Customer loyalty in financial services is closely tied to the perceived effort of defecting from one bank and moving to another, despite efforts from regulators to make switching easier in an effort to increase competition, according to a study by Datamonitor in Australia.
The study found that barriers to defection in financial services currently have a higher impact on customer retention than factors such as satisfaction. For transaction accounts, the effort involved acts as a deterrent to switching, while for mortgages it is the exit fee that locks customers in.
According to Petter Ingemarsson, senior analyst for Datamonitor and author of the report, dissatisfied transaction account customers frequently stay with their bank despite wanting to change providers.
In a 2009 Datamonitor survey, 29% of respondents said they kept their transaction account provider for reasons other than satisfaction. In fact, the proportion of transaction accountholders who switched provider in the previous 12 months actually dropped between 2008 and 2009 (from 7.2% to 5.5%) and is not expected to rise in 2010.
"The main reason for this reluctance to switch bank account provider is the effort of switching linked payments. Account holders frequently tie direct debits and direct credits to their accounts, which greatly increase the perceived effort of switching account. Forgotten direct debits and credits could cause inconvenience or potentially economic loss for the customer," explained Ingemarsson.
In 2008 the Australian government mandated a "listing and switching" service for banks, whereby a consumer can request a comprehensive list of direct debits and credits over the past 13 months in order to help them switch banks. The banking industry agreed to implement this service by November 2008, but Datamonitor's research found, in some cases, banks are still unable or unwilling to provide this service.
Similarly, for mortgage holders, the government is now in the process of introducing legislation to limit exit fees (which are generally charged when a customer refinances their home within five years of taking out their mortgage).
However, there is a balance that must be struck when approaching such regulation: "On one hand, consumer protection from unfair or deceptive practices should be guaranteed but, on the other hand, over-regulation can lower the efficiency of the overall financial system," concluded Ingemarsson.