Managing consumer behaviour

Over the past two years the European banking industry has gone through massive amounts of unprecedented change. After the recession the industry is now a subject of intense public scrutiny and as such the impact on customer relationships seems inevitable. In Ernst & Young’s February 2010 report, Understanding Customer Behaviour in Retail Banking: The impact of the credit crisis across Europe, the professional services firm looks at managing customer relationships and how to achieve a successful banking connection.

There is no doubt that customer trust in banks has fallen dramatically - the days when financial institutions were on of the most respected organisations on the high street are officially no more. Across Europe, 45 percent of customers say that the crisis has had a negative or very negative impact on their trust in the industry.

The Ernst & Young survey found that 24 percent of respondents had at some point changed their bank account, with 10 percent of the change happening in the last two years alone. A further 11 percent of Europeans said that they plan to change their main provider in the future. Customer in Spain (20 percent) and Italy (14 percent) are the most likely to change their banks, with only six percent in Belgium and France planning to do likewise.

The Ernst & Young report looks at four main areas: the impact on trust; loyalty; reasons customers look elsewhere; and, measuring satisfaction. In regards to the impact in trust, the decline has severely impacted customers relationships with their banks. In turn, many customers have moved to diversify their exposure to one institution by using other banks for other services. As a result of this, a customer's relationship is perhaps more diluted across the various entities.

Across Europe experiences are different with the affect of the crisis varying across countries. As a result, the consequences of the crisis in trust also vary. Most negatively impacted of the six countries surveyed is the UK, where the majority of respondents - 56 percent - say their trust in banks has decreased. At the other end of the scale in Germany, 60 percent of those questioned say that the crisis had made no difference at all to their level of trust in their bank.

Ernst & Young suggests that there is a significant opportunity here to remain the number one provider to their customers and present an ethical and robust image in a bid to attract more customers. By employing a "back to basis" approach to retail banking, organisations will be able to increase clarity and transparency around complex products. Ernst & Young also suggests innovating around the customer experience, so as to improve one-to-one relationships and maximise business by developing personal relationships through the expanding channels that are growing in popularity.

Looking at loyalty, Ernst & young were surprised to see that the concept of the main bank was under threat across Europe as customers look to spread their allegiances. Just 19 percent of respondents held one type of product with their main bank, when considering daily operations, savings, investments, loans, insurance and credit cards.

Ernst & Young reports a marked difference between countries on the respondents faithfulness to a single provider. In the UK, only 11 percent of customers can be considered "very loyal" (holding more than four products with their main bank), whereas in Spain and France, more than 40 percent of customers are still extremely faithful to their primary bank.

The report suggests that the concept of a main bank is under threat and points out that with 74 percent of respondents only having one type of product in each of their other banks it could suggests that customers are more frequently selecting a bank for a specific product. Ernst & Young says that this could mean the beginning of an era in banking specialisation.

It could be time for banks to look more closely at the ways in which they interact with their customers. With customers spreading their loyalties it is important for banks to not only develop new strategies to target dissatisfied customers, but also focus on strong relationships and loyalty as a source of income. There is room to capitalise on the stable of brands that are often owned by single institutions and develop new ones to appeal to alternative customer bases.

Shopping around

Ernst & Young points to the fact that respondents are diversifying their portfolios and shopping around. The statistics demonstrate a clear opportunity to increase fidelity and extend the level of cross-selling suggests the report. Yet again there are clear distinctions between the principal banking economies of Europe, with customers in Italy appearing to be more loyal with 66 percent claiming they hold only one product or less with other banks, compared to 43 percent in Spain.

While consumers continue to diversify their banking portfolios, it appears that customers maintain their main bank relationships as positive. Whether as a result or inertia or genuine satisfaction, more than half of customers in Europe have stayed with their main bank for more than 10 years, and seven out of 10 have remained loyal for more than five years.

France and Belgium appear to benefit most, with more than 80 percent of customers in both countries having stayed with their main banks for more than five years. Germany, in contrast, sees 25 percent loyal for more than a decade and only a further 14 percent stayed for more than five years. Ernst & Young warns that the longevity of a customer relationship is not always an indicator of profitability, however. Banks need to be weary of customers that are no longer active or productive, despite their lengthy ties to an institution.

A further challenge, says the report, is the new regulations that came into force at the end of 2009. The European Banking Industry Committee has now adopted a set of Common Principles for Bank Account Switching, which will make it easier for consumers to switch their current accounts within their own country. A European Commission report found that 56 percent of European consumers in 2008 had saved money by moving banks, so it is hoped competition will be increased among providers. This creates both opportunities and disadvantages for retail banks as customers take advantage of the new rules and competitive pressure heats up.

