Customer loyalty is a crucial issue for 70% of Europe's banking community, according to Datamonitor's new report on the changing patterns of bank customer loyalty in Europe, based on an opinion survey of 96 bank executives.
The report, 'Customer Loyalty in European Banking', comprises four chapters covering current trends in customer loyalty and their impact on profits, the reasons behind the current trends and the influence banks can have on them, data and analysis on what can make customers loyal again, and an analysis of how resources can be allocated toward rekindling relationships with consumers in European banking.
Customer loyalty is a crucial issue for 70% of Europe's banking community and, in Spain, Italy and the UK, it is seen as a top priority. According to Datamonitor, loyalty is declining 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 synergies and reduced cost.
Current levels of shopping around and switching are inversely correlated by country. Shopping around is relatively high in the UK and France, while switching 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 of both.
Thus, Datamonitor says that the UK and Italy will both see a further deterioration of the current situation: in the UK, consumers will shop around more, and in Italy switching banks will see a further increase. Spain, however, will see a dramatic increase in shopping around as well, despite the fact that this is not a common occurrence today. The Nordic and Benelux countries, together with France and Germany, will see relatively moderate increases in switching providers and shopping around.
Customers are also becoming more savvy. Datamonitor has measured a dramatic increase in comparing before buying in every country, and expects this to have an effect on either shopping around or switching. This effectively means that banks can no longer have it both ways: either consumers will start to shop around more, or general turnover rates will rise. This gives banks a strategic dilemma, however. They either run the risk of not being able to compete with specialists in specific product markets or they take on the risks that come with defensive product strategies that tie consumers in (for example, more customers leaving the relationship altogether because competitors have better deals).
Cycles of disloyalty
The report also highlights a decreasing trend in banking loyalty, as consumers compare, shop around, and switch more and more. Banks will need to react to this trend but, in order to find out what to do, they must first find out about the drivers of change. There is also interaction between cultural, competitive, and regulatory factors that leads to changes in consumer attitudes and behaviour.
Approximately two-thirds of the factors behind decreasing bank loyalty in Europe have to do with the competitive landscape, and changes therein. An increase in competition drives shopping around and switching most directly. Small innovative competitors from abroad, as well as 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 suggests the existence of a loyalty spiral in which innovators drive the rest of the competitive landscape to target customers more aggressively. This, in turn, creates opportunities for the new innovative players to come in.
Only markets where regulatory constraints exist are safe from such a spiral. But the removal of such regulations, and other major events impacting the competitive landscape (such as the development of powerful new channels or a consolidation wave), can initiate disloyalty spirals even in protected markets.
In effect, this means that no bank is safe forever from sudden decreases in customer loyalty. Datamonitor asserts, however, that the banks' future is entirely in their own hands. Exploiting a major change or event impacting the market to their own advantage can be done, either to stem disloyalty or to take advantage of the disloyalty among competitors' customers.
The report poses the question of what could make disloyal customers come back? The most important loyalty factor in convincing consumers to behave loyally toward their bank in Europe is service, followed by value for money, then access channels. All other factors - including the bank's commercial brand, its traditional image, the convenience of a single provider, and personal factors � are much less important.
Moreover, 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 such markets, traditional affinities along geographical and socio-political lines still carry some importance. However, there are strong indications that these will disappear as those markets evolve, and brand is not poised to replace them fully.
The convenience of a single provider is another loyalty factor that is disappearing quickly, the report says. This is due to the implementation of multi-channel distribution strategies in the past few years. Bigger banks and easier access mean that customers have no emotional or practical reason for staying with a bank that does not provide added value in return for grouping purchases at one point.
Customers can only be retained if they can get better service, better value-for-money, better products, and better distribution from their main provider. Taken at face value this implies that multi-product strategies are being surpassed by events. The final chapter of Datamonitor's Customer Loyalty in European Banking 2003 report shows how such strategies can survive, and how they can be adjusted to break disloyalty cycles. The report says that most banks realise that competing on a product-by-product basis with specialist providers cannot be upheld in the long term, and that they must instead make their multi-product strategies work.
However, service initiatives and CRM tools are often given extra budget space only when it is too late. Service tools are given a boost particularly in those countries where bankers are very concerned about current and future disloyalty trends. In countries where loyalty causes relatively little concern, Datamonitor has observed complacency toward improving service levels.
The overall profile of the customer prone to be subject to a disloyalty spiral is that of the young urban professional: this customer group is hard to please but can also be highly profitable, as it is in the 25-40 age group that most consumers contract their most important long-term financial products (most notably pensions products and mortgages). The latter are the most difficult to cross-sell on the basis of an account relationship.
On the basis of these findings, Datamonitor recommends that bankers should turn their product marketing policies around. Instead of grouping products around the current account in relatively loyal markets, and reacting with service initiatives if they are hit by competitive spirals, banks should concentrate on providing high levels of service for the long term, and react with mortgage-based product packages when disloyalty begins.
The full report can be ordered direct from Datamonitor.