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3.

Extract from Banking in a Changing World

The Age of
Customer Value

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It takes two to tango: Boosting sales through loyalty

Connecting with the customer: Moments of truth
at the front line
Retail strategies in tomorrows Europe
Making it big in small business
Winning three credit card hands
Imperatives for success in private banking

In a world where consumers are comfortable with no-frills airlines and direct
retail channels, and drive their luxury car to the discount store for bulk buys,
banks have a challenge on their hands. Being trustworthy and reliable is not
enough; customers no longer revere their banks. The financial services industry has to follow the lead of more traditional consumer sectors and grasp the
concept of value as customers perceive it. Bluntly, banks need to understand
consumers better if they are going to serve them effectively and profitably.
The first two articles in this section consider how to engender and capitalize on customer loyalty, which can no longer be taken for granted. Detailed
research and thought into the manner in which the front line interacts with
customers are vital if banks are to excite, acquire, and retain customers. The
third article looks more broadly at how Europes retail banks should set about
differentiating themselves in the years ahead which involves going beyond
marketing to examine the very strategy that will underpin the bank. Players
will need to decide whether a utility, community, or relationship model is best
suited to their aspirations and skills.
The last three articles zoom in on specific products and segments. A comprehensive dissection of the skills needed in the small business segment is
followed by a set of case studies of three contrasting credit card markets:
the US, continental Europe, and China. Both articles suggest that banks are
failing to capture the substantial opportunities at stake. We conclude the section with a look at the private banking sector where banks need to step up to
the plate with more sophisticated segmentation and advice if they are to give
clients the value for money they seek.

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It takes two to tango:

Boosting sales through loyalty
Marc Beaujean, Vincent Cremers, Luis Cunha,
and Francisco Gonalves Pereira

Steve Bossman, retail CEO of Pushbank, was worried. According to the latest
figures, sales were leveling out bad news for a bank accustomed to steady
growth. Admittedly, regional executives had been grumbling that it was getting
harder to hit their targets, but then they always did. Surely it wasnt marketings
fault? In his previous job as marketing director, Steve had invested heavily in
state-of-the-art tools and techniques to make the sales force proactive: propensity models, campaign management, sales training, scripts, the lot. Indeed,
Pushbank was seen as a leader in its field, and Steves efforts had helped land
him the CEO job.
So what was the problem? Had the bank lost competitiveness? Did it lack stamina?
Did it lack talent? As Steve agonized, his eyes fell on a photograph of himself and
his wife, and a clich came to mind: it takes two to tango. Of course! Here was he
thinking about the bank, when he should be thinking about its customers.
Steve Bossman and Pushbank are far from alone in their predicament. By
now, much of the banking industry has embraced proactivity and enjoyed the
resulting hike in sales. However, banks are starting to find that closing a sale
is getting more and more difficult, and sales campaigns are less effective than
they used to be. It seems that current models may have reached their limits.
So what now? What will be the next differentiating factor in banks go-to-market strategies? We have a suggestion: loyalty.

The loyalty paradox

As banks concentrated on increasing share of wallet, they neglected to consider the impact their actions were having on the health of their customer
relationships, namely on customer loyalty. Indeed, many of banks push efforts

The authors would like to thank Biljana Cvetanoski, Aunia Grogan, Raul Galamba de Oliveira, Ansgar Hlscher,
Jan-David Kohrt, Jan Hendrik Kraus, Dieter Roelen, and Ute Schuler for their contributions to this article.

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It takes two to tango: Boosting sales through loyalty

alienated some customers, who felt (quite reasonably) that their bank didnt
care about them and was only trying to sell them another product. In a recent
asset management mystery shopping exercise in Spain (a country known for
its high-performing banks), it emerged that salespeople were recommending
whatever the product of the day might be, irrespective of how well it matched
the mystery shoppers needs.

The economic benefit for the bank

is clear. Those customers that are
truly loyal to their bank and believe
in what it can do for them as
opposed to simply being too lazy to
move to a competitor can put as
much as 78 percent of their wallet
with one institution (Exhibit 2). They
are much less likely to go elsewhere
for mortgages and investments:
30 to 40 percent less likely than
an average customer, according to
our research, and more than 60
percent less likely than an unhappy
customer. This is because a staggering 96 percent of loyal customers will discuss a new product need
with their main bank, compared to
just under half of disloyal customers. In a nutshell, banks that boost loyalty
can boost sales.

