who opened a new account with their funds (with this Community Bank or other institutions), chose that financial institution because they Already had an account there.
• Service – 54%• Service & reputation – 77%• Convenience – 26%• Price – 25%
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Overall Relationship with Bank
67%
26%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Open (0) (n=207)
Closed (C) (n=199)
Overall Satisfaction with Bank(Top-2-Box Score on 7-Point
Scale)
Why Customers Defect
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Problem Resolution
• Banks are not organized toward effective problem resolution
• The challenge: get the initial customer contact person to own the problem
• This is a true differentiation opportunity on the defection variable that matters the most
• The change is major enough to require an organization-wide mandate for success
Execution Elements
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Convenience
• Differentiation on convenience is difficult among all but the mega banks
• Internet and phone banking are putting most banks on an equal footing regarding convenience
• Improved "stickiness" on internet and phone sites can become an important differentiator
Execution Elements
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Pricing
• Customers don't mind paying fees; they mind being gouged and nickel and dimed
• Review your fee structure to ensure you have the right balance between optimizing your fee income and turning off your customers
• Develop a desired position for your fee income levels relative to the competition
• Improve responses to customer fee inquiries and offering account alternatives to fee-sensitive customers
Execution Elements
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Cross-Selling
• Cross-selling isn't about lip service — it is about doing
• Executing cross-selling is difficult
• Product packages ("Happy Meals") are a good path to success
• Mass customization of cross-selling works
Execution Elements
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Service
• World class service — what does it really mean?
• Everyone claims they offer it, so few truly do
• Can you compare yourself to Disney or the Ritz-Carlton hotels? If not, why not?
• Identify major service defects and address those first
• Mystery shop for the right stuff vs. the easily measurable behaviors
Execution Elements
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Bank Intervention
• Less than 25% of all customers report that the bank has made an effort to salvage their account
• We lack processes to ensure that every account closing is handled consistently with the intent of recovery
• Customers welcome account recovery initiatives by the banker, even at the point of closing (which is generally too late)
• Some sales efforts bring about inappropriate account openings, which result in more account closings
Execution Elements
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A Peek Into the Future
• The big banks will figure retention out; some are already working on it. Waiting on this issue is a losing proposition.
• Website sophistication and stickiness, as well as phone bank activities, will become more important in retention management as customer usage increases
• Learn from non-banks about customer loyalty; they are ahead of us
• Customers are looking for a bank they can trust. Winning that position will gain you long-term retention
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Takeaways
• Customer retention is clearly tied to shareholder value, both in terms of current income as well as earnings predictability
• Improved retention must touch the employee wallet, not just their heart
• Align what matters to customers with what employees are trained, paid and measured to do
• Root causes for defection are consistent across the industry; spend less time on fact finding and more on fixing, measuring, rewarding
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Takeaways – Cont'd
• Correct sales process to ensure that only needed accounts are open; i.e. reward only for fully-funded accounts, back out sales incentives for zero balance accounts
• Measure both cost and benefit of account retention; advertise results throughout the system
• Show your employees why retention matters; they ultimately are the number one cause for retention OR defection
• Goal controllable attrition levels and reward for them
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My Family
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Isabella