The retention game: it's important for a financial institution to keep those customers coming back--tomorrow and forever. Here's how to play 'finders keepers' successfully. (Cover Story).

Depending on which expert you talk to, you'll hear that it costs between five and 10 times more to find a new customer than to keep the current one. It's not exactly classified information. Unfortunately, it's another one of those facts that everyone seems to know, but few are doing anything about, according to business development consultant Richard Wemmers.

"What's keeping bankers awake at night is not the competition, but federal regulations, privacy laws and the new government acts to thwart terrorism that are increasing scrutiny on the bank," says Wemmers, founder of Wemmers Consulting Group in Atlanta. "Banks today are not being aggressive enough about keeping or seeking customers because they've been so profitable for the last 10 years."

Focusing on due diligence while underrating competition may be unwise, as the broad barometers of banking are signaling trouble. Total deposits to financial services institutions are dropping. Mergers and acquisitions have weeded out the weaker players, and the quantity of banks is shrinking. Wemmers predicts, too, that brokerage firms will continue to slice off market share with their lure of higher earnings on deposits.

"Consumers have a herd instinct," he claims. "Once they feel it's safe, they'll move everything. If you give your customers no reason to pause, if they have no loyalty, they'll dump you in a hurry," says Wemmers.

Imagine customers so loyal that they would pay more and travel farther just to do business with your bank It can be done, says Wemmers. In fact, it should be a business goal--achievable with careful planning.

"If I were a bank president today, I would be courting my current customers so that they had second and third reasons to pause before moving anything out of my bank," comments Wemmers. "I would also have in place a positive proactive new business program focused on a specific profitable target and have very unique selling propositions in place."

Retaining the old

Each time new customers enter your bank, they bring with them the potential for a lifetime of profit. Whether you'll keep them for the long term or lose them to another is determined by their banking experience. Before losing these "lifetime opportunities," learn more about what affects your customer retention rates. According to Wemmers, there are four key factors:

* Uniqueness. Ask yourself what your bank does to differentiate its offerings from the others in the same business.

* Competitiveness. It's not all about price, but about how your customer feels about you when they're away from the bank. Can they come up with a reason to continue to do business with you? A positive response means you're competitive.

* Quantity of contact. Too often people assume or take for granted their current customers. Wemmers says the rule of thumb is to communicate with a person every six weeks. Research shows you need that amount of contact to keep your business top of mind.

* Depth of relationship. Examine how many relationships you have with each customer. Three is a desired level, says Wemmers, but banks are more likely to have an average of only 1.5.

"Financial institutions don't do very much toward telling the majority of their best customers how much they're appreciated," complains Wemmer. "They don't try to leverage that loyalty into selling them other services."

What can be done to improve customer loyalty and retention? Jump-start your action plan with these five steps, suggests Wemmers:

* Locate your best customers. "It's the old 80-20 rule, where 20 percent of your customers will give you 80 percent of your business" says Wemmers. "Focus on those that can help you the most."

* Direct your efforts. Don't try to be all things to all people. Spreading the same messages and services to everyone adds up to diluted communications for your current customers.

* Ask, listen and remember. Ask your customers what they think of you and what they believe about your bank. Listen carefully to what they tell you and try to take action on those things that you can. Remember to go back to your customers who expressed concerns and communicate how you solved them.

* Be proactive. Have a written, specific action plan focused on your current customers to tell them how important they are, how much you appreciate them and to stimulate more business.

* Practice value-added selling. Offer the customers something they're not asking for. For example, if they're buying a CD, ask them if they'd like to have some financial planning advice along with the purchase.

Attracting the new

Some strategy overlaps occur when mining current customers for new revenues and seeking entirely new customer prospects. New product offerings, for example, are attractive to both. Before embarking on a new customer quest, though, do some research.

"The first tool I recommend to take business from your competitors and get them to come to your bank is research," claims Wemmer. "Do it properly and you'll find out things you can act on to sell, because now you're dealing directly with what your prospects think about you and others offering a similar service."

Zero in on new prospects with the following three steps:

1. Create a specific plan.

What type of customer do you want, and how do you plan to go after them? Understand your target, learn their financial needs and determine how you can serve them uniquely.

Example: Independently owned Devon Bank of Chicago is planning to maximum its relationships with the small-business sector by underwriting a seminar series. Last year they partnered with a nonprofit organization, the Institute for Small Business Success, to offer six seminars a year on topics such as business development, succession planning and team building.

