Analysis of loyalty in European banking

WM Circle Logo

By: Wise Marketer Staff |

Posted on August 7, 2003

Datamonitor has published its new 'Customer Loyalty in European Banking' report, which analyses European bank loyalty in terms of the recent declines in loyalty, cycles of disloyalty, and looks at how to make customers loyal again.

The report is an action-driven analysis of changing patterns of bank loyalty, based on an industry opinion survey of 96 bank executives. It comprises four main chapters:

  1. Declining loyalty: Measures current trends in customer loyalty and their impact on profits for banks.
  2. Cycles of disloyalty: Analyses reasons behind the current trends and the influence that banks can have on them.
  3. Replacing loyalty: Provides data and analysis on what can make customers loyal again.
  4. Tactics and strategies: Concludes the report with an analysis of how resources can be allocated toward rekindling relationships with European banking customers.

Datamonitor measured customer loyalty and its evolution by two main metrics: the extent to which consumers shop around at different providers for new financial products while keeping existing relationships intact, and the extent to which they terminate relationships and switch to other providers altogether.

Declining loyalty
According to the report, customer loyalty is now a crucial issue for 70% of Europe's banking community; In Spain, Italy and the UK, it is seen as a top priority. The reason why widespread fear exists is that loyalty is declining rapidly, and this comes as a double blow to bankers in Europe.

Not only is acquiring new customers from outside the existing customer base up to ten times as expensive as making a cross-sale, many European banks have put in place a business model that counts on wide cross-sales across the financial services product spectrum to achieve desired synergies and reduced costs.

While shopping around is relatively high in the UK and France, switching providers is more important in Spain, Italy and the Nordic region. In Germany, both shopping and switching occur at a relatively high rate. Future trends in these metrics also sway either in favour of more shopping around or of more switching, but rarely both at the same time.

Moreover, a dramatic increase in 'smart consumers' (comparing products and services before buying) has been noted in every country and, sooner or later, this will have an effect on either shopping around or switching. This gives banks a strategic dilemma: Either they run the risk of not being able to compete with specialists in specific markets, or they take on the risk that comes with defensive product strategies that tie consumers to them - in which case more customers may leave the relationship because competitors have better deals.

Cycles of disloyalty
It is apparent that bank loyalty is decreasing. Consumers compare, shop, and switch more and more, and the banks will have to react to this phenomenon. But to find out what to do next, they also have to understand the drivers of change.

According to the report, approximately 65% of all factors behind decreasing bank loyalty in Europe are to do with the competitive landscape and changes therein. An increase in competition most directly drives both shopping around and switching between banks.

Surprisingly, small innovative competitors from abroad and direct players that have recently entered the market carry as much weight in driving changes in loyalty as banks with a much larger presence in the market. This points toward the existence of a 'loyalty spiral' whereby innovators drive the rest of the competitive landscape to target customers more aggressively. This, in turn, creates fresh opportunities for new innovative players to enter the market.

According to Datamonitor, only markets where regulatory constraints exist are safe from such a spiral. However, the removal of such regulations and also other major events impacting on the competitive landscape (such as the development of powerful new channels, or a consolidation wave), can initiate these disloyalty spirals, even in protected markets.

Replacing loyalty
So, in these times of spiralling disloyalty, Datamonitor offers some suggestions of what can be done to encourage customers to come back. The most important factor in convincing consumers to behave loyally toward their bank is service, followed by value for money, and finally multiple channels of access. All other factors (including the bank's commercial brand, its traditional image, the convenience of a single provider, and personal factors) are considered much less important.

Emotional factors accounted for less than 25% of all loyalty drivers, while customer satisfaction was considered around three times as important. Moreover, the emotional drivers (such as image and brand) are relatively important only in markets where consolidation and full commercialisation of the banking sector has not been fully carried through. In those cases, traditional affinities along geographical and socio-political lines still carry some importance. There are strong indications, however, that these are likely to disappear as those markets evolve, where brand is not poised to replace them fully.

Because of the implementation of multi-channel distribution strategies during the past few years, the convenience of a single provider is another factor that is disappearing quite rapidly. Bigger, more commercial banks and easier access means that customers have neither emotional nor practical reasons for staying with a bank that doesn't provide added value in return for grouping purchases in one place.

Tactics and strategies
Customers can only be retained, suggests the report, if they can get better service, better value-for-money, better products, and better distribution at their main provider. Although this implies that multi-product strategies are being surpassed by current events, the final chapter of the report shows how they can survive, and how they can be used to break disloyalty cycles.

Most banks realise that competing on a product-by-product basis with specialist providers cannot be upheld in the long term, and that they will need to make multi-product strategies work.

Broadly speaking, banks are giving much of their attention to marketing tools that should deliver value for money and, most of all, service to consumers, in return for a larger share-of-wallet. However, according to Datamonitor, when it comes to the tactical use of these tools, many banks make the mistake of giving service initiatives and CRM-tools extra budget space when it is too late. Service tools are given a boost particularly in those countries where bankers are highly concerned about current and future disloyalty trends. However, in those countries where loyalty causes relatively little concern, bankers are more complacent toward improving service levels.

Key findings
The report finds that the overall profile of the customer most likely to be swallowed up by a disloyalty spiral is that of the young urban professional. This group is hard to please but can also be highly profitable, because it is in this 25-40 age category that most consumers contract their most important long-term financial products (notably pensions products and mortgages). The latter is the most difficult to cross-sell on the basis of an account relationship.

On the basis of its findings, Datamonitor recommends that European banks should turn their product marketing policies around and, rather than grouping products around the current account in relatively loyal markets and reacting with service initiatives when these are shattered by competitive spirals, instead they should concentrate on providing high levels of service over the long term and react with mortgage-based product packages when disloyalty starts up.

The full report is available from Datamonitor's Financial Services division.

More Info: