Customer retention is the outcome of a strong and healthy relationship between banks and customers. One of the key defining aspects of any relationship is longevity. A good relationship is expected to last for a certain period of time or meet the terms of agreement of said relationship. That is the prerequisite condition for a relationship to flourish and mature to its maximum benefit for the parties involved.
Let’s look at an example from the dating world: a lady, let’s call her Jane, might be interested in pursuing a relationship with a partner, if a set of qualifying factors have been fulfilled. According to Psychology Today, there are 4 factors (clues) that would indicate a potentially healthy long-term relationship Jane could use as a benchmark:
- Mutual feelings: Jane can use this as a starting indicator: Does that person like me? Or would he like me if we were on a date?
- Trust: there is a certain risk factor in every relationship. Jane could ask in a vulnerable moment: Can I trust that person?
- Future outcomes: Jane is an intelligent person and has a set of end goals for the relationship. She can ask: Are my end goals aligned with that person’s goals for this relationship?
- Satisfaction: The million-dollar question is: Am I going to be happy, and fulfilled with this person? Can the results have greater benefits than risks?
The answers to Jane’s questions are often complicated and cannot have a binary outcome. Yes, there are two default outcomes: success or failure, however, there are many variables that could turn things around. For example, if children are involved in the relationship. What if time passes and some goals become miss-aligned with the agreement, what is a tolerable level of compromise? What are the possible remedies to rescue or dissolve the relationship?
The answers often fall on a scale from (0) for the most miserable outcome or (10) for the unsustainable level of happiness. Among other things, a relationship is a real investment. Jane is most likely interested in retaining that relationship until all possibilities are exhausted.
Let’s translate that to the banking industry
The same rules apply here. Let’s try it in the context of a fictional bank in Malaysia, HeyBank. In this case, HeyBank is looking for a customer to establish a transactional relationship with satisfactory outcomes. However, HeyBank needs to look into the same factors:
- Mutual feelings: HeyBank can choose a customer if the customer likes the bank’s offer and is willing to accept their terms.
- Trust: there is a certain risk factor that HeyBank can tolerate. HeyBank uses methods like Credit Score to assess that customer. A more extensive method HeyBank can use is eKYC. We talked about it extensively here.
- Future outcomes: HeyBank wants a healthy relationship with the customer to achieve profitability and provide a financial service to the customer. In return, HeyBank expects to get paid for the services they provided. Financial compensations are the primary measuring stick of such relationships.
- Satisfaction: HeyBank wants to have a healthy relationship with the customer and the customer is expected to be satisfied with the services provided. The customer is likely to come back and use HeyBank financial services like loans and credit cards, again. That is retention at its finest!
Why is retention important for banks?
Retention is the future of the banking industry and every other industry in the wild. The impact of retention is to be measured by considering the following:
- Impact on revenue: losing customers means loss of revenue and dissatisfied customers will cause a severe problem because they can influence other customers to jump ship.
- Customer satisfaction and advocacy: satisfied customers are loyal and will influence their family and friends to use the services of that bank that made them happy.
- Long-term savings: according to Forbes, it is cheaper to nurture and retain existing customers through personalised services, enhanced experience, VIP perks and other strategies than to invest in attracting new customers regularly. It can be quite costly to acquire new customers, and the risk of switching is high.
- Performance and profit: a relation between a bank and a customer only becomes profitable after two years, according to professionals monitoring the industry. This means that banks need to maintain the relationship for more than two years to realise good performance from every new customer they acquire. Therefore, retention is needed to minimise the risks associated with churn. It is logical to assume that among HeyBank’s biggest concerns is making the customer happy.
Retention in other industries – a brief overview
Statista.com published customer retention rates for various industries around the world. The banking industry ranked 11th among industries like retail, hospitality, manufacturing, customer services, financial services, telecommunications, health care, etc.