"We're sponsoring the seminar, defraying the cost to attend and communicating with all of our customers to let them know it's available," explains Muriel Glick, vice president of marketing for Devon Bank. "We're reinforcing our relationship with our customers, too, by attending functions and talking with them about other opportunities where we can enhance our value to them."

To spread the word, media ads and flyers are inserted in all the area chamber of commerce bulletins. Brochures are mailed to all commercial customers, adorned with bright starburst stickers proclaiming "Be Our Guest."

"If picking up the cost of seminar can help encourage them to go, that's great," says Glick. "We really feel it's important because as our customers succeed, so do we."

In business for 56 years, with assets over $250 million, Devon Bank prides itself on being a community-minded bank.

"We have an edge over larger banks," she says." We really are intimately involved in our community, and I think we have the potential to make a difference with our customers."

2. Offer new products and services.

The Ninth Annual survey of Community Bank Executives (2002) by Grant Thornton revealed that 86 percent of community bank executives plan to offer new products and services.

Sectors such as the Hispanic market are fertile grounds for banks. Within two years, it's predicted that one in four Americans will be of Hispanic ancestry. This growing marketing is an excellent area for introducing new products or services.

3. Sell securities and insurance.

Banks are in a unique position to leverage trust in these two categories. While not a big profit source in terms of fees, they help lock in relationships.

Example: Univest Corp., headquartered in Souderton, Pa., recognized that the future of banking would depend on more than margins on loans and deposits. It changed status from bank to holding company five years ago.

"We bought an investment company and two insurance agencies," explains Linda Bishop, vice president of marketing for Univest, which holds assets over $1 billion." We did that to provide convenience, and better customer service levels, and of course, to help increase profits."

Every bank employee is trained in basic product knowledge through Web-based product modules developed together with a financial services training company. The eight modules were created over five years, and include topics such as Investments 101, Insurance 101, Trust Basics, Deposit Products and Loan Products.

"The material is presented in an engaging manner, but it's in plain English and job relevant," explains Dan Goldberg, president of Valley Forge, Pa.-based BankersEdge.

A Jeopardy game board in the final test of the module adds spice, as well as a way for management to track scores and employee participation. This is all part of the plan to make each bank employee an informed part of a team.

"The bank staff, insurance agents, everyone will have common knowledge of our products, " says Bishop. "Then we have integrated sales training to specifically address 'How do we identify the full gamut of a customer's needs and then address these needs through our full product line?'"

The more products a bank customer has, the more rewards they receive through Univest's Reward program, which offers special monthly rates for people with deposits totaling $25,000. New product packages are being launched this month (June 2002) that revolve around life stages.

Top customers are also identified and contacted often. Relationship managers are taught an organized and deliberate method of making customer contacts throughout the year. The first may be a call to thank them for business, with follow-ups explaining upcoming product specials. Customers are asked if they'd like advance notice of these through phone or e-mail messages. Then they're invited to some special event, such as customer appreciation day with a hospitality room at the branch. They may even get a special invitation to the annual Univest Grand Prix, an international bike race sponsored by the bank.

"We believe in the theory that the better we serve our customers and the more accounts they have with us, the more likely they are to stay with us," explains Bishop.

RELATED ARTICLE: What Customers (Really) Want

Big bank or little bank? Discount brokerage or full service? Internet only or bricks and clicks? With so many choices, how do people decide which financial service institution they're going to use? The answer lies in that one word all real estate brokers know so well: location.

"Location remains critical despite emphasis on alternate channels such as the Internet, telephone or ATM," comments Steven Reider, president of Bancography in Birmingham, Ala, whose firm conducted the November 2001, Market Awareness and Competitive Research survey.

More than one-third of the respondents in the survey named convenience of location as the primary determinant of bank choice. Less than 1 percent cited Internet or telephone banking as their primary determinant of choice, ranking lower in fact, than sheer inertia, which logged in a 13 percent response.

Service battles

Location may bring customers in, and the "I've always banked here" syndrome may keep a handful of them around, but they will jump ship if they're unhappy. Poor customer service compels consumers to drop accounts in many industries, but bank customers are likely to change providers more often, according to a recent survey by Mobius Management Systems Inc., Rye, N.Y. Forty-three percent of bank customers drop accounts because of bad service compared to 32 percent of Internet customers and 22 percent of pager or cell phone vendor customers.

