Customer Loyalty Is Not What It Used to Be
Customer satisfaction and loyalty are now top goals for many financial institutions, in large part because conventional wisdom suggests that higher degrees of satisfaction and loyalty will translate into new business opportunities, including a greater share of their customer's wallet and referrals. However, the recent demographic shift to digitally-literate younger customers now poses questions with respect to the industry’s belief.
Raddon's National Consumer Research shows that the general public is demonstrating a higher degree of satisfaction with their primary financial institutions, with 96 percent of all consumers reporting that they are either "very satisfied" to "satisfied" with their main financial institution provider. It should be noted that credit union and community bank primary customers possess higher levels of satisfaction, respectively 99 percent and 98 percent, while primary customers of major banks (Bank of America, JPMorgan Chase, Wells Fargo, Citibank, PNC Bank and U.S. Bank) display a slightly lower level of satisfaction at 93 percent. Such high levels of satisfaction result in a greater likelihood that consumers across all generations will remain customers of their current primary financial institution. Given such a positive correlation, it can be concluded that customer satisfaction is key to customer retention.
With respect to customer loyalty, Raddon’s National Consumer Research also demonstrates that the general public is demonstrating a greater loyalty to their primary institution. In a scant four years, the consumer's loyalty score has increased by 600 basis points. It should be noted that loyalty scores are calculated from consumers' responses to the question asking how likely they are to recommend their primary financial institution to a family member or friend.
Like customer satisfaction, customer loyalty scores are higher with credit unions and community bank primary customers and lower with major bank primary customers. However, the correlation between customer satisfaction and loyalty is not as strong as the correlation with retention. It is only those consumers who are "very satisfied" with their primary institution who will recommend their primary financial institution to a family member or friend.
Although loyalty scores are trending upward for most consumers, loyalty has disintegrated with younger consumers (Gen Y). Such an erosion of the financial institution brand is problematic given that the younger consumers (net borrowers) are the industry’s future life blood. A Scratch study, The Millennial Disruption Index, polled 10,000 millennials (the generation born between 1981 and 2000) over the past three years, and found that:
- Banks made up four of their top 10 least loved brands
- One-third of millennials believe that they will be able to live a bank-free existence in the future
- More than 70 percent of millennials believe that the way they will access money and pay for things will be completely different in five years
- Nearly half of all respondents indicated that they were counting on startups to overhaul how banks work
- Approximately 75 percent of respondents reported that they would be more excited if financial services provided by Google, Amazon, Apple, PayPal, or Square than from their own banks
To reverse this brand erosion among younger consumers, the industry must come to grips with the realization that, in a digitally networked economy, customers and consumers are more empowered to define and alter the terms of the relationship with their financial institution. Digital channels have made it easier for institutions to sell and cross-sell additional products to customers but they have made it just as effortless for consumers to make purchases from institutions other than a primary provider. Thus, institutions are compelled to change their modes of customer engagement to attract and retain customers. Raddon’s National Consumer Research demonstrates higher levels of customer engagement correlates with higher loyalty. This correlation also has been confirmed by other proprietary customer research/engagement studies that Raddon has conducted.
Banking looks very different than it did just 10 years ago. With consumers using increasingly sophisticated channels, they are becoming more empowered and have greater service expectations. As a result, customer satisfaction and loyalty will only be determined by a complete set of customer experiences across multiple interactions offered by a brand. Consequently, to attract and retain younger consumers, financial institutions must give serious consideration to the new modes of customer engagement.
Pat Bator is a senior market and product development analyst at Raddon Financial Group. He has worked in the financial services industry for more than 25 years (21 years with the Raddon Financial Group). Since joining RFG, he has been a main contributor to the firm's syndicated national research program, analyzing consumer and business preferences for financial products and delivery channels over the past two decades.