Retail banking: the ailment and the cure

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By: Wise Marketer Staff |

Posted on October 28, 2005

While many retail banks measuring their success by product lines rather than by customer value, to gain a competitive advantage they should instead focus on customers, according to research from business intelligence firm SAS and customer strategy consulting firm Peppers & Rogers Group.

The study, entitled 'Measuring Customer Value in Retail Banking', explored the challenges and opportunities that retail banks experience in developing and integrating customer value metrics into their product-based business models. The study surveyed 48 executives from eighteen US retail banks, ranging in asset size from US$12 billion to US$1.3 trillion. It asked participants about the application of customer value metrics, the process for measuring customer value, and the impact of customer value metrics on their organisation.

The financial services industry has been widely recognised as a leader in customer intimacy. Retail banks in particular are often praised as pioneers in deploying best-in-class strategy and technology to develop profitable customer relationships. Much of this progress has been built on gaining insight into customer value and then using this insight for strategic and tactical decision making.

Lifetime value
Customer value (also known as Customer Lifetime Value or CLV) includes both the current and future value of a customer, across multiple products. The next point of focus is to actually use that knowledge, whether through out-bound sales and marketing efforts or in-bound customer service interactions. The goal is to align the entire organisation to enhance the relationship between the bank and the customer, across all products.

According to the study, retail banks reported a high degree of confidence in their customer value models - the average accuracy score was 7.6 on a 10-point scale. But while customer value models are perceived to be accurate, their value to the organisation has not been fully realised.

Improvement needed
According to the study, while more than half (52%) of respondents reported that using customer value metrics for decision making drives success at their organisations, 44% were undecided. And when asked if the use of customer value metrics provided a competitive advantage, only 34% said yes, while 33% said no and another 33% were uncertain.

And while all the retail bank executives surveyed said they recognise the potential importance to their organisations of measuring customer value, the way customer value measures are being used and the perceived benefit varies between institutions. On one hand, banks are actively calculating customer value: every single executive surveyed reported that their bank calculates customer value, and has been using this key metric for decision making for an average of nearly seven years. Senior executives at retail banks view - and use - customer value strategically. Two-thirds (67%) of those surveyed said that senior managers at their banks use customer value in decision making, and more than three-quarters (78%) use customer value in strategic planning.

New strategy
While retail banks have long known that growing customer loyalty, customer profitability and share-of-wallet are the keys to competitive advantage, the survey discovered that only 17% of retail banks are organised around customer value.

And even though most retail banks today use customer value to generate insight into customer opportunities, the majority of customer value applications tend to be tactical rather than strategic. Nearly three-quarters (72%) of the surveyed executives noted that their banks use customer value metrics to help measure the effectiveness of sales campaigns, while only 17% use them in measuring the overall success of the organisation.

"Retail banks must refocus their strategy from product-out to customer-in," said Michael Lengel, principal with Peppers & Rogers Group. "Customers are the scarcest resource in business today - even scarcer than capital. A sound customer strategy helps banks to focus on not just any customers, but the right customers - those who offer the highest value today and tomorrow."

Perhaps the most significant reason that banks have not realised the full potential of tracking customer value is related to management accountability. According to the research, only 6% of the executives surveyed hold anyone responsible for changes in customer value.

"This lack of ownership creates miscues at the organisational level," said Lengel. "For instance, most retail banks incentivise and reward employee performance based on selling as many products as possible. But why should a segment manager in credit cards care about increasing customer value if she's rewarded on the number of accounts opened per quarter? Ownership must happen at the management level and the customer-facing level."

The study suggests that retail banks may need to refocus their strategy on customers and customer value management rather than solely on products and product management. By doing so, they can start to create and use strategies that increase profitability and result in a stronger customer franchise. A white paper exploring the research has been made available for download from the SAS web site - click here.

For additional information:
·  Visit SAS Institute at
·  Visit Peppers & Rogers at