Why loyalty is tricky for the finance sector

I did some work for an organisation that was working in the financial sector, seeking advise on developing a loyalty program. For starters I was impressed that a financial institution is actually thinking about developing loyalty. During our discussions a number of key things emerged, which I wanted to share with everyone.

Customer loyalty for traditional financial institutes, such as banks, mortgage lenders, etc. and customer satisfaction don’t always go together. Statistics for customer complaints in the UK shows that the biggest banks have the highest number of complaints! Similarly, customer dissatisfaction rates for the biggest banks in Australia are the highest. This is an interesting phenomenon, which we normally won’t find in any other industry. If customers are dissatisfied, and unhappy with the product or service, they would simply leave. However, in the financial sector this does not appear to be the case.

So why do customers still stick with a bank, despite the fact that they provide bad customer services? And does it mean that these customers are ‘loyal’ to the financial institution?

Why customers take bad customer services

When we think of non-financial products and services, we need to look at what the customer is purchasing. A customer buys perceived value that he/she would derive from using that product or service. While each product and service has a price tag attached to it, the value can differ greatly. For instance, you can buy a suit for £200, and a similar suit, in the same colour and design; you could get for £2000. So why do the customers pay more? In this case the perceived value that a customer would get would be higher, even though the material may be the same. It could be things such as self satisfaction for wearing a luxury brand, or the feeling that you belong to a particular group in society, etc. Similarly we can look at it from another angle. Two cars that cost the same, but appeal to different segments, because of the value that customers get from them.

In the financial sector, things are different. First, the perceived value is much more quantifiable. You know what rate of interest bank x is offering as compared to bank y. The major portion of the perceived value is no longer perceived, it is factual. So if you put £10,000 in a bank for a year, you will know exactly what rate of return you will get from two competing banks. Hence, if banks make mistakes and don’t provide a good service with this, you still know that you are getting a good rate of return.

There are cases, where two banks would be offering near identical rates, and customers would still stay with the one that is offering poor service quality. One of the major reasons for this is the cost of switching can be high. Most people have a bank account tied in to many different things. Your salary would be going into the account, and perhaps you have set up direct payments to expenses such as rent/mortgage, utilities, gym membership, etc. Calling up to change the bank details for each of these can be a big pain, and very time consuming. Hence many customers would stick with a bank, just because switching to another bank is a big hassle. These customers think that the perceived value of switching to another bank is lower than the value of the time it would take to switch.

Are these customers loyal to banks?

So does that mean these customers are loyal? I would think not. However, is it possible to win true loyalty of these customers? The answer is yes. Currently most banks are not thinking about true loyalty, and hence customers have no better option to switch to. However, if a bank were to start working on true loyalty, it could start a revolution.

Are loyalty progams the way to go?

Can using a points based loyalty program win loyalty? I don’t think points based loyalty programs are run correctly. They focus on the wrong things. They don’t seem to be creating true loyalty in other sectors, so the chances of them developing true loyalty in the financial sector would be low.

Why change?

Finally, one could argue, well if customers are not switching, and they don’t want to switch then why should we worry about loyalty? At the present most financial institutions are not thinking about loyalty. However, if we get more companies to start thinking like the Israeli financial company, we could see a change in the industry as a whole. This would mean companies that are not adapting would see themselves being overtaken by those that do.