Many banking institutions are evaluating their current fee structures and considering modifications in an attempt to drive bottom-line improvements, while also acknowledging the potential ‘fallout’ that can arise from a change to fee structures.
Using data from the U.S. Retail Banking Satisfaction Study, J.D. Power has analyzed the topic of fees from multiple angles. Among other things, prior analysis related to the topic of fees has found that:
- The ‘negative impact’ of monthly maintenance fees has been decreasing within the retail banking industry, indicating that customers are becoming slightly more ‘accepting’ of monthly fees.
- Many customers pay a higher-than-average fee, yet remain highly satisfied. This is driven by the delivery of a clear ‘value proposition’ from their bank (the customer feels that the benefits they receive from the bank outweighs the cost).
- When implemented, fee changes represent a significant risk for banking institutions. Problem incidence will increase, driving an increase in labor costs associated with problem resolution. Intended attrition also increases, especially within the first month after a change.
When considering whether or not to increase/decrease monthly fees associated with checking accounts, it is important for banks to fully weigh the pro’s and con’s of the change. On one hand, an increase in the percentage of customers charged a fee (or an increase in actual fee amounts) can positively impact revenue.
However, as displayed in the chart below, data finds that banks who position themselves as a ‘low cost’ institution enjoy bottom-line benefits such as lower ‘cost-to-serve’, greater loyalty and greater share-of-deposits. Additionally, customers of ‘low-cost’ banks are significantly less likely to open additional accounts/products outside of the bank.
The decision to implement/increase/decrease fees should be unique for each and every banking institution depending on their overall strategic plans. It is critical, however, that they fully understand all potential ‘tradeoffs’ for any decision that is implemented. Analysis of consumer behavior and customer satisfaction data can be an extremely valuable tool to use when determining the appropriate cause of action.
Data from J.D. Power’s U.S. Retail Banking Satisfaction Study finds that younger investors have greater willingness to open investment accounts/products at their primary retail banking institution.
For example, among Affluent Investors, 37% of those in the Generation Y age cohort hold a mutual fund/annuity with their primary retail bank. Conversely, only 9% of Affluent Investors in the Pre-Boomer age cohort hold a mutual fund/annuity with their primary retail bank.
On one hand, this could be good news for ‘banking’ institutions looking to increase their share of investable assets held. On the other hand, traditional ‘investment-only’ institutions may be at risk of losing valuable asset share moving forward.
With the continued acceptance of digital banking channels, it is important for financial institutions to ‘keep up with the times’. Even banks that promote personal service as a key part of their value proposition need to devote investment resources to their digital channels. Failure to do so may put the bank at risk of losing customers that represent future growth potential (ie. Millennials), who have already shown a preference for digital interaction.
Data from the 2014 Retail Banking Study provides an interesting case study on the impact of investing in digital channels. As shown in the graphic below, ‘Bank A’ has been investing heavily in digital channels while ‘Bank B’ has not. Bank A has seen a greater lift in customer satisfaction, driven by their technology improvements. It is also important to note that, despite a heavy investment in digital interaction, Bank A has also been able to significantly improve the branch experience.
The chart below provides further evidence of the impact of investing in digital channels, as interaction scores for Bank A are significantly higher than those at Bank B. Additionally, the negative ‘gap’ in digital satisfaction between Bank B and the industry average has widened considerably.
Finally, the real impact of investing in digital channels is shown below, as Bank A has seen their key loyalty and advocacy metrics improve, while Bank B has seen declines.
Data from J.D. Power’s 2014 Retail Banking Satisfaction Study finds that customers are becoming more tolerant of monthly maintenance fees.
2014 study data finds that Fees satisfaction among customers paying a fee has increased to 594 (on a 1,000-point scale), which is significantly higher than 2013 study findings. Furthermore, the increase in satisfaction is especially profound among Affluent Retail Banking Customers.
Banks are doing a better job of illustrating their ‘value proposition’, which has helped mitigate dissatisfaction with fees. In other words, customers have a better understanding of the services and features available to them for the price they are paying.
In addition to illustrating the associated value, other drivers of Fees satisfaction include:
- Ensuring that customers ‘completely’ understand the fees associated with their account
- Ensuring that customers are aware of available fee discounts/waivers
- Maintaining stable fee structures associated with accounts
Data from the 2014 Retail Banking Satisfaction Study was released to subscribers on April 29th, 2014.
Past analysis conducted by J.D. Power has found that mergers and acquisitions, if not managed properly, often result in significant declines in both customer satisfaction scores and Brand Image ratings. From the very beginning, customers of the acquired bank are likely to have negative perceptions of the brand to which they’re forced to switch, which amplifies any tactical problems that arise from the adoption of new banking policies, processes, and products.
Prior analysis has also found that retail banking customers typically react negatively to change, particularly when it disrupts their previous pricing structures or general routines. While fee changes are a major source of frustration among customers during a merger/acquisition, simple developments such as changes to online banking, account statements, and product services/features are also causes of frustration. Acquired customers experience more problems than current customers as they struggle to familiarize themselves with the processes and culture of a new financial institution.
