Customer loyalty to UK banks is fast disappearing as a result of acquisition-focused marketing strategies, with 90% of the country's leading retail banking providers agreeing that the number of switchers is rising, according to a report from independent market analyst Datamonitor.
According to the report, 'Customer Retention in UK Retail Banking', unsecured personal loans have the highest defection rates, with almost one-quarter of customers leaving their lender within a year of taking out a loan.
Churn by acquisition
Datamonitor suggests that banks are largely responsible for this apparent change in consumer attitudes because they have been striving for market dominance through customer acquisition campaigns. Customers have been encouraged to switch providers rather than being rewarded for their loyalty, resulting in a greater number of defections across the board. When customers feel very little loyalty to their banks, they shop around for financial products and services that suit their needs.
"The convenience of having a single financial services provider, which used to be an important driver of bank loyalty, is a thing of the past. Customers now expect added value in return for keeping all of their financial products in one place," explained Oksana Selezneva, Datamonitor financial services analyst, and author of the report.
Unsecured personal loans are arguably the most commoditised product in the UK retail banking market, with price being the key governing factor. Substantial price cuts have occurred among the previously least-competitive lenders, with many big banks cutting their loan APRs in 2003 to try to stop customers from migrating to cheaper direct providers, and to attract new customers.
However, when the best-deal seekers have gone, high-street based lenders are still able to enjoy large and loyal personal loan customer bases, indicating that, while price is clearly important, customers apparently appreciate other factors such as convenience and quick access to their funds.
Credit card holders are the next most promiscuous customers. According to Datamonitor, 23% of UK credit card holders switch providers within a year of signing up. Again, the credit card market is firmly focused on customer acquisition and pricing tactics. Reduced-rate balance transfers and low introductory rates have become common, and often at the expense of existing card holders.
However, the report argues that price-dominated tactics are not always the most effective. Credit card providers can - and do - compete on brand image (for example, Barclaycard). "If customers feel a connection to the image and the brand of the company they are much less likely to be tempted away by a competitor's advertising campaign, and are more likely to put up with product or service failures," said Selezneva.
One in five mortgage holders are likely to change their provider within a year of taking out a mortgage. This proportion has grown in recent years due to the popularity of re-mortgaging and the growth of buy-to-let sector, with many house buyers trying to take advantage of the next best deal on the market. Many mortgage providers offer subsidised deals to new borrowers and to those willing to switch from their current lenders, while neglecting existing customers. It is no surprise that the market has seen greater levels of customer defection.
Providers are adopting various tactics to stem the flow of defectors, from offering extended tie-ins, which discourage new borrowers from switching too soon, to only accepting applications from customers who have not changed their provider recently.
However, a small number of lenders, such as Northern Rock, Britannia BS and Nationwide BS, are approaching the issue with long-term loyalty in mind, by offering new and existing customers the same prices.
Inertia may fail
Current account customers are the least likely to switch banks, due mainly to the high level of inertia that exists between customer and provider. Competitive interest rates do not necessarily play the most important role in a customer's choice of a current account provider: Even if they switch from the least to the most competitive offering on the market, the difference does not usually amount to a great deal.
But Datamonitor warns that providers should not be complacent, because customers will not put up with sub-standard service or accept artificially low returns on their deposits in the face of the media barrage of best-buy tables and aggressive competitor advertising.