Both banking and financial services have customer retention rates at 75% and 78% respectively. Is that good? Maybe. It is logical to assume that banks want to increase retention rates. According to a publication by Harvard Business School, a 5% increase in retention can increase profits by 25% to 95%. This study might be dated, but it remains relevant. At the bare minimum, banks in Malaysia should aim to increase their retention rate by 5% within the next 3 to 5 years in order to maximise the outcomes.
Better service means more customers: How do traditional banks compare to digital banks and eWallets in terms of the number of customers over time?
Digital banks, not digital banking, are a new and different kind of financial institution. Essentially, they offer similar services as traditional banks, but customers get to deal with these banks entirely online. These banks would not have physical branches (maybe just a headquarter). Being online enables them to serve customers 24/7, all year long.
In Europe, many digital banks are known as mobile banks. The best mobile banks in Europe became successful because they were able to pull off a masterpiece of innovative financial services powered by advanced technology with state-of-the-art capabilities.
Revolut is considered one of the best mobile app banks licensed in the EU, not yet in the UK, with some 12 million customers as of 2020. Let’s look at something interesting here: since 2015, this bank grew from 100,000 customers to 12 million. That is an astounding growth rate. Revolut is able to cover all of the EU territories, deal with countries that have trade agreements with the EU like Canada, Japan, and Australia, and users are able to transfer in 29 currencies and withdraw money into 130 currencies, according to Business of Apps.
BNP Paribas is a French bank with a long international experience, more than 200,000 employees, and nearly $US53 billion in revenue. It is worth noting that this bank is more than 150 years old. The Group serves nearly 33 million clients worldwide in its retail-banking networks and BNP Paribas Personal Finance has more than 27 million active customers.
If we compare the two: a digital bank founded in 2015 versus a more traditional bank founded in 1848, the new player is able to successfully attract 12 million users in 5 years, while the more established player has 33 million. That is an indicator that technology is moving the banking industry far and beyond name recognition and reputation.
We can assume that both banks have a retention rate of around 75% if we are following industry numbers. This is a mere assumption because it is really difficult to find public numbers released by banks or other organisations that document banks’ retention rates and practices.
In contrast, Maybank is the biggest bank in Malaysia with some 22 million customers. Touch n Go eWallet has 6.5 million users in early 2020. In the same period, Boost reported 10 million users. Maybank eWallet has nearly 2 million users by Q4 of 2020. Financial institutions in Malaysia seem to exhibit similar conditions as their European counterparts. New technologies and innovations seem to attract more customers going beyond name recognition and reputation.
Acquiring these customers is not an easy task. It is expensive and requires unprecedented technical feats. If financial institutions do not work on retention, they risk losing a significant amount of customers, which would translate into a loss of revenue and ultimately loss of profit. Retention isn’t easy. There are many factors that influence customers’ stickiness with their bank or digital financial service providers. Let’s look at some of the challenges to the retention problem.
What are the primary challenges to better retention?
In a 2019 post published by a reputable consulting firm in Europe, retention goes beyond customer onboarding and the perceived satisfaction process. A comprehensive view of customer behaviour is needed to provide the right services and keep customers happy.
Personalisation: it will be the primary driver of retention by 2025. Banks need to develop and stay ahead of the curve to stay relevant to the needs of their customers. Personalisation requires powerful technical capabilities such as artificial intelligence and machine learning to perform data analysis and create much-needed personalisation in areas like customer journey, product offerings, and customer experience.
Quality of service and risk of substitution: a study published in 2010 explored the factors determining customer satisfaction in the Malaysian banking sector observed two important behaviours:
- Current loyal customers may not be truly loyal to their bank
- Current customers may not be committed to their financial service provider in the future due to cost, location, convenience, and the range of services provided.
This is a complex issue and the study found that relying on historical loyalty data is insufficient to understand how to retain customers. The study also points to the likelihood of substantial customer mobility between banks due to customer’s perceptions, values, financial returns, and risk assessment.
The study also suggests that in a knowledge-based economy, customers are becoming more knowledgeable and cautious buyers of financial services.
Additionally, anecdotal evidence suggests that customers are equipped with the knowledge and digital skills that enable them to find more options for financial service providers and product preferences. If customers are not happy or satisfied with the level of service offered by one bank, customers can and will make a move to other banks that meet their demands, easily and quickly.
