Three Tactics To Keep Customers From Switching

By Michael Beird and Karen Licker.  Original post appeared in BAI Banking Strategies on March 16, 2012

It’s no secret that retail banks across the country face an enormous revenue challenge. In the summer of 2010, regulatory changes to Regulation E went into effect, significantly reducing the revenue banks could earn with their overdraft programs. The second punch came with the passage of the Durbin Amendment in October 2011, which capped interchange fees on debit cards issued by banks larger than $10 billion.

Ordinarily, such legislation goes largely unnoticed by the majority of consumers, but the combined revenue impacts from both of these changes in less than a year put grave pressure on the sustained profitability of America’s biggest financial institutions. In response, some of these banks, most notably Bank of America Corp., briefly experimented with an ill-fated debit card fee, which helped inspire many angry customers to move their relationships over to credit unions and community banks during last November’s “Bank Transfer Day.”

Recent research by J.D. Power and Associates shows that customer defection is continuing a three-year rise. Both large and regional banks are taking the biggest hits, with defection rates increasing from 7.7 % in 2010 to 9.8% this year, likely heavily influenced by the negative press big banks continued to receive in the media as well as enticements from smaller institutions to transfer accounts (see chart, “Customer Defection on the Rise”). Even so, banks such as Bank of America continue to experiment with new fees in order to bolster their depressed retail banking revenues.

Banks need to understand that industry fees, absent of associated real or perceived value, have a direct impact on both retention and acquisition. However, there are three strategies that banks large and small can take to keep their customers from switching accounts:

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