But theres a paradox here. If customers are unhappy, why arent churn levels
soaring? Banking churn rates in Europe are in fact just 5 percent very low
compared to those in industries such as insurance (15 percent) and mobile
phones (15 to 20 percent). The solution to the puzzle lies in the difference
between attitudinal loyalty and behavioral loyalty. Even if only 5 percent of
customers switch bank in any year (behavior), 45 to 60 percent dont feel
emotionally attached to their bank (attitude) and wouldnt choose it again, let
alone recommend it to friends or family.
This is cause for concern. Large portions of the client base are attached to
their bank by sheer inertia and who would bet a bank franchise on inertia?
The bar for attitudinal loyalty is set much higher than mere satisfaction, which
is something that banks often measure, but that doesnt mean very much.
Being satisfied is a rather ambiguous state, prone to inertia. What we are
talking about here is being emotionally engaged with ones bank, being loyal
to it (Exhibit 1).

Naturally, recognizing that greater loyalty means more sales is not enough.
The multi-million-dollar question is whether banks can do anything about it.
We believe they can. The first step is to understand that loyalty is created only
through interactions between frontline bank staff and the customer. The next
step is to manage these interactions so that the customer feels a greater
sense of loyalty and emotional connection to the bank. These interactions fall
into three groups:

Moments of service. These are the perfunctory everyday interactions between the bank and its customers, such as requests for information, transactions, waiting in branches, and so on. Although customers invest hardly
any emotion in these moments, getting them wrong can damage attitudinal
loyalty, whereas outperforming the competition will bring virtually no reward.
Banks should target a solid performance level that meets customer expectations, but avoid over-investing in it.
Moments of truth. These are the few interactions where the customer invests a substantial amount of emotional energy.1 Just six events account
for three-quarters of all these interactions: when the customer gets financial advice, arranges a mortgage, or opens an account, and when the bank
approaches customers proactively, communicates price changes, or troubleshoots a customer problem such as errors in a statement, a check that
1

For more on these interactions and how they can be managed, see the next article, Connecting with the
customer: Moments of truth at the front line, pp. 8392.

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bounces unnecessarily, or something more serious. However rare they may

be, the banks performance at such moments will have a lasting impact on
a customers perception. When we surveyed almost 3,000 customers in
three European countries, we found out that 92 percent of positive events
for a bank (such as a customers purchase of a new product or increased
spending on it) are linked to a positive customer experience at one of these
moments of truth. On the other side, 53 percent of banks negative events
(such as a customer closing an account or buying a product from another
bank) is explained by a bad performance at a moment of truth. So, although
they dont happen often (once every five to seven years on average), these
crucial moments provide an opportunity to outperform customers expectations and make a strong and lasting impact on their attitudinal loyalty.
Moments of intimacy. These are the interactions that establish a closer
and deeper professional relationship between the bank and its customers.
Since moments of service do little to excite customers and moments of
truth are few and far between, banks seeking to build loyalty in a systematic
manner need to engineer these moments of intimacy. They can consider
possibilities such as introducing tiered loyalty programs (like the bronze,
silver, and gold cards that airlines offer frequent flyers); calling a branchs
most valuable 150 customers at least twice a year; and organizing events
outside the bank for the best customers. Fostering a more intimate relationship can greatly improve customer loyalty. We found that when an adviser
feels comfortable calling his or her customers, the success rate of commercial campaigns can rise from a mere 2 percent to more than 45 percent.
Armed with an understanding of how these interactions can affect customer
loyalty, leading institutions are starting to develop loyalty campaigns to sit
alongside more traditional sales campaigns. These can target clients at risk
of defection and try to boost their emotional link to the bank. The KeyClub
operated by UBS is a good example of a loyalty campaign. Launched in 1994
and revamped ten years later, KeyClub enables customers to collect points
through their interactions with the bank, which they then redeem with a variety
of partners and at UBS-sponsored events. We all know intuitively that loyalty
matters; the innovative insight here is that it can be purposefully created and
managed in a banking relationship.
Banks should not undertake loyalty programs in an ad hoc fashion, but should
target those customer groups that are likely to bring the greatest benefits, and
intertwine their campaigns with traditional sales efforts. We are certainly not
suggesting that banks should abandon the proactive mindset they have built
up over the past few years; rather, they should add a new element that will
increase their overall prospects of success.