Data from the 2013 Retail Banking Satisfaction provides a good case study to examine the potentially disruptive impact of M&A activity. BMO Harris had purchased M&I in 2010, and the conversion process lasted until late 2012. In turn, the 2013 Retail Banking Study found that BMO Harris experienced the largest declines across the industry for both overall satisfaction and the Brand Image rating for Good reputation.
Further, the impact of the merger on both Brand Image ratings and satisfaction scores was more pronounced in certain segments of BMO Harris Bank’s customer base, including geographic location. Given that M&I was headquartered in Milwaukee, it is not unexpected that customer frustration with the merger was significantly more negative in Wisconsin than in Illinois or within the Chicago CSA, which is the home market of BMO Harris. Additionally, decreases in both Brand Image ratings and satisfaction scores were larger among different demographic segments at BMO Harris.
However, data from the first three fielding waves of the 2014 Retail Banking Study shows that BMO has done a solid job of addressing the initial problems and taking corrective action to improve the customer experience. Whereas their overall satisfaction score had decreased by 55 index points in the 2013 study, the first three waves of the 2014 study finds that BMO’s score has rebounded significantly (increase of 45 index points).
While all businesses would likely consider customer satisfaction a ‘nice to have’, many question whether investments towards improving the customer experience will actually result in a positive impact on the bottom-line. Across multiple industries, analysis of consumer data collected by J.D. Power shows a clear relationship between high customer satisfaction and improved financial indicators.
Specifically within the retail banking industry, highly satisfied customers tend to hold a greater share-of-wallet with the institution and also report significantly higher scores related to loyalty and advocacy.
Data from the first three fielding periods of J.D. Power’s 2014 Retail Banking Satisfaction Study finds that customer satisfaction is at its highest level since the study originated in 2007. This is consistent with data from other industry sources, which also identifies improvements across the customer experience.
The improvements in retail banking satisfaction also mirror trends in customer sentiment, as consumers continue to feel more positive about the economy and their personal financial outlook. Similar trends have previously been noted in J.D. Power’s Full-Service Investor Study, which also sees a relationship between economic prosperity and customer satisfaction.
The full publication of the 2014 Retail Banking Satisfaction Study, which will include aggregated data from all four fielding periods, releases on April 29th, 2014.
Strapped with a wide range of financial burdens, it is tempting for financial institutions to consider pricing changes in an attempt to improve bottom-line performance. However, any changes must be weighed carefully, and the potential business threats must be clearly understood.
Data from JD Power’s Retail Banking Satisfaction Study finds that Overall satisfaction declines significantly when fee changes are implemented, and more importantly, intended attrition levels are three times higher among customers that experience a fee change, compared to those whose fees remain stable.
Pricing changes can also be costly to banks if not handled effectively, through the allocation of resources required to handle customer complaints related to the change. Nearly one third (32%) of customers that experience a fee change contact their bank with a problem and, on average, problems require 1.9 customer contacts to be resolved. Therefore, for every 100,000 retail banking customers that experience a fee change, bank personnel will receive 60,800 contacts. In comparison, for every 100,000 retail banking customers that do not experience a fee change, bank personnel will receive 19,000 contacts.
Estimating that bank representatives can handle 6.5 customer contacts per hour, and that their labor cost is $40 per hour, fee structure changes may result in an incremental labor cost of $257,231 for banks to absorb.
Although data suggests that fee changes have a lagging effect on customer satisfaction (the full impact isn’t recognized until months after the change was made), intended attrition is impacted immediately, as customers tend to ‘overreact’ to a new charge. Therefore, it is particularly critical for financial institutions to minimize the initial bitterness experienced by customers, as this time period represents the greatest risk of attrition.
Lastly, failing to ensure that all customers are fully aware of a fee change in advance can significantly impact customer satisfaction, loyalty and problem metrics. In order to successfully mitigate this problem, banks need to focus on over-communicating the change to ensure the message is fully received by their customer base
Financial institutions should begin the process of communicating fee changes immediately after the decision has been made. The appropriate messaging and delivery methods must be identified, and investing in quantitative or qualitative market research to aid in decisions should be considered. Lastly, the timeframe of the change must kept top-of-mind. Initial communications should begin months before implementation, and because the risk of customer attrition is highest within the first month after a pricing change, banks should place heavy focus on preparing all types of employees on how to handle any immediate backlash from customers.
Data from the 2013 U.S. Retail Banking Satisfaction Study finds that satisfaction and loyalty metrics among Affluent customers are lagging those of Non-Affluent customers. In turn, financial institutions are jeopardizing their ability to deepen the share-of-wallet they hold with their most valuable segment of customers.
Contrary to findings within the retail banking segment, data from the 2013 Full Service Investor Study finds that Affluent investors are significantly more satisfied than Non-Affluent Investors (818 vs. 785, respectively), leading to lower levels of intended attrition. Therefore, financial institutions have an opportunity to identify the drivers of Affluent customer satisfaction from the wealth management experience and translate them into the retail banking experience.
For example, Affluent customers are considerably more satisfied with the Fees and Product Offerings associated with their investment relationship, as opposed to the Fees and Product Offerings associated with their retail banking relationship. Successful communication, often driven by the presence of an account manager, helps raise pricing-related satisfaction within the wealth management industry. Additionally, financial institutions may want to consider revisions to their lineup of retail banking products/services to better align with the specific needs of Affluent customers, which tend to be more complex.