Customer Retention During the Downturn

In light of the deepening economic crisis and its effect on churn behavior, retail banks need to revisit their retention strategies and revise their tactics so they reflect the new reality in the marketplace.

You can download PDF version of this whitepaper here.

It used to be that when a customer pulled the trigger and took out all their assets from a bank, the culprit was usually customer service – a study in Europe conducted before the current economic crisis cited service-related issues as the reason why 7 out of 10 customers churned from banks across the continent in the prior year[1].  While convenience and product / service features did matter, it ultimately came down to the level of service provided to the customer.

Customers essentially were willing to give their (albeit temporary) loyalty to a bank as long as they felt their business was valued and they were treated fairly. But manage a problem poorly or jack up the customer’s credit card rates without a proper explanation, the risk of churn rose significantly.

That said, banks still had a good chance to retain the customer through the taking of reactive actions – i.e. making a pitch with a better rate or the offering of additional benefits. As customers usually had to contact a call center or visit a branch to close down their accounts, the bank had one final chance to retain them.

Things have clearly changed however. While the traditional factors driving churn in retail banking are still there, a new set of them has also arisen (in an era where churn can take place in a virtual online environment) and many a bank has been and is unprepared to address the increasing churn that has come along with it.

The New Emerging Factors Instigating Churn

Word-of-Mouth Driven Bank Runs –  With the increasing number of banks failing around the world, depositors have begun acting in manners normally though irrational. A simple comment from a friend these days over a rumor he or she heard could be the trigger causing a customer to churn from a bank. Depositors are increasingly worried their assets will be seized when the institution they bank with shuts down.

A recent example of this happened in India, when the nation’s largest bank – ICICI – suffered significant withdrawals and a severe drop in stock value when rumors swirled around the country regarding its imminent collapse[2]. Government ministers eventually stepped in to reassure the public, but the damage was already done.

Many banks , and particularly their front-line employees, are beginning to realize that they are ill-equipped to address and handle such panic-driven runs, having most likely not faced such situations in the past, and, not having operated in such a hostile and sensitive economic environment.  As it is, these bank runs may continue for some time until the economic crisis wanes.

Rate / Fees Sensitivity – Many a bank is looking for additional ways of increasing revenues during this crisis. One of the sure-fire ways of doing so is through the introduction of new fees, or, the increasing of interest rates on credit.

In stable times, the impact on churn of such tactics may be minimal – customers would evaluate the alternatives and consider the hassle of switching banks too significant to actually churn.

Now, however, as the loyalty of customers to their given bank has significantly decreased due to the mistrust generate by the financial services sector, significant levels of churn could follow any action taken by the bank that the consumer base deems unfair.

Case in point – TD Canada Trust suffered significant public humiliation and backlash in Canada when it tried to not only introduce a 35 dollar inactivity fee on its unsecured lines of credit, but also increase the interest rate on it (despite the lending rate to the bank decreasing)[3]. The overwhelming negative response caused the bank to backtrack and reverse its decision to charge the fee – resulting in not only an increase in dissatisfaction with the bank, but some level of churn as well (ultimately for nothing).

Banks need to increasingly be careful in the decisions they make during this downturn. In an effort to generate short-term gains, they stand to lose customers over the long-term. Each and every planned action that ultimately will affect the customer base needs to be carefully considered and tested before being turned into policy.

Redemption Channel Proliferation  – With the significant number of channels available to customers  for churning, the task has become all the harder during this economic crisis for banks to keep their depositors. Whereas in the past customers would usually come by a branch to withdraw all their assets  or call a contact center to request a wire, many new options are now available. Customers can transfer out all of their assets not only online, but through using mobile banking and even in some cases sophisticated ATMs.

What this in turn has done is prevent allowing a bank from taking one last stab at retaining the customer. No employee is able to make a better offer or additional benefits to keep the customer from churning, as is the norm in the case of a contact center or branch.

Tactics need to be devised by banks facing such types of churn to attempt to save the customer relationship. For example, pop-up chat windows can be utilized when a customer requests an online wire over a certain amount, with qualified employees utilizing devised scripts and offers to properly attempt to prevent the churn activity.

Merger Impact – As the crisis has had a significant impact on the sector, the number of financial institutions merging around the world is rapidly increasing. In some cases, banks near collapse are being swallowed up by bigger fish. In others, banks are realizing they can more efficiently serve their joined customer bases by joining forces with another.

Regardless of the reason, banking mergers (or even the rumor of one) bring with them a major increase in customer churn – a study found that attrition almost doubles when two banks merge[4]. Most financial institutions are caught unprepared to handle the customer dissatisfaction that arises when such an even happens, with other banks waiting on the sidelines to swoop in to steal customers.

Case in point – Commonwealth Bank of Australia lost one out of every three of its customers after it acquired the Bank of Victoria – the combined deposit market share dropped from 30% to 20% within a short period of time following the merger[5].

As the likelihood of a merger has increased so drastically, banks need to prepare themselves for such an event, and, more specifically, the issue of how to prevent a major uptick in churn. One of the key issues poorly addressed in these cases is communication – both internal and external.

Firms need to communicate the proper messages both to their employees (particularly to those on the front-line) and their customers. The focus here is around assuring confidence in the merger, the strength of the institution as one, the bettering of the offerings, the improvement of services, etc. Obviously however, these assurances must be backed up by real actions, and not be hollow promises.

Issues around overall service (i.e. poor problem resolution, rude service, limited banking hours) will continue to be the primary driver of churn – banks that have yet to set up proactive and reactive methods for addressing dissatisfied customers need to start here first. Those that have effectively done so need to revise their tactics to address the new factors listed here – failure to do so will guarantee further churn during these troubling times.

[1] BMC Churn Index Survey, 2007.




[5] “Retaining Profitable Customers,” US Banker


One thought on “Customer Retention During the Downturn

  1. Very well written article! There may be some upside to customer churn at banks despite the substantial downsides. Like many companies, retail banks have what Larry Selden refers to as “angel customers and demon customers”. When significant churn can be predicted by a foreseen event, banks can take measures to retain their “angel customers” (large deposits with little cost to serve) while encouraging “demon customers (small deposits with high cost to serve) to move onto a competitor. This is where a robust CRM insights capability linked to varied service levels by customer segments can really pay off.

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