It takes two to tango: Boosting sales through loyalty

First get to know your partner

One way of intertwining sales and loyalty is to use them as criteria to segment
the customer base specifically, by level of loyalty and by share of wallet
held with the bank. This produces five clusters of customers, each of which
requires a distinct course of action from both the commercial and the loyalty
standpoint (Exhibit 3).
Manage approachable skeptics. These are customers with average loyalty
towards the bank; perhaps they are new customers, have had few interactions
with the bank, or simply feel little emotional connection with it. This cluster
typically represents 30 to 60 percent of the total customer base. Banks should
carefully manage every interaction with these customers: although they welcome proactivity, they need to be convinced that any offers are in their own
personal interest. Consequently, banks must link propositions to customer
needs at every single moment, paying particular attention to any signs from
the customer that they are being too pushy. Failure to do so, especially at moments of truth, could damage the relationship beyond repair.
Often banks need to create stronger moments of intimacy before they can
propose more advanced product offerings that can be sold only to the most
loyal customers. This is especially true if banks want to become a customers
adviser, which is where the big money lies.

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It takes two to tango: Boosting sales through loyalty

Target expectant high-potentials. These are customers who have a high level
of attitudinal loyalty but a low share of wallet. Consistently across Europe,
most banks still have up to a quarter of their customer base in this cluster,
although the proportion can be as low as 5 percent in some cases. For banks,
these customers represent an opportunity there for the taking. The customers
will welcome a more proactive approach, as many of them believe their banks
should have contacted them more often. As a first step, banks should propose existing products and services that could be relevant for these customers; later, they can use the customers to test new or more advanced product
offerings. While doing so, banks should pay close attention to maintaining
relationships by excelling at moments of truth and avoiding bad experiences
at moments of service, otherwise loyalty levels will start to fall.

approached to test more sophisticated products and services that the bank
is considering launching more widely, pushing sales to this group will have
very little impact as the bulk of their money is already with the bank. These
customers typically make up 10 to 15 percent of a banks total customer base
but can represent as much as 50 to 60 percent of its profitability, so much of
its success will rest on ensuring that they continue to be served well at moments of truth and that nothing bad happens at moments of service. These
customers also tend to like interacting with their bank, so it need not hesitate
to include them in moments of intimacy campaigns.

Rescue apathetic non-believers. These are customers with a low level of

attitudinal loyalty but a high share of wallet, usually for historical reasons or
because the relationship has been tarnished by the banks excessive proactivity. The only things keeping these customers with the bank are inertia and the
lack of a compelling competitive offer. Some banks have as many as a quarter
of their customers in this cluster, although there are wide variations between
countries. For this segment, banks should abstain from sales activities (by
removing customers from target lists, ensuring they dont receive sales calls
from call centers, and so on) and urgently engage in relationship building,
taking steps to create moments of intimacy. Initiatives as simple as calling to
check whether customers are happy with the bank and find out if they have
any problems can help to regain trust (naturally, any problems reported must
be followed up). Failure to act results in plummeting customer satisfaction
and increased churn as customers feel more and more disconnected from
the bank.
Turn around uninterested sleepers. These are customers with a low level of
attitudinal loyalty and a low share of wallet. They typically make up 5 to 15
percent of banks customer base, and often have dormant accounts. Sleepers are very difficult to turn around, and institutions should think twice before
embarking on heroic loyalty-boosting attempts; the economic impact is likely
to be minimal in the short to medium term because of the limited assets
these customers hold with the bank. If banks do decide to engage in a turnaround, they need to create some level of intimacy before launching any new
sales activities. Inviting these customers to the branch solely to discuss the
banking relationship and clear up any lingering problems can be a good first
step.
Sustain happy devotees. These are customers who have a strong relationship
with their bank and have put most of their assets with it. Although they can be

Step out on the dance floor

If banks are to dance the loyalty tango with any hope of success (let alone
with any flair), they need to make sure they are completely in time with their
partners, the customers.
First of all, they must monitor customer loyalty levels just as they track profitability and share of wallet. However, that doesnt mean asking a statistically
representative sample of customers a series of standard questions. This may
be adequate when a bank is trying to understand its starting situation, or even
craft its commercial strategies, but when it is seeking to define the precise
loyalty level of any given customer, individual information is needed. Weve
experienced three ways of getting this information:

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It takes two to tango: Boosting sales through loyalty

