As an industry, banking does a terrible job of creating loyalty among its customers. According to a recent Temkin Group report, consumers in the US are more likely to recommend their fast food restaurants and airlines (airlines?!) to a friend or colleague than their bank. That is not good.

Australian banks are taking note.  Three of the big four banks have seen a 2 per cent rise in customer satisfaction.  They understand that loyalty is driven by great customer experience. Customer experience isn’t just service — it is the way that a bank approaches its products, processes and customer interactions.  Great customer experience means that customers accomplish all their banking needs with minimal effort, and a high degree of delight and trust.

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(Image source: www.ozp2plending.com

The proliferation of word-of-mouth online is driving up consumers’ power to shape brands. The sum of individual, concrete interactions drives retention and increases good old-fashioned word of mouth.  Marketing campaigns entice — but loyalty is built by focusing on individual customers.

Leading consumer brands, from Mercedes Benz to Four Seasons, have made the commitment to customer experience leadership. For banking in particular, there’s a question about how customer experience improvement impacts the bottom line. There’s a clear reputational advantage to having an off-the-charts “net promoter score.” But what about smaller, incremental improvements? Will customers really detect the difference?

The short answer: yes, your customers will notice.

As an overall, aggregate metric, there’s a tendency to treat NPS or other CX metrics as measures that merely impact overall brand perception, which influences a company’s ability to draw new customers.  While important, the impact on brand perception is only part of the story.

To understand the rest of the picture, we need to descend from the clouds of marketing theory and look at the impact that improving customer experience has on the behavior of individuals.  More than just overall brand perception, customer experience directly influences whether existing customers will return to your business and whether they will promote your business via word-of-mouth.

Here, small improvements in customer experience have a significant and measurable impact on your business — where the rubber of customer experience improvement meets the road of business results on a daily basis.

A great experience creates individual loyalty.

In terms of retention and getting a greater share of wallet from existing customers, we recently investigated how to quantify the impact of good versus poor customer experiences by examining experience and revenue data from two global $1B+ businesses — one that was transaction-based, one that was subscription-based.  After controlling for other factors that drive repeat purchases, we found that customers of a transactional business who had the best past experiences spend 140% more in the subsequent year compared to those who had the poorest past experience.  Even within great experiences, customers who gave a score of 10 out of 10 spent 26% more than those who gave a score of 9 out of 10.

For the subscription-based business that we examined, we found that a customer who rates as having the poorest experience has only a 43% chance of being a customer a year later, whereas the customer who gives one of the top two experience scores have a 74% chance of staying with the business for at least another year.  Projecting over time, we found that a customer who gives the lowest score will likely only remain a customer for a little over a year, whereas a customer who gives the highest score is likely to remain a customer for another six years.

This is the kind of work more banks should be doing themselves. It allows leaders to focus improvement efforts where there is real payoff.  In the subscription-based business, we noticed the biggest gains are from improving the worst experiences, while in the transactional business even moving for a 9 to a 10 had a dramatic influence on future spending. In your bank, do you know where to invest for maximum impact?

A great experience generates word-of-mouth referrals.

Loyalty drives word-of-mouth marketing, and in the digital age, word-of-mouth matters.  As a recent McKinsey study shows, word-of-mouth is the only factor that ranks in the top three consumer influencers at every stage of the purchase decision journey.

Not only do companies need to provide great experiences to generate positive referrals, they also recognize that it’s essential to have robust systems in place to save dissatisfied customers and prevent negative word-of-mouth.  Word-of-mouth hits the bottom line on an individual-by-individual basis.  It is often conflated with branding and marketing efforts, but it is driven by real experiences that customers have with banks.

That is where word-of-mouth gets its authority and that is why it is such a great determinant for purchase decisions.  And now that there are so many online channels for word-of-mouth, the days when people can be fooled by clever ads are coming to an end. That money is better spent on creating great experiences.

About the authors

Robert Schiff is vice president and general manager, financial services, at Medallia. Before Medallia, Robert was a partner at McKinsey & Company. He has served commercial financial institutions and public sector agencies on issues ranging from retail banking to regional economic development. Robert sits on the external advisory board of ACCION Venture Lab, a financial inclusion-focused angel investing/venture capital fund. He lives in San Francisco with his wife, Harper and has a B.A. from Haverford College and an M.Phil. with Distinction in Economic and Social History from Oxford University.

Peter Kriss is a senior research scientist at Medallia. Peter is a behavioral scientist whose work focuses on the role of communication in promoting “good” social ends, such as mutually beneficial economic relationships, agreement over conflict, efficient coordination, and fair and ethical behavior. At Medallia, he conducts research on best practices and uses his extensive experience in the design of experiments and surveys to drive innovation and success for our clients. Prior to joining Medallia, Peter completed his doctoral degree in behavioral decision research, with a focus on how real people both should and actually do make decisions. His work at the intersection of economics, psychology and management is published in top academic journals. PhD, MS, Carnegie Mellon University. BA, Swarthmore College.

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