Banks need to sit up and take notice of hidden defections: a record number of customers buy secondary banking products from digital competitors, such as big technology firms and digital-only banks. But improved digital offerings and more personalized selling can work like magic.
Banks lose out on a large chunk of product purchases through digital channels, especially when it comes to credit cards, insurance and investments, according to Bain & Company. This hidden defection – buying an additional banking product from a competitor – totals a whopping 25% to 51% of secondary products. And that’s not all. Here’s another telling number: 52% of US customers bought products from their primary bank in 2016, compared to 58% in 2014. An alarming drop of 6% in just two years.
Customers tend to dodge their primary institution when buying higher-profit products and services. For example, a primary bank wins 64% of all purchases on average, but its win rate for loans is only 57%, compared to 78% for deposits. The stakes are high, as a five-point increase in the overall win rate would mean about $5 billion in revenue across the 25 largest US banks, Bain & Company estimates.
As consumers look for solutions elsewhere, banks are stuck with a greater number of unprofitable relationships, a shift that inevitably affects earnings. And the problem is that these defections hardly ever show up on most financial institutions’ radar. It’s a hidden loss: customers don’t shut down their account, they simply open another one elsewhere. Account growth may slack off but there is no noticeable drop in total relationships. And “bankers can’t respond to what they don’t see,” Kevin Tynan, senior vice president at US lender Liberty Bank for Savings, warns.
Digital competitors eat away product sales
But what’s behind the decline in product purchases at primary banks? The answer is pretty straightforward: more intense competition, mostly from digital-only banks and big technology companies.
They take a substantial share of new purchases thanks to their relatively simple product lines and streamlined user experience. And they’re unlikely to slow down anytime soon. Consumer purchases of additional banking products through digital channels, especially online, have become widespread and will only increase as younger, plugged-in generations swell in size.
Big techs are ready to move into several areas of banking, including consumer lending. For example, Apple now offers leasing of its iPhones, and WeChat provides instant lending in China. In fact, China actually reports lower mobile usage for routine banking interactions this year, probably because consumers turn to more convenient and engaging non-bank platforms such as WeChat and Alipay for payments, savings and other daily ﬁnancial transactions.
Which customers are affected the most? Based on variables in another Bain & Company survey, purchases from a competitor are most likely when the consumer owns multiple products at a primary bank and gives a low net promoter score. Of course, other elements are also at play, such as exceptional products, pricing and salesmanship at the winning competitors.
Improve digital offerings to cut defections
So how to curb hidden defections? Don’t forget to ask for the sale.
Many customers would have purchased from their primary bank, had it made an offer. Take the US, for example: 42% of defectors said they bought from a competitor bank simply because they received an offer or saw an advertisement. Only one-fifth were actively researching when they decided to buy the product. What’s more, half would have purchased from their primary bank if the bank had made a move.
Bain & Company suggests that banks should make more and more targeted marketing and sales pitches in time. They have a wealth of data on their customers’ risk profile and stage of life, meaning that they could provide the right offer at the right time and in the right place — before competitors step in and snatch the customer. And since more purchases are completed through digital channels, banks need to ramp up their digital marketing efforts.
Digital services are a key factor in winning over customers. They are buying digital products from competitors at 1.4 times the rate purchased from their primary institution — a worrying figure, which Kevin Tynan at Liberty Banks says may require financial institutions to “carefully reexamine their digital offerings”. This can mean rolling out a product pricing strategy that targets unprofitable customers, making a watch-list of vulnerable accounts based on a data-driven analysis of past behaviours, and last but not least, improving and promoting digital services.
Sacrificing some revenue is also an option
In some markets, big banks have teamed up to revamp their digital products and fend off competition together. In Sweden, for instance, a payments system for mobile phones backed by local banks, known as Swish, is now used by more than 50 percent of the population. Dutch banks have also been planning to introduce a similar common mobile payments system, but it is hobbled as two big lenders decided to focus their attention elsewhere.
There are other strategies to stem defections and strengthen customer relations. BBVA Compass in the US, for example, sent out direct mails in 2017 encouraging its credit card customers to switch from their high-interest card debt to a less expensive online loan. A typical customer could save hundreds of dollars by jumping on the offer.
“If our credit card customers refinance at a lower rate, we are OK with that because they are still banking with us, so our relationship is being strengthened,” Onur Genc, chief executive of BBVA Compass, told the American Banker. “If we don’t provide this to our own customers, we are sure they are going to get it from somewhere else,” he explained.