What’s the solution to customer retention according to experts?
McKinsey’s research states that Banks need to rethink their competitive components and start thinking of retention as an integral part of their growth strategies. Give the customers what they are looking for and meet their demands, and exceed their expectations. Highly satisfied customers are 250% more likely to remain with the bank and expand their dealings. Customer experience and customer satisfaction are the keys to move forward:
1. Developing strong customer journey(s) and sub-journey(s):
While primary journeys must be laid out clearly, sub-journeys (for example account activation) have the most significant impact on customer satisfaction for most products. Research shows that the “onsite search” function is a sub-journey with eight times more impact on customer satisfaction than opening a new account sub-journey.
For financial institutions, solutions don’t have to be complicated, and they don’t need to reinvent the wheel. Banks can focus on their priorities and delegate the responsibilities of designing journeys and optimising digital processes to technology partners like JurisTech. Fixing such issues is expected to increase customer satisfaction by 15-20%, according to McKinsey.
2. Developing a strong customer engagement strategy:
A relationship is a defining element between customers and financial institutions. That relationship covers after-sales services, upselling, financial advice, problem-solving, wealth management, and more.
Banks can invest in and deploy the right technologies and tools to empower their officers to play a more advisory role mixed with digital recommendations generated by algorithms and artificial intelligence tools.
3. Developing personalised, data-driven financial products:
Financial institutions have access to a colossal amount of data about their customers or prospects over the years. The leading challenge banks face is making useful and actionable insights from the data they have acquired over the years.
Armed with actionable insights, financial institutions can create highly relevant products and offers for existing customers and prospects. Banks today can use behavioural science to develop products and services with the right incentives for the right customers at the right time, delivered through the customer’s preferred channels.
Examples of application:
According to BCG, innovative customer journeys help increase customer satisfaction and lower cost. This conclusion is valid for one retail bank in Australia. The bank worked with BCG and concluded that to improve both the customer experience and its overall performance, they needed to go through a radical digital customer-journey transformation. The expected results were the elimination of siloed delivery practices, deliver a better customer experience, and reduce costs.
The bank also established that among the many journeys they could potentially map, three stood out. In a retail bank, the following journeys need to be transformed and must be exceptionally executed:
- consumer onboarding,
- credit cards, and
- property ownership.
The results speak for themselves:
|After transformation, it takes seven minutes to open a new account across selected channels.||The retail bank achieved a 20% reduction in end-to-end costs across critical areas.||The bank realised a 10% reduction in the number of credit-card-related contacts and complaints made to the call centre.||Delivery of features to customers is two to three times faster than traditional-based delivery methods.|
By improving the customer journeys, the bank improved customer experience, reduced cost base, reduced turnaround time, reduced time to open an account, and improved Net Promoter Score.
This is a useful example for Malaysian financial institutions. All the evidence presented here indicates that if Malaysian banks invested in technology partners and solutions with a specific focus on delivering customer-centric results, they will be able to have the retention targets they need.
The moral of the story can be summarised as follows:
- Make the right changes based on customer preferences
- Keep an eye on every customer journey and its impact on acquisition and retention
- Banks need to be agile and flexible in terms of their ability to make the needed changes quickly
- Banks, big or small, need to have a reliable technology partner that would help them achieve the targeted goals
- Banks need to look out for customer needs and prevent customer switching by ensuring that customers are happy and satisfied
- Banks need to realise that a significant portion of their customers will switch to other financial service providers if financial institutions did not align with customer values.
- Retention is significantly cheaper than acquisition
JurisTech (Juris Technologies) is a leading Malaysian-based fintech company, specialising in enterprise-class software solutions for banks, financial institutions, and telecommunications companies in Malaysia, Southeast Asia, and beyond.
To explore more on our product suite that will help in customer retention, check out our digital onboarding solution, Juris Access; artificial intelligence (AI), Juris Mindcraft; and other digital banking solutions to achieve your goals.