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Home Retail and Marketing

A Survival Strategy for Smaller Banks

March 17, 2017
Reading Time: 5 mins read

By Kevin Tynan

We’re losing the battle to keep customers. Here’s what we can do about it.

The majority of North American banking customers now prefer a digital connection with their bank to interacting with a person, according to a survey by The Wall Street Journal.

Some banks may see this event as a notable achievement after years of convincing customers to make the switch, but I see it as a body blow to banking—a reminder that incremental changes, such as the success of electronic transactions, are not sufficient to withstand the tsunami-like wave of competition threatening the financial landscape.

Consumers want the convenience of digital banking but it’s a double-edged sword. With each click of a button, the consumer is tearing the fabric that keeps them tied to an institution.

Electronic banking fosters impersonal relationships. Almost 80% of those surveyed in a 2016 Accenture Consumer study regarded their banking relationship as transactional, rather than advice-driven. Digital banking short-circuits the need for tellers and personal bankers, the relationship builders that keep customers in the fold. With each click, consumers advance the collective belief that one bank is the same as another. Brand, history and community position are losing their value as tools for retaining customers, or differentiating one bank from another.

When speed and convenience is king, FIs are relegated to the position of financial utilities, generic banking monoliths existing only to process transactions and facilitate purchases.  

We see the repercussions from generic banking in the 2016 Consumer Banking study from Accenture, which showed 11% of customers switched from their primary institution last year, up 10% from the previous year. Switchers report that they leave most often for cheaper products and more convenient branch locations. Perhaps more alarmingly, online virtual banks were the most popular financial alternatives.

The threat to traditional banks is underscored in a recent study from Ernst and Young, which found 40% of customers felt a decreased dependence on their bank as their principal service provider and reported using non-bank providers in the previous year. An additional 20% of customers who had not yet used non-bank providers, planned to do so in the near future.

Bank attempts to stem customer attrition are not working.

Stickiness—the concept of making paperwork so cumbersome that it limits customer flight—is not as effective. For the first time since 2013, consumers see switching banks as easier—that is, not as big a deterrent as it once was. “Difficulty of the switching process” fell last year from second to fifth place in the E&Y study as a reason for not leaving an institution.

Reward programs don’t seem to be very effective, either. Two-thirds of consumers do not participate in a bank rewards or loyalty program. And 17% of consumers are not sure they participate. Only 13% of financial institution decision-makers and 16% of all marketers reported being completely satisfied with their reward programs.

Customers who think that one bank is as good as another are increasingly vulnerable to the marketing of low-priced vendors. A recent survey shows customers tend to buy low-margin products from their primary bank but shop around for higher-margin products. The majority (61%) of consumers choose other sources for brokerage accounts, 70% choose other sources for auto loans, and 52% choose other sources for home mortgages. Customers are peeling off for the lowest cost, most convenient bank—or non-bank.

National banks have staked out their position—high-priced electronic banking supported by a network of walk-in branches and casting a big client net. They are here to stay. Community banks are managing an eroding base as customers split for lower-priced service providers, which are increasingly online institutions.

Their only solution is niche banking, a slate of limited services focused around a narrow customer segment where they can reign as market leaders.

A few community banks have carved out niches catering to obvious needs within the community. But most institutions will need a more nuanced solution and the careful analysis that comes from a methodical review of consumer trends, internal data, and the competitive landscape.

Here are a few suggestions to get you started on that journey.

  1. Examine your history. You’ll need to examine historical data to understand where you are heading. To do this, graph your growth (or shrinkage) in the number of accounts and balances over the last twenty years. Assess the profitability of each accountholder. Determine whether the number of profitable customers is growing or shrinking. Chart the average age of customers during the past ten years to see if you are capturing desirable segments. Perhaps, more importantly, append lifestyle data to see which groups you are currently attracting. Look at attrition and churn rates broken down by demographic and lifestyle segmentation.
  2. Analyze. Once you have collected this information, you’ll start to see patterns emerge, such as which clients are most profitable, which segments stay with you, and which are growing. Use correlation analysis or simple projections to predict your future. I like to use graphs and charts because it’s easier to spot trends visually than picking them out on a spreadsheet.
  3. Assess. Go through the data, listing conclusions derived from the data. Some will be expected, others will surprise. Your goal is to identify positive trends and profitable consumer/commercial markets. Once identified, list customer segments that offer growth and profit potential. You’ll need further research to thoroughly analyze the niches and determine the profit potential for each group. You might find that your institution could cater to two or three niches, or that you need to phase out unprofitable or time-consuming customers that take resources from your new mission.
  4. Measure and respond. Next, you’ll find it helpful to review satisfaction scores along all points in the journey of your new niche customers to pinpoint weaknesses or opportunities for improvement. Implement a closed account program to ensure customers are leaving for the right reasons, consistent with your mission. (Save this data for a ‘win back’ campaign.)

Your niches could be lifestyle- or lifestage-based. Perhaps, they are working class or affluent folks. Educated or not. Once defined, learn everything you can about them and their lifestyles, their attitudes towards finances, family, and future. Define your new competitive environment and monitor competitor activities, including their success in capturing your target audience. Conduct focus groups and periodic research.

Finally, once you’ve developed an audience and a strategic plan, don’t pay much attention to what the national banks or other institutions are doing. Their plan is probably much different from yours and it’s easy to become distracted by industry experts and conferences speakers who have a much different agenda and priorities.

Kevin Tynan is senior vice president marketing at Liberty Bank for Savings in Chicago. Email: [email protected]. Twitter.

Tags: Customer relationship managementDigital bankingFuture of bankingLoyalty programsProfitability
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