A simple customer-retention strategy: securing direct deposits.

How much should retail banks spend to acquire new customers? Recently, it seems that bank investment in new customer acquisition is increasing substantially, with many banks offering free checking products (many without a minimum balance requirement) and significant cash incentives to lure new customers. Add on the cost of marketing and media campaigns and new customer acquisition cost is possibly at its highest point ever.

It would be encouraging if all consumers attracted by these lucrative offers would develop a lifetime relationship with their new bank. Unfortunately, that is not the case, as customer retention continues to be an issue in most banks, with annual consumer attrition ranging from 12 to 18 percent. More discouraging are the rates of attrition for new-to-bank customers, which are double and even triple the portfolio attrition rate at many banks; in some cases, banks lose 40 percent of new customers before these customers' first-year anniversary. With most customer relationships taking four to eight months to become profitable, a focused customer retention strategy is just as important as investment in customer acquisition.

What are the keys to customer retention and profitability, and how difficult are they to execute?

One of the simplest strategies for both retention and profitability is to secure the customer's direct deposit early in the relationship. With regular account funding from their payroll or pension deposit, customers are more likely to use the account for other transactions, sign up for additional products and services, and grow their deposit balance, all leading to higher profits. In addition, consumer accounts and households with direct deposit exhibit higher account profitability, and attrition rates are 50 to 75 percent higher than the portfolio rate. As compared to customers without any electronic transactions into or out of their account, those with direct deposit are over 80 percent less likely to attrite and over twice as profitable.

Tactics for securing the customer's direct deposit can be quite simple. For example, enhancing new account collateral to discuss the customer benefits of direct deposit provides information to customers that can help them initiate the direct deposit directly with their employer or pension plan. More sophisticated collateral may include a direct deposit authorization form with specific instructions for the customer to complete and process directly with their employer or pension provider. Branch staff members who understand the value of direct deposit often help the customer complete these forms while in the branch, ensuring that forms (including bank routing and account numbers) are completed correctly and processed quickly--thus helping to build the account balance sooner.

Exceptional branch staff will take the initiative to process the direct deposit (with the signed customer authorization), contacting the customer's employer or pension provider directly and sending the form to them to set up the direct deposit. On an institutional basis, many banks have set up central processing centers to process customer direct deposit requests completed during the account opening process. While the costs of establishing a small processing unit may be high, the benefits include institutionalizing the knowledge developed in the processing (employer processes and standards) and a more consistent customer experience.

While the strategies and tactics may be simple, the benefits of increasing direct deposit penetration can be significant. For a bank with 50,000 new customers per year and a 30 percent attrition rate for new-to-bank customers, a 2.5 percentage point improvement in customer attrition, easily realizable with a direct deposit campaign, can lead to a $500,000 profit gain per year.

Laura Fuller is a director with Dove Consulting in Boston. She specializes in strategy, organization effectiveness and process improvement in the financial services, government and consumer goods sectors.