Customer Loyalty in Retail Banking (Part 2 of 2)

Does improving the client experience really improve profits or is it just a feel good exercise?  According to the Bain & Company report “Customer Loyalty in Retail Banking: North America 2010”, released in October 2010, it absolutely does.  The study confirms that loyal customers stay longer, buy more products, cost less to service and recommend their bank more often.  Most importantly, banks that lead through loyalty, experience higher growth rates and lower cost of funds.  Key findings from the Customer Loyalty in Retail Banking study include the following:

  • The power of customer loyalty is clear and compelling:  It leads to more profitable growth.  Loyal customers stay longer with banks that treat them well.  They buy more of their products, and they cost less to serve.  They recommend their bank to their friends and colleagues, becoming, in effect, a highly credible volunteer salesforce.  Investing in loyalty can generate more attractive returns than rolling out an ambitious new marketing plan or building new branches.


  • Friendly service” may not be easy to define or deliver, but it is far less expensive than investing in major systems upgrades.  Delivering friendly service is inextricably linked to improved employee loyalty, stronger corporate culture and effective training.  Getting the connection right can be highly profitable.


  • Loyalty leaders also do not need to price as aggressively as their competitors.  According to the study, banks that were price leaders (meaning those paying top rates on deposits in their markets in order to attract new business) enjoyed an annual deposit growth rate of 5 percent from 2002 through 2007 but faced a cost of funds of 265 basis points.  In contrast, the loyalty leaders that paid only average rates turned in a 5.6 percent annual deposit growth rate but paid just 184 basis points for their funds.  In other words, banks can choose to buy growth through pricing or they can earn an even higher rate of growth at lower cost through the loyalty advantage.


  • Among affluent U.S. customers, a promoter is worth $9,500 more than a detractor over the tenure of his or her relationship with a bank.

While many banks are increasing their focus on client experience, it should be even higher on the priority list.  With more attractive returns than new marketing plans and new branches, and less expensive than major systems upgrades, increasing customer loyalty should be on the top of every bank and credit union’s priority list for 2011.  The cost of funds difference alone is enormous.  For every $100 million in deposits a bank can save $800,000 in its cost of funds if it leads by loyalty rather than by price.  That is before factoring in the additional deposit growth and expense savings loyalty leaders enjoy.

Can any bank be a loyalty leader?  I believe so.  According to the Bain study; “The fact that some regional banks attained scores close to those of direct banks or community banks and credit unions demonstrates that larger banks can earn the loyalty of their customers.”  This has significant implications.  For large banks, it means that they can compete on loyalty, provided they put the right processes in place (measurement, training, reinforcement, recognition/incentives) and leadership is fully engaged.  For small banks and credit unions, this means that they cannot take customer satisfaction for granted.  Not all small banks and credit unions do equally well in creating a superior client experience. 

While our research at Prime Performance shows that as a category, small banks and credit unions typically perform on par or better than the best performing large banks, this is not always the case at the individual institution level.  As large banks increase their focus on their customers, small banks and credit unions need to make sure they are not losing their competitive advantage.  Any bank can be a loyalty leader, but it must be a strategic decision.  Is your client experience a strategy or an afterthought?

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