Banking Process Improvement

          In the business of retail banking, the share of a customers’ assets, sometimes referred to as ‘share of wallet’, are primarily seen as inventory for the bank. Similarly to the way in which a retail store holds products to be sold, customers deposit their money and assets into a bank and it essentially becomes free inventory that can then be lent out by the bank for loans by other clients. This, as opposed to the bank having to borrow money from other financial institutions to support its lending operations side of the business. The amount of liquid assets a bank has in reserve for lending and carrying out transactions is known as lendability. 

Based on this premise, increasing the number of customers that a bank has bears enormous financial incentive for its operations. The more clients that open accounts, sign up for direct deposit, or save money over an extended period of time, the more the bank can extend loan offers to new customers, creating exponential growth. With all this in mind, you can imagine that attracting new customers and making the account opening process as seamless as possible would be a high priority for banking executives.  While customer attraction is one piece of the equation, customer stickiness or retention is the other half.

Customers are typically acquired through various cost bearing incentives. You will often see bank promotions that offer things like a “$300 cash bonus when you sign up with a minimum $2,000 deposit!” or “Switch your direct deposit to here within 60 days of opening your account for a $150 bonus”; these can broadly be considered customer acquisition costs. Many banks place strong emphasis on gaining new clients, but don’t have a good sense of how customers spend once they create an account, or what makes them decide to stick around. To ultimately maximize lendability potential, banks need to gain a full understanding of how the financial levers that control their revenue operate.

The Issue

Ivory Bridge Group was hired by a well-known regional bank that for years had been struggling to keep customers. Persons would sign up for a new account, then remove their funds and close it out within the first 6 months. Out of the 1.2 million new customers that were being acquired each year, a whopping 1 million would leave. 

The bank could not understand why their churn rate had become so high. Cash incentives were very competitive and their marketing was apparently quite effective in bringing in new customers, yet they couldn’t seem to keep clients engaged.

An important thing to note here is that all customers in any industry have a lifetime value (CLV) that must be understood to confirm how much each customer is worth to your business. In this instance, the bank’s customer value is commensurate not only with the quantity of deposits and life of the financial services that they take out, but also how many times their deposits or other assets could be lent out as free inventory. In addition, the entire process of attracting and keeping customers bears a cost on the company’s expense sheet. There is a cost for marketing to thousands or millions of potential clients with the standard outcome of gaining only hundreds or thousands. Because of this, churn should not only be looked at as clients who open accounts then later close them out, but also as those who were initially attracted to start the process, but never finished creating an account. This results in a minimized ROI, as money spent on attracting these individuals has been effectively lost.

Our Process

IBG implemented a lean six sigma approach to uncovering the root cause of this bank’s high churn rate. We began with a customer discovery process reaching out to existing clients, those who had chosen to leave and new prospects who were still in the application process. There was a series of phone calls, surveys, focus groups and one on one conversations that all aimed to gain some perspective on how customers experienced banking at this institution. In parallel, we took the time to understand how the bank was approaching customer service and engagement. This included how they utilized their omni-channels as a way for clients to interact with the bank’s services through multiple touch-points. Just as the customers can be seen as inventory, the bank should be viewed as a business - and in business, clients come first.

Using all of the data that was collected through these discovery sessions, IBG was able to put together a detailed process map to analyze the bank’s performance and relate key performance indicators to actual customer experience feedback. This helped us to determine - and clearly describe to the executives - which strategic decisions or changes were affecting which aspects of the market. In other words, what were the financial levers that created flux in the system? 

We also developed a series of customer profiles and archetypes based on what was learnt during our interactions and used these to define the specific pain points felt by different groups. By quantifying the intensity of the problem for each group and correlating it with the related financial impact it was having on the bank, IBG was able to identify the key issues that, if addressed, would help retain the largest customer segments.

Findings

It turns out that there were a couple situations that made customers unhappy with their experience at this institution. The bank had implemented an account fee that was deducted semi-annually. While the size of the fee itself did not appear to be a major issue, the customer perception of the reason for the fee deduction was not very clear at all, which led to a general mistrust of the process. Originally, the bank had concluded that the churn was due simply to the fact they were deducting a fee, but with further analysis and the integrated review done by IBG, it was determined that approximately 100K of the 1 million clients churned each year were specifically driven away because of how and when the fee deduction occurred. 

As a fact of life, people will always find the path of least resistance when signing up for a service or program. To compound on the issue of low trust, the bank’s application process also had a few kinks that discouraged many prospects from completing it. IBG was able to use all of this information to tailor a solution that would reduce the bank’s churn ratio.

Solution & Results

We suggested a relatively minor process redesign to address the major issues that dissatisfied customers were facing. In order to decrease attrition, we needed to decrease the number of complaints in the system. The new application process removed some of the friction of the old one and added an explanatory statement that clarified what fees would be deducted from the account and why. Training for customer service representatives was also updated to provide them with specific language crafted to the customer experience that gave a clearer understanding of the process and expectations when banking there.

Following the implementation of these changes, the bank saw a 45% decrease in customer churn. This resulted in a net $4 Million annual profit generated by their semi-annual fees. The customer care staff also witnessed decreased complaints and an increase in overall customer satisfaction and trust. New member acquisition cost was lowered due to the ease of client processing and the improved retention rate at signup. 

Final Analysis

Companies often misunderstand the reasons for customer churn. Without a thorough investigation and analysis of findings it can be easy to make generalized assumptions based on the surface problem that is observed. This situation emphasized the importance of perception in procedural justice. Although the fee deduction may have been quite standard, customers felt they had no input into the process and that the decision-maker was not being transparent in their motives. Uncovering this in our many client discussions was key to choosing where to make a change. In this way, once there is a clear understanding of which key performance indicators are generated by which financial levers and they are made to work together, a large profit can be yielded.