"Every time we do this survey, it's the bank that customers are the most willing to walk away from," explains Abby Pinard, vice president of marketing service for Mobius. "Part of the reason is obvious, there's another bank down the street, but the real lesson is to improve customer service."

Reider agrees.

"People choose based on the bank down the street, but they develop loyalty and affinity based on the institution's breadth of offerings," he says. "It becomes a service battle."

He points to newcomer households as evidence. According to his survey, over 80 percent of newcomers sign up with a regional bank, mostly for convenience. Once that relationship is established, though, they lose out to competing institutions. The reason became clear, says Reider, when he saw how customers rated their overall service experience with their primary institutions: Sixty-five percent of customers of regional banks rated their institutions as excellent; 88 percent of community bank customers rated their banks the same.

Pinard offers some pet peeves that were uncovered in the Mobius survey that may be turning your customers right out the proverbial revolving door:

* Fifty-four percent of consumers polled said they wait on hold no more than five minutes before considering the customer service to be poor.

* Fifty percent of consumers polled said they spend no more than five minutes navigating a vendor, biller or bank website before picking up the phone and calling customer service.

How to Measure Cross-Sell, Retention and Churn

Increasing cross-sell, improving retention and reducing rank at the top of every bank's strategic priorities. But there are no standard definitions for these measures, and different calculations can yield sharply different views of a bank's performance. Here is one company's definitions for these critical measurements.

Cross-sell ratio: Defined as the number of products per household, cross-sell represents a primary measure of relationship depth and loyalty. Because banks include different products in their cross-sell statistics, it is difficult to compare results, or even know which measurement is appropriate. Banks can easily inflate cross-sell statistics by including products that do not enhance the relationship's profitability or tenure. Here are some guidelines for building a measure that captures the depth of your customers' relationships:

* Count services, not products. A household with three CDs is no more likely to remain loyal than a household with one GD.

* Do not include nonrevenue services. Direct deposit and ATM cards are simply means of accessing a checking account. These products are as inappropriate in a cross-sell calculation as check orders.

* Count all services with balances and also include safe deposit boxes and related services such as trust, investments and insurance.

* Calculate across households; not customers. If a woman owns a mortgage and her husband owns a checking account, the bank is meeting two needs of that household, even though each customer owns only one service.

Retention: Retention can be calculated in terms of households, accounts or balances. The last may be most important. Some research studies estimate that over 80 percent of the decline in retail profitability arises from balance declines in open accounts, rather than from account closures. But each measure has benefits and drawbacks:

* Household retention: what proportion of households that were present last quarter (or month or year) remains with the bank today? This is the simplest measure to calculate and does not penalize a bank for changes that occur in a consumer's portfolio as part of their normal financial lifecycle, such as paying off a loan. But it would consider a household that closed many accounts retained, even though the value of that household would have diminished significantly.

* Account retention: What proportion of accounts that were present last quarter (or month or year) remains with the bank today? This more rigorous definition detects the impact of closed accounts though not balance reductions. By definition, it will always be lower than household retention. This is an effective measurement for deposit accounts--less so for installment loans, which have a defined lifespan.

* Balance retention: What proportion of accounts that were present last quarter (or month or year) remains with the bank today? This may be the most effective measure of profitability, but it can be influenced by market conditions such as the rate environment. Also, balance attrition in one product could reflect growth in another; for example, withdrawal from a checking account for a down payment on a mortgage account.

Churn: Often, high new-account volumes mask low growth in a bank's overall account base. Some banks need to open as many as 12 new checking accounts just to net one incremental account in their portfolio a year later. This measure is a statistic that can be thought of as a replenishment ratio. Calculated as closed accounts divided by new accounts (within the same period), it shows how much of the bank's production has gone simply to offset closures--or to "break even." The lower the ratio, the better. For example, if a bank closes 70 accounts in a month and opens 100 in the same month, its replenishment ratio is 70 percent, since 70 percent of its sales efforts went toward offsetting lost accounts.

Reprinted with permission from Bancogrophy Spring 2002 newsletter

Janet Bingham Bernstel is a freelance writer who specializes in financial services and marketing issues. She is based in Jupiter, Fla.

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