Focus on the Customer Experience to Boost Bank Competitiveness

Several factors are leading banks to increase their focus on enhancing the customer experience. Many have taken a more customer-centric approach to regain trust following the Financial Crisis. There has also been a shift away from an overarching focus on new customer acquisition and towards optimizing customer lifetime value.  And banks are looking to counter the increasing competitive threat posed by FinTech firms that promise to manage all their clients’ financial needs through a single digital platform.

There are several ways banks can benefit by integrating an understanding of the customer experience in solutions development and delivery.

  • Change customer perceptions. Build systems and strategies around the customer experience that retains your traditional strengths (trust, experience, product breadth and expertise) while tackling some of the more negative perceptions of the sector (slow moving, inwardly-focused).
  • Differentiate yourself from other banks. To fully embrace the customer experience, you may need to make significant changes in many areas, including organizational structures, marketing, sales and service. And be sure to plan carefully. These types of changes often come with a number of barriers (including organizational inertia and lack of senior management buy-in) and, unfortunately, many banks fail to make the transition.
  • Optimize customer lifetime value. By understanding customer needs and challenges at various stages of the customer life cycle, you can reduce customer churn, while improving cross-sell/upsell rates.
  • Integrate your sales and service channels. One of the key selling points of FinTech firms is their commitment to providing a seamless customer experience on their platforms.  Though banks have traditionally struggled to integrate their digital and human channels, many surveys have shown that customers do use multiple bank channels. Banks that can provide a seamless customer experience across their various channels can both increase customer satisfaction and gain a competitive advantage over the FinTechs.
  • Capture the voice of the customer.  By developing opportunities for customer feedback at all sales and service touchpoints, you can gain real insights into customer needs, behaviors and preferences; identify gaps in these areas; and incorporate this intel into developing new products and enhancing existing solutions and service.
  • Leverage internal stakeholder insights.  To gain a strong understanding of how to improve the customer experience, gather detailed insights from front-line sales and service staff who can offer unique perspectives.  Along with the voice of the customer, use these insights to develop more informed product development as well as marketing, sales and service initiatives.
  • Optimize return on investment.  Identify areas that have the greatest potential for enhancing the customer experience, and redirect investment to these areas.
  • Create customer advocates. Engaged customers who have a consistently positive experience often turn into advocates (on social media, through word of mouth, etc.) and may even become referral sources.

Investing in digital channels generates benefits for banks…but they should not abandon human channels

One of the most notable trends in leading U.S. banks’ quarterly earnings conference calls was the extent to which digital channels have become central to their current operations and future growth plans. The reason? Digital channels provide numerous benefits to banks, including:

  • Allowing banks to reduce branch density…and more easily expand into new markets. With the growth of online and mobile banking, branches account for a significantly decreased share of everyday banking transactions, so most banks have been able to reduce their branch density, which saves costs while enabling banks to maintain a physical presence in markets.  Bank of America reported that its branch network has declined from 6,100 to 4,400 during the past decade, but also referred to plans to open 500 branches in new markets.  Similarly, Regions discussed plans to open 20 de novo branches in new markets in 2018, while also closing 30-40 branches.
  • Building a national presence. Banks that already have a limited branch presence are looking to leverage their brand strength and develop a national presence by creating a digital bank. Citibank recently announced that it was creating a national digital bank. Similarly, PNC reported that it would begin rolling out a national digital strategy later in 2018, which it claimed would enable it to take advantage of its brand awareness and serve more customers beyond its traditional retail banking footprint.
  • Enhancing the customer experience. Banks are investing in digital service channels not only to provide a wider range of functionality to clients, but also to enrich the customer experience. In doing so, banks can improve customer satisfaction and boost retention levels.  Regions discussed its goal of providing a consistent experience, with customers seeing the same information and having access to the same capabilities across all channels. The shift to electronic self-service channels also reduces servicing costs; Citibank reported that call center volume fell by 12 million phone calls in 2017.
  • Communicating through new marketing channels. Banks are significantly changing their media mix and messaging to reflect the channels where people are now consuming information and entertainment, and to communicate to clients and prospects in fresh new ways. In its 1Q18 earnings conference call, BB&T discussed that it is ramping up its digital marketing campaigns; 86% now have a digital component.
  • Capturing new sales opportunities and lowering average cost per acquisition. As customers increasingly use digital channels for their banking activities, they become more receptive to using these same channels to open new accounts and/or upgrade existing products and services. As a result, many banks are reporting strong growth in digital sales. Wells Fargo recently launched a digital mortgage application and noted that 10% of its mortgage applications in March 2018 came through that capability. The number of BB&T business accounts opened online rose 43% y/y and retail savings accounts grew 96%. Bank of America reported that digital accounted for 26% of all sales. It also rolled out an auto shopping app, with auto loans sourced digitally accounting for 50% of all direct auto loan originations in the first quarter.

