How Europe's banks can profit from loyal customers
The McKinsey Quarterly: How Europe's banks can profit from loyal customers
A new approach to identifying these individuals is the key.
Marc Beaujean, Vincent Cremers, and Francisco Pedro Goncalves Pereira
Web exclusive, November 2005
Europe's retail banks are missing out on what amounts to a sizable "loyalty bonus," according to McKinsey research. We examined the banking markets in Belgium, Germany, and Italy and found that loyal customers typically generate, over the life of their relationship with an institution, 30 to 70 percent more value than run-of-the-mill clients do. Loyal customers not only buy more products than their counterparts but also tolerate higher banking charges.
In our experience, most of the region's banks fail to identify and nurture these important customers, relying instead on segmentation models that are ineffective and even counterproductive. In fact, we believe that such miscues may be contributing to a growing sense of disenchantment among banking customers across the region.
Our research emphasizes what marketers in other retail industries already know: loyal customers—those who will recommend a bank to friends and family, feel that their expectations have been exceeded, and will without hesitation select the same bank to make a fresh transaction1—are more profitable. In practice, the mind-set of loyal customers is such that they will stick with a bank that treats them well and provides good value over the long term—even if it doesn't offer the best deal for every transaction. One bank we studied is able to charge its most loyal customers a premium of 20 to 30 basis points on mortgages, for example.
Exhibit 1, based on an analysis of the profiles and saving patterns of about 1,000 people in each country, demonstrates how greater loyalty leads to higher wallet share and reduced churn. High-potential customers,2 acquired at age 30 and remaining loyal throughout their active lifetimes, are worth 30 to 70 percent more than the high-potential but nonloyal ones, whose value to the bank gradually erodes or who eventually leave the bank altogether. These loyal individuals buy, on average, 40 percent more products than their less enthusiastic counterparts do (2.8 to 1.7), although in some countries the difference is far greater. By age 55, they make a direct contribution to the bank's bottom line of €548 a year, on average, compared with €183 a year for customers from the lukewarm majority.
ex 1
Few European banks currently segment their customers by loyalty; most institutions rely only on factors such as age, stage in the life cycle (for instance, student, married, or retired), and other socioeconomic variables. This failure to track loyalty is, in fact, doubly damaging. Our experience suggests that in addition to missing the opportunity to target the most profitable customers, banks selling new products to less loyal ones (say, as part of an indiscriminate marketing campaign) risk alienating them, since they automatically assume that what's being offered is not in their best interest. Such efforts could ultimately drive customers away.
Banks might supplement existing customer data by establishing an index, or matrix, that specifically tracks loyalty. Every customer can then be placed in a zone by loyalty (anger, distrust, passive loyalty, active loyalty, and advocacy, for example) and by share of wallet (Exhibit 2).
ex 2
An analysis of the answers to four or five simple questions, posed through the bank's existing channels, can determine an individual's position in the matrix.3 Once a bank segments its customers by the nature of their relationship, it can tailor actions to specific clusters, take steps to move individuals up the loyalty curve, and aggressively market new products to them.
The success of a major Benelux institution using this type of relationship matrix as well as our preliminary work with other banks suggest the benefits of such an approach. To exploit this opportunity, however, a bank must take three factors into account.
* For new sales, a bank's frontline staff should target only those customers with whom it has established an intimate and trusting relationship.
* A bank must be proactive in developing such intimacy, in particular by focusing on high-potential customers who have not approached the bank in the past 6 to 12 months. Sales efforts tend to be more efficient when the sales representative knows the customer.
* A strong effort should be made by frontline staff to handle "moments of truth"—highly emotional interactions (positive and negative) that endure in the customer's memory over time and affect loyalty (Exhibit 3).4 The optimal management of such events means ensuring that salespeople recognize positive events as opportunities to cross-sell and respond appropriately in times of crisis (when a card gets swallowed by an ATM, for instance). Our experience suggests that banks can significantly improve their handling of moments of truth.
ex 3
Segmenting customers according to loyalty means going beyond the traditional approaches that most European banks use to devise effective commercial strategies. The process takes time—12 to 18 months to transform a full branch network, we estimate—as well as new frontline skills, but early findings suggest that these techniques are effective in extracting more value from existing customers.
About the Authors
Marc Beaujean is a principal and Vincent Cremers is an associate principal in McKinsey's Brussels office, and Francisco Goncalves Pereira is an associate principal in the Lisbon office.
Notes
1 Such a definition, while simple, goes well beyond customer satisfaction, the traditional proxy for loyalty used by many banks.
2 Those who are expected to become affluent by the age of 55.
3 Questions should be linked to customer behavior ("If the bank makes a mistake, would you leave the bank?") and not their perspectives ("Are you happy with the bank?"). Likewise, questions requiring either a "yes" or "no" answer are preferable to open- ended ones.
4 Marukel Nunez and Corey M. Yulinsky, "Better customer service in banks," The McKinsey Quarterly, 2005 Number 1, p. 30.
April 23, 2006 at 11:17 AM in Financial Services | Permalink
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