Getting inside the customers mind

To boost and then capitalize on customer loyalty, banks have to understand
what really drives customers attitudes towards them: what makes some
customers true advocates while others are indifferent at best, staying with
their bank only through apathy.
To obtain customer insights that are fresh, nuanced, and perceptive, banks
have to throw away their old ideas about talking to customers and do more
than fire off a bunch of questions or run a few focus groups. They need to
apply appropriate (and often innovative) research methods.
Qualitative exploratory techniques such as diary keeping, in-depth interviews, ethnographic sessions, and accompanied shopping (observation)
can capture insights that would never otherwise come to light. To give an
example, we asked a group of 28 people to keep a diary for two weeks to
record their experiences with a particular product purchase (Exhibit). We
used in-depth interviews to explore their mindset before and after the
actual purchase, and identified astonishing shifts in their attitudes. The
insights we gained went far beyond anything we could have discovered
simply by asking questions. Take mortgages. When they first approach
a bank, many customers are concerned only with getting a rough idea of
how much they can borrow. They have no intention of actually applying
for a mortgage; indeed, they may not even have found a house to buy.
Yet if they feel the bank is empathetic at this stage, they may well go
back to it later when they are ready to take out a mortgage.
Quantitative research can benefit from using state-of-the-art modeling
to uncover the latent needs and preferences behind customers decisions, as opposed to their stated reasons for their actions (which tend
to be based on what they think should have driven their behavior, not
what actually did). Techniques include the increasingly common conjoint
analysis, as well as more innovative paths such as structured equation
models.
We recently used these new approaches on 2,500 customers in Germany
and Italy to determine what drives them to be truly loyal and to deepen
their relationship with a bank, as well as to understand how they buy investments and mortgages. The results proved enlightening. In time, we expect
more banks to abandon their traditional comfort zone of surveys, focus
groups, and the like for the new terrain of innovative research techniques.

Survey all customers up front using simple questions such as those we used
in one of our market surveys (Exhibit 4). This is probably the best method as
it provides complete and accurate information and can be done by a banks
call center. The chief drawback of this approach is its cost possibly too high
for mass-market customers, though justifiable for more affluent groups.
Ask one or two simple questions at the beginning of key interactions (such as
moments of truth and proactive commercial campaigns) to identify broadly
where the customer stands. The bank employee can then use the answers
to judge what behavior to adopt: for example, refraining from proactive selling if the customer refers to an unresolved problem that has damaged his
or her relationship with the bank. This method obviously requires the bank
to train its sales force appropriately, but it is perfectly achievable.
A more ad hoc approach is to talk with customers after a moment of truth
to ascertain its effect on their loyalty level. The information gleaned can be
fed back into the organization to improve future interactions.
Once a bank develops a systematic approach to monitor individual customers
loyalty levels, the next step is to embed this information in the sales machine.
This will have repercussions for the marketing function as well as the front
line. The pendulum will swing to one side or the other depending on the banks
starting situation. Two specific tasks are vital:

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It takes two to tango: Boosting sales through loyalty

Upgrade central intelligence. Normally banks have a process to define

their commercial priorities. Some are based on sophisticated propensity
models with tools that feed contacts to call centers and the wider network;
others take a simpler common-sense approach, with names sent around in
spreadsheets. The concept and implications of loyalty must be woven into
the existing central intelligence machine, since building something separate will only create confusion and sap credibility. Hence, target lists that
were previously based solely on performance indicators (such as customer
profile, propensity to buy a certain product, or existing share of wallet) will
now incorporate loyalty indicators to generate the optimum method of maximizing sales potential. The end result will be that the bank can identify and
implement the best concrete strategy for each individual customer. That
will mean restricting efforts for some segments, strengthening them for
others, and investing in customer intimacy campaigns beyond pure sales
campaigns for clients at risk of defection.
Transform frontline mindsets and behavior. Since it wont be feasible to
rank all customers by their loyalty level at the outset, especially for massmarket segments, it will be important to involve the front line. Two areas
are critical. One should be part of the toolkit of any bank looking to improve
customer loyalty: namely, operating properly at basic moments of service,
excelling in detecting and performing at moments of truth, and being comfortable in dealing with moments of intimacy. The second area involves
training the front line to shape their interactions so that they are able to
ascertain a customers loyalty level and then decide whether to continue
with a sales pitch or use the occasion to improve loyalty instead. It is much
more of a challenge to get a sales force of several thousand performing at
this level.
*

At first glance, these ideas may seem to be not that far removed from current
practice. We disagree. The days of tinkering with the old system are rapidly
fading. We urge banks to embrace these new ideas wholesale. Winning institutions are starting to recognize that the pure push model is nearing the end of
its life-cycle, whether because it is no longer distinctive, because consumers
are increasingly cynical, or because it is time to put the customer back at the
heart of the business. It is a model that has undoubtedly served banks well,
but the next wave of growth will, we believe, come from taking an economic
approach to loyalty and ingraining it in the institution and its actions.
The potential of this new approach is already evident. Just six months into
its loyalty effort, one major Benelux institution had increased the number of

successful sales meetings per officer by more than 80 percent, and the assets under management per employee by more than 40 percent. Not only that,
but frontline staff were much more motivated.
So, for all the Steve Bossmans out there, the message is clear. It does indeed
take two to tango.

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