The Future of Loyalty

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Data show that customer loyalty and millennial can be compatible for community banks

By Michael Lotti

Customer loyalty, a longtime foundation of community banking profitability, can sometimes seem uncertain, especially with the ongoing media discussion about the habits of the under-35 crowd. Data from the past four years, however, show that the traditional strengths of community banking are still important to consumers, that profitable customer loyalty is attainable and a foundation for growth. The data also show that those under-35 “millennials” (or Gen-Y youngsters) can be profitable community bank customers.

Data Point #1: The Branch Experience

According to Bain & Co.’s 2013 survey of more than 74,000 U.S. banking customers, more than 60 percent of bank transactions now happen via computer, tablet or mobile device. But that same survey also revealed that 80 percent of new bank accounts are opened in branches. Likewise, a survey of more than 2,000 bank customers by Youbiquity Finance showed that nearly 80 percent of respondents had visited a bank branch in the past year.

Social media presence is, indeed, important, but according to a recent J.D. Power and Associates study of nearly 3,800 bank customers, fewer than 5 percent actually used a social media channel for bank service.

Conclusion: Branches are still great places to provide first-name service and cross-sell products. In addition, a community bank’s reputation as a problem-solver still largely rests on how its employees perform in face-to-face interactions with customers.

Data Point #2: Electronic Interaction

Of course, community banks have to branch beyond the branch. The Youbiquity Finance study showed that in the past two years, bank customers went from using 4.3 to 6.2 channels for interacting with their banks. In particular, the number of customers using mobile banking apps jumped from 7 to 23 percent, and the number using bank webchats went from 1 to 11 percent.

In the end, though, it was the quality of online or social media interactions that seemed to matter most to bank customers. Both the J.D. Power and the Bain & Co. studies showed that social media users preferred ease of finding information and timely responses over the other benefits of interacting with their banks electronically.

Conclusion: In addition to making online transactions easy to perform, community banks should make sure that it’s easy to find information on their websites. And they should strive to provide superior customer service in multiple venues, not just the branch.

Data Point #3: Profitable Customer Loyalty

Good news, part 1: According to FIS Global’s 2011 survey of 3,000 banking customers, community banks rank higher in terms of customer loyalty than do large and regional banks. The company’s 2013 survey, which included more than 4,000 banking customers, showed that community bank customers are much better “Net Promoters” of their banks than customers of large and regional banks.

So in terms of customer loyalty, community banks have a strong foundation.

Good news, part 2: Most new bank profits come from customers who are already loyal, and most loyal customers do not have as many products from their primary bank as they could. Consider these market research data:

41 percent of bank customers opened a new banking product in the past year, but only 50 percent of them used their primary bank, according to Bain & Co. data.

Community bank customers have an average of 0.25 loans with their bank—compared to 0.53 for large bank customers, 0.35 for regional bank customers and 0.58 for credit union members, according to FIS Global’s 2013 survey.

Why do community banks lag behind in loans to their own customers? Paul McAdam, FIS Global’s senior vice president of research and thought leadership, notes that many community banks do not offer credit cards or mortgages, but he also thinks that they often miss other good sales opportunities. To highlight those opportunities, he uses a loyalty- and profit-based breakdown of banking customers based on FIS Global’s 2011 survey.

Conclusion: For McAdam, focusing on the “Potentially Profitable Loyals” is an efficient way for community banks to boost sales. Instead of spending a marketing budget on the uncertain prospect of pulling people away from other banks, they can pitch products that are likely to be needed by already-loyal customers.

McAdam also thinks that “Potentially Profitable Non-Loyals” are worth pursuing. But as these customers are predominately from millennials who come with their own large set of consumer data, they deserve a section of their own in this article.

Data Point #4: Millennials

Demographers generally use millennials or Gen Y to refer to the 75 million Americans who are 19 to 35 years old. According to Jason Dorsey, whose consulting company analyzes and shares data on millennials, more than 3 million of the cohort become “financial adults” each year—that is, out of college, earning a regular paycheck and on the way to professional advancement.

Dorsey’s economic assessment of millennials is simple: “By 2017, millennials will have more spending power than any other generation” in the United States, and that’s why it’s so important to make them customers now. Over the next decade, they will be looking for consumer loans, mortgages, business loans and ways to advantageously consolidate college debt.

“When you think about the lifetime value of a client, Gen Y brings more value than any other generation,” Dorsey concludes.

But how do their community banks engage with this cohort? According to the data, by getting the where, what and when of communication right.

Where. Social media, of course. Millennials are two times as likely to use social media as members of other generations (J.D. Power) and 40 percent more likely to use a smartphone or tablet for banking (Bain & Co.). More to the point, Dorsey reports, 84 percent of millennials rely on the opinions of fellow consumers before choosing a product, and most of that information comes from online product reviews and their social media networks.

What. High-quality information, with as much visually based communication as possible, says Dorsey. According Michael Marx, senior director of global research, marketing and analytics at Visa (who gave a workshop on the topic at ICBA’s Community Banking LIVE convention in March), millennials don’t trust sales pitches and instinctively fact-check information from the Web. Every community bank, then, should strive to make their product offerings honest, simple, transparent and educational—“with very little small print and no asterisks.”

When. Always and instantaneously. Dorsey notes that millennials will almost always read and respond to a text. Marx agrees, but notes that it’s important to distinguish “instant communication” from “instant resolution.” What millennials want, he says, is simply to know that someone is listening to them and trying to help them. And if they don’t get that sense right away, they’ll look elsewhere and take their business with them.

Conclusion: Millennials, like their parents in the ’70s and ’80s, are must-have customers for most community banks. They respond positively—and loyally—when banks communicate with them where they are at and offer them products that address their needs.

McAdam is optimistic about the ability of community banks to improve customer loyalty in today’s market, noting that FIS Global’s surveys consistently show that about one-third of customers want a relationship with a bank. “The task for community bankers is to find that one-third in their geographic area and niche strengths,” he says. “And they have to apply their research intelligently. They have to be disciplined.”


Michael Lotti is a writer in Minnesota.

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