Banks Need an Integrated Digital-Human Channel Strategy

While strategic investments in digital channels can lead to significant bottom-line benefits, banks should be careful not see this progress as proof that they no longer need human channels. A recent J.D. Power survey found that satisfaction levels are lowest for retail banking clients who exclusively use online or mobile channels and highest for “branch-dependent digital customers.” Moreover, the gap in satisfaction levels is highest for Millennial customers, underscoring this demographic segment’s affinity for branches. And while digital sales for many banking products are growing strongly, human channels are still vital for a bank’s success.

This means that banks must develop an integrated channel strategy, with digital and human channels acting in synch—and indeed actively promoting each other. Bank of America provided a great example of this synergy in operation in its 1Q18 earnings conference call: clients used its digital channels to schedule an average of 35,000 branch appointments per week during the quarter.  Full integration of digital and human channels recognizes the particular strengths and limitations of different channels, and can optimize a bank’s return on its investments in marketing, sales and the customer experience.

Leading U.S. Banks Report Modest Increase in Marketing Budgets in 2017

Marketing spend by the top 40 banks reached nearly $14 billion in 2017, up 1.8% on average from the previous year–and once again, 5 banks spent over a billion dollars on marketing. EMI analysis of bank spending reveals:

  • 30 of the 40 largest banks grew marketing spend in 2017, with 17 reporting double-digit growth.
  • As in past years, banks with national credit card franchises lead all others, in both absolute terms and in their marketing intensity (marketing spend relative to revenues). In 2017, spending among these card leaders declined, as focus shifted from acquisition to portfolio marketing.
  • Two banks notable for substantial 2017 marketing increases are Goldman Sachs Bank focused on promotion of its online lending platform, Marcus by Goldman Sachs, and U.S. Bank capitalizing on brand-building around the Super Bowl, held last week at the Minneapolis stadium bearing the bank’s name.

EMI annual analysis of Federal Financial Institutions Examinations Council (FFIEC) call report data for 40 leading U.S. banks distills both absolute spending and marketing intensity ratios, as measured by spend percentage of net revenues (net interest income plus noninterest income).  Results are reported below.

Advertising and Marketing Spending Highlights

19 banks/bank charters had advertising and marketing budgets of more than $100 million.  5 had billion-dollar-plus budgets (JPMorgan Chase, American Express, Capital One, Citigroup and Bank of America).

Of the 17 banks reporting double-digit growth, the two with the largest absolute increases in their marketing budgets were:

  • U.S. Bank: +$107 million, with a focus on growing national profile behind the increased marketing spend, including heavy branding around the Super Bowl, which was held last Sunday at the U.S. Bank Stadium in Minneapolis.
  • Goldman Sachs Bank: +$80 million, driven by an advertising campaign to promote Marcus by Goldman Sachs, its online personal lending platform.
  • First Republic was also notable for its 46% increase–a strategy that seems to have paid off with 18%+ revenue growth reported by the San Francisco-based bank in 2017.

Other banks boosted marketing spend to support new campaigns in 2017.

  • Fifth Third (+10% to $115 million) launched a campaign in May 2017 that played on its “5/3” name, promoting “Banking that’s a Fifth Third Better”
  • BB&T (+10% to $89 million) introduced a new brand campaign and tagline (“All we see is you”) in September 2017.
  • SunTrust (+38% to $220 million) rolled out its ‘Confidence Starts Here’ ad campaign in March 2017, building on its onUp movement focused on building financial well-being.

Marketing spend declines were led by:

  • Capital One: decline of $139 million, with a strong drop in spending in its card unit partially offset by a $23 million rise in its retail banking unit.
  • American Express: down $111 million, although this follows a ramp up of marketing and promotion spending in recent years.  American Express is also increasing its focus on targeting existing clients, which typically involves lower marketing spend.

Marketing Intensity Highlights

Even though 30 banks increased their marketing budgets in 2017, only 14 increased their bank marketing ratios, meaning that growth in marketing spend did not match the rise in net revenues.  Banks with the strongest growth in their marketing ratios were Goldman Sachs Bank (+183 basis points), SunTrust (+61 bps) and U.S. Bank (+44 bps).

Most retail banks have marketing ratios of 1-3%. Those with the highest marketing ratios include Santander Bank (4.1%, due to continued growth in the bank’s U.S. marketing budgets in recent years) and BMO Harris (3.4%, following a 17% rise in marketing spend in 2017).  4 banks have marketing ratios of less than 1%.  Most notable in this category is Wells Fargo, which has traditionally–and infamously–focused on sales and required much lower advertising budgets than its peers.  Wells Fargo did launch a new integrated marketing campaign in April 2017, which it reported was focused on “rebuilding trust.”  This contributed to a 4% rise in its advertising and marketing budget in 2017, but its spend levels remain well below comparably-sized banks.

We expect that banks will maintain or even increase their marketing budgets in 2018 to build brand awareness and affinity, as well as to promote new products and services–in particular those focused on digital transformation.  However, many banks remain focused on improving efficiency ratios, and marketing budgets are often on the firing line when banks look cut costs.  However these cuts–when executed without a careful strategy for maximize marketing ROI–often sacrifice market share gain and longer-term growth.