Deja vu for Customer Relationship Strategies

BAI Banking Strategies, November 10, 2010, by Mary Beth Sullivan

Many of the “new normal” strategies for improving customer relationships were first introduced about 20 years ago, according to consultant Mary Beth Sullivan.

The transformation taking place within retail banking organizations today feels eerily familiar to those of us who have been in the business for 20 years or more.

In the late 1980s, we spent countless hours dissecting and interpreting customer profitability, demographic, behavioral and attitudinal information to build relationship products, service protocols, segmentation models, and delivery strategies that attempted to put the customer squarely at the center of everything we did.

Then, in the 1990s, whether consciously or not, many banks refocused their business models. Quarterly earnings growth took center stage as institutions faced a variety of forces, including competition from monoline consumer finance and investment companies, the rapid expansion of secondary markets, the infusion of liquidity into the economy and government policies that encouraged balance sheet leverage. Product-centric growth objectives came to trump long term, sustainable profitability strategies.

The results haven’t been pretty. Customers no longer trust the banking industry. Balance sheet concentrations resulting from the product volume surge of the last decade coupled with the current mortgage foreclosure mess (delayed cleanup of toxic assets) and the tepid economic recovery (not enough business to go around) will undoubtedly drive more consolidation in the industry, even among relatively healthy institutions.

Product-centric strategies make no sense in the new environment with its new profitability dynamics. After all, who needs more single-service checking accounts? Bank managers are now focused on diversifying their balance sheets, building new revenue streams, and creating more sustainable business models, which brings us back to a focus on customer relationships and lifetime (longer-term) customer value.

If it feels like déjà-vu, you are not alone. I spoke with several bankers at the recent BAI Retail Delivery 2010. Like me, they started their careers before 1990 and appreciated the irony of today’s situation. We wondered aloud if we’ve really made any progress at all in the last 20 years. We agreed that the following core strategies that are being embraced again are essential for achieving a more customer-centric retail model that creates sustainable profitability:

Better use of customer profitability information. Both current profitability and lifetime profit potential data must be used to generate more highly engineered sales and service strategies, product packaging and pricing combinations and delivery system investment decisions. Far too few banks understand the profitability of their retail customers. For more insight on this, I encourage you to read the recent article by Sherief Meleis, The Case for Building Customer Lifetime Value.

Both current profitability and lifetime profit potential data must be used to generate more highly engineered sales and service strategies, product packaging and pricing combinations and delivery system investment decisions. Far too few banks understand the profitability of their retail customers. For more insight on this, I encourage you to read the recent article by Sherief Meleis, The Case for Building Customer Lifetime Value.

More refined segmentation. More finely-tuned segmentation analytics will make use of customer profitability information and combine it with demographic and attitudinal information to enable banks to design and deliver more relevant and targeted value propositions – an absolute imperative for rebuilding revenues.

Greater focus on service excellence. Many banks today place too little emphasis on service excellence in their frontline goals and incentive systems. This wasn’t always the case. In fact, service quality objectives were often as highly weighted as sales objectives in branch performance management systems, especially when in-market competitors were vulnerable as a result of mergers, poor financial performance and the like. As we seek to rebuild customer trust and deliver information, advice, and solutions to help customers meet new financial challenges, service excellence should be a primary objective for customer-facing employees.

Better engineering of the relationship sales process. To succeed at building deeper, more profitable customer relationships, banks must get better at engineering sales processes, especially across product silos and lines of business. The industry has spent a fortune on customer relationship management systems, sales training, referral programs and the like. Even so, achieving a higher percentage of profitable relationships and leveraging skills and capabilities across organizational reporting lines remains a challenge for most banks.

Better skilled and more engaged frontline employees. Imagine if all your branch managers held leadership positions in their communities; all small business relationship managers could provide cash management advice; and all customer service staff members possessed cheerful, whatever-it-takes attitudes. Rebuilding the retail bank skill set to compete in a more customer-centric business model is perhaps one of the greatest challenges many banks face today.

Bank managers should feel a sense of urgency to change. Not only do the industry’s profit dynamics demand it, but consumers from every socio-demographic segment and most small businesses need the types of help today that banks can be uniquely positioned to provide. Consumers, for example, are back to saving money and are worried about retirement, debt levels, college financing and restoring their credit profiles. Businesses, meanwhile, are more concerned about managing cash flow and making payroll than expanding operations.

Loan-to-deposit ratios at banks are heading back toward 1990 levels and everyone’s talking about relationships again. In many respects, the “new normal” isn’t really so new after all. It’s just been about 20 years since we last experienced it.