The retail banking sector is under pressure – increased regulatory compliance costs, changing consumer behavior driven primarily by technology and competition coming from new and non-traditional sources (players like PayPal, Dwolla and Google Wallet). Important factors for successfully competing within this environment are customer loyalty, customer service and strategic incentive marketing.

Let’s start with customer loyalty. Even a slight reduction in customer turnover brings a significant increase in profits. In his book, “The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value,” Frederick Reichheld states that a 5% reduction in customer churn can increase bank net profits as much as 80%.

Bain & Company’s recent “Customer Loyalty in Retail Banking” report reveals a great deal of “hidden customer defection.” More than one-third of customers bought a product from a competitive bank within the last year. However, this study also showed that “omnichannel customers” (customers interacting with their bank via website, mobile, telephone and physical bank channels) are much more loyal than customers who interact solely digitally or solely with the physical branch. In other words, loyalty for today’s banking customer requires the ability to interact with their bank how they want to interact, when they want to interact.

What is the benefit of loyal omnichannel customers?

Omnichannel customers on average have more product with their primary bank than digital-only customers and 1.3 more products than branch-only customers. The payoff for banks to provide strong customer service is clearly high. Finally, improving customer loyalty increases the Lifetime Value (LTV) of that customer due to the increased longevity of the relationship and by increasing the opportunities to sell additional products as the customer moves into new stages of life with new needs. Also, strong customer service increases the likelihood that they will refer friends, family and colleagues to the bank.

As discovered by a recent Oliver Wyman and AOL retail banking study, marketing offers and negative experiences (poor customer service) are the primary influences that drive customers to consider switching banks. Specifically, 40% seek a new bank due to unsatisfactory customer experience and 40% look to switch banks as the result of a marketing offer they are presented with. Only 20% of customers surveyed switched banks due to a life event, like moving.

So, the most successful banks will have strong customer service programs to avoid turnover within their own customer base, while attracting dissatisfied customers from their competitors. In addition, offering strategic incentive marketing programs to attract new competition while, again, using the strength of their products and services to avoid customers being tempted by the incentive programs of competing banks.

Why are strategic incentive marketing programs important for banks and what should be incentivized?

Incentive marketing programs are critical for banks because many products and services banks offer are commodities (in fairness to the banking sector, the commodity/”sameness” of products is often regulated by law). Customer service, convenience and incentive marketing programs are critical tools in a bank’s toolbox as they seek sales and profitability growth.

What products should banks design incentive marketing programs for?

Checking accounts are particularly important to acquire as they are the foundation for banks’ relationships with their customers. Nearly every customer needs a checking account, and in many cases, the bank that holds a customer’s checking account is their Primary Financial Institution (PFI). Given the longevity and product cross-sell opportunities housed within the PFI relationship, it is a high priority goal for banks to achieve this status with as many customers as possible. Since the checking account is most often the basis for this PFI relationship, banks should strategically incent the opening of checking accounts, particularly premier checking accounts.

A large challenge is that the market for new checking accounts is rather finite, with only 9% banking customers switching checking account institutions each year. Another 7.5% of consumers open their first checking account in any given year – all the more reason a bank’s marketing and incentive programs need to be strong and compelling.

For retail banks to thrive within the current climate of increased regulatory costs, fickle customers, changing technology and competition from new sources, they must continually work to strengthen their customer service, loyalty and incentive marketing programs. For more information, request a copy of our white paper titled: Increasing Bank Revenue and Profitability with Strategic Incentive Marketing Offers.