Thursday, December 23, 2010

Churn Management in Banking

Retail banking has changed significantly over time. When we recall the past, the relationship of banks with their customer base was different.

When the generation of my parents opened an account with a bank, they were looking for a long-term relationship. Key factors for deciding which bank fits best were trust, the branch network, i.e. branches close to home and the size of the bank because that meant the bank had to be of great renown. Customers were loyal to their chosen bank. They usually did not close their accounts to move to a different financial institution, they sticked with their bank a whole lifetime.

The product portfolio a bank could offer differed at that time as well. Structured finance and complex derivatives were not introduced to the market or at least not considered as a valid option for the majority of private clients. That was also partly caused by the strict distinction between retail and investment banking in most countries.

The internet as well as the globalization and deregulation of the financial sector changed that situation fundamentally. The ability to collect immense volumes of information, enabling the individual customer to compare different financial products, analyze benchmarks without having to contact a financial councilor, doing online banking without talking to a bank clerk, revolutionized the banking business. Customers are not longer dependent on their bank; the relationship strings are loose and can lead to higher churn rates.

Generally, customers are satisfied when purchased products or services agreed upon fulfill their expectations. Nowadays, that does not necessarily lead to the conclusion of customer retention. That is one of the biggest challenges of the financial industry, especially of online banks.

According to a recent study of the (German) Gallup-Institute in autumn 2009, 65% of retail banking customers do not feel bound to their bank, only 14% are loyal and 21% consider themselves as bound to their financial institute but not loyal. These numbers are even worse for direct banks, since their customers are only interested in efficient service, low fees, fast transactions and the independency of opening hours. They normally do not need guidance from an advisor. This independence makes those customers volatile. As soon as another bank comes up with an allegedly attractive offer or lower fees, they consider moving away from their current bank.

It is therefore pretty tough for financial institutions to keep their profitable customers. That is the reason why banks are developing Churn Management or Customer Loyalty Systems respectively.

An example for such an initiative can be found at the German DAB (specialized on online banking). They started by analyzing the importance of customer loyalty on behalf of their executive board. Based on the results they determined alternatives for action, not just to identify likely churners but also to trigger loyalty campaigns.

In that context it is very important to achieve a common understanding of what loyalty means to the organization and how a bank can determine early in the process if a customer has a tendency of closing his accounts with the bank. Examples of wantaway customer scenarios are:

• Customers that alienate their cash and stocks completely and do not perform any transaction, at least for a segment-specific timeframe.
• Customers that reduce trading by a specified minimum percentage per defined period.
• Customers that reduce – with their own transactions – their total asset value more than a specified minimum amount.
• Customers that went inactive but were categorized in an active customer segment before

Once that understanding of a likely churner is established, the banks can analyze their customer information in their data warehouses, using business intelligence, do identify the risk of losing profitable customers. Each bank has usually thousands of different parameters that could play a role in that analysis.
Based on the historical information of each customer, an individual trend analysis can be established to show the development of each customer, his lifetime value. The marketing and sales team, who need to have a clear view of potential churn-threads in order to react quickly, can get a monthly dashboard showing the key performance indicators of each customer, like

• Customer Value (past performance and asset value)
• Performance Rating (based on thresholds and benchmarks)
• Risk of Churn (on a scale of 0 – 100)
• Customer Portfolio Development (trend, total assets, variance analysis, product split)

Prepared with this information in an easy consumable way, e.g. in dashboards that show the information in graphs, using traffic light indicators and other widgets to demonstrate the trends in a flexible manner (and maybe a more detailed overview of the customers’ portfolio), the sales department can trigger actions to retain their profitable customer base. Marketing can package specific incentives for their most valuable customers, knowing that simple fee reduction would not solve the underlying thread. The call centers will get a better feel for the importance of their customers and can prioritize the incoming requests. Last but not least, the management will get a tool that allows them to make better informed decisions regarding product strategy, customer relations and other strategic investments.

Coming back to the example of the DAB in Germany, they implemented such a loyalty system and are already seeing the positive impact such an analysis tool and management system has on their business and their customers. They expect to retain up to 30% of their customers with a high churn risk through to proper micro-campaigns based on the customer analysis provided.

Retaining 30% of your profitable customers that you normally would lose is quite an achievement and key to the success of a financial institution. You can make the math!