Ernst & Young says that it has never been so crucial for retail banks to focus on their long-standing, loyal customers and concentrate on cross-selling and trust-building exercises on the customers that count. Improving customer service and service quality will have a major impact as will targeting resources towards key customers.

Indeed, customers will continue to look elsewhere. The report syas that 10 percent of customers have changed banks within the last two years and a further 11 percent plan to do so. Among those who have changed their bank, 63 percent of German respondents did it within the last 24 months. Likewise, in the UK and Italy, half the main bank changes are concentrated in this time frame. The highest risk of attrition is in Spain, where a fifth of all customers expressed plans to move from their primary provider. France and Belgium seemed less impacted.

The Ernst & Young report says that it is vital banks first investigate the actors that are driving customer attrition before they can attempt to introduce any meaningful retention strategies. A third of respondent in the report attribute their decision to change banks to service levels, while 26 percent blame the price of products. Among those planning on leaving these issues take on even greater significance with 43 percent blaming price and 42 percent attributing dissatisfaction with service. A massive 25 percent plan to change their main bank because of a lack of trust.

Once again there were clear differences between various European countries in their reasoning for changing their bank. Price elasticity is at its lowest in France and the UK, where only 16 percent say they would change provider because of price. In Italy and Germany by contrast, price is considered at 50 percent and 55 percent respectively. Trust is the greatest concern in UK and Belgium, where 26 percent of customers blame their decision to leave on a lack of trust. In France, the biggest worry is service, blamed by 35 percent for their move.

Ernst & Young's report makes it clear that the current band of dissatisfied customers is not necessarily the least loyal; expressing an intention to leave a main bank and actually doing so are two very different things. Nevertheless banks need to look at improving retention and harnessing new customers.

The fourth area in Ernst & Young's Understanding Customer Behaviour in Retail Banking report is around measuring satisfaction. The company found that service quality emerges from the respondents as a clear driver of customer satisfaction with 43 percent ranking it as "highly important". Pricing policies and personal relationships with advisors with 37 percent and 32 percent respectively. The majority of respondents rank product quality and diversity, and the delivery of services as of only medium importance.

While service quality is a priority for the majority of European clients, it ranks behind personal relationships with advisors in France and behind pricing policies for those in Spain. But despite the disparity, a message is shouting loud and clear that customers throughout Europe would like more personal attention from their banks.  Nearly half of those surveyed across the continent - 46 percent - consider the level of personal service they receive to be either bad or limited with the 12 percent of the UK and 13 percent of Italy respondents saying the attention they receive is bad. Spain produces the most satisfied customers, with 40 percent describing the personal attention they receive from their bank as excellent and a further 34 percent describing it as good.

The report maintains that there is a lesson to be learnt by the financial organisations. They need to understand that despite the increasing demand from customers for services such as online and telephone banking, this should not be developed at the expense of personal relationships. There is certainly an opportunity for banks to invest in retention models that appreciate customer need and values. In the UK and Italy in particular there is room to gain competitive advantage by improving personal contact offerings and focusing on relationships.

The Ernst & Young report goes on to confirm that the credit crisis has had an impact on consumer confidence, loyalty and customer retention in the sector. With this comes both opportunities and challenges: banks need to ensure they are responding, investing and improving customer service alongside improving recognition and loyalty programmes and personalise relationships. 

Key findings

The financial crisis has caused customers to change their attitudes towards their banks. Customers are looking to move provider or diversify their banking portfolio, spreading financial products across a number of institutions to minimise their exposure to perceived risks.

The impact on trust:

• Today's economic recession has had a negative impact on the trust that 45 percent of Europeans have in their banking providers
• The UK has been most negatively impacted with 56 percent saying heir trust in banks has decreased
• In contrast, 60 percent of German respondents say the crisis has made no difference to their level of trust

 Loyalty:

• Among customers who have more than one bank, 74 percent have only one product with each other non-main banks, using them as specific banks for specific products
• More than half - 54 percent - agree they would join a loyalty programme if their bank offered one
• French and Belgian customers hold the longest relationships with their banks with 85 percent and 83 percent respectively banking with their main provider for more than give years

Reasons customers look elsewhere:

• 24 percent of respondents have changed their main banking provider at some point in their life, but 10 percent did it in the last two years
• A further 11 percent plan to change imminently, which points to a recent acceleration
• Price (43 percent), service (42 percent) and products (31 percent) are the top three concerns driving customers to change their banks

Measuring satisfaction:

• Service quality is the most important criteria for customers when choosing a bank
• Nearly a third of customers consider a personal relationship with their bank advisor to be highly important when choosing a bank
• The greatest dissatisfaction is in the UK and Italy where 12 percent and 13 percent respectively, say the attention they receive is bad, whereas 40 percent of Spanish respondents describe the personal attention from their bank as excellent