Customer Retention to the Retail Banking

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Abstract

Due to the ever-increasing completion in various sectors, organizations now adopt various strategies that are aimed at ensuring that they succeed in the market place. One of the various strategies adopted by the organizations includes customer retention strategy that aims at ensuring that customers are retained for a long time. In that regard, this report evaluates various aspects of customer retention to retail banking.

Customer retention is an increasingly pressing issue in today’s retail-banking sector. Customer retention entails the strategies employed by an organization with the objective of preventing customers from diverging to other organizations. Retail banking, on the other hand, refers to selling of bank products and services directly to retail customers, other than other businesses and corporations. The main purpose of customer retention in retail banking is to maintain existing customers since it is much more costly to acquire new customers than to retain existing ones. Customer retention can be achieved through cultivating trust and transparency, employing customer satisfaction strategies, keeping customers close and disincentives. Moreover, customer retention should be carried out at all times even though more emphasis should be put when a bank innovate new products or services. Finally, it can be noted that customer follow up is also important as it enables a bank to clearly understand the needs of customers and to keep them close.

Table of Contents

TOC o “1-5” h z u Introduction PAGEREF _Toc365195191 h 4Purpose of customer retention PAGEREF _Toc365195192 h 5Benefits of customer retention PAGEREF _Toc365195193 h 6Where and how to retain a customer PAGEREF _Toc365195194 h 7When to retain customers and consequent follow-up PAGEREF _Toc365195195 h 9Conclusion PAGEREF _Toc365195196 h 11References PAGEREF _Toc365195197 h 12

IntroductionRetail banking involves banks dealing directly with retail customers, rather than with corporate customers. According to Muraleedharan (2009), retail banking generates high levels of income for a bank through various products and services that are offered to consumers. Examples of such products and services are equity credit loans, installment loan, deposit services, bill-paying services, credit and debit cards, mortgage services and individual retirement accounts. The wide-range of products and services are distributed to consumers through numerous channels that range from network of branches to the internet and the telephone. In some cases, retail banking is carried out through non-banking organizations such as retailers (Muraleedharan, 2009). The success of retail banking is highly dependent on ability of a bank to retain customers among other factors.

Customer retention has been defined by Wieland (2006) as any strategy that is adopted by an organization to satisfy customers and hence, retain them. On the other hand, Liu et al (2012) define customer retention as activities that are undertaken by a seller in order to minimize customer defections as much as possible. Unfortunately, the above definitions do not give consideration to the fact that organizational activities may help to retain customers but render them inactive. Hazra (2013) gives a more comprehensive definition which regards customer retention as organizational activities that are aimed at enhancing the quality of a product or a service in order to prevent customers from diverging to competitors and to lure the retained customers to remain active. The strategy adopted by an organization to retain customers determines the rate at which they are going to purchase a product or a service within a given period of time (Wieland, 2006). In this regard, customer retention can be termed as an important determinant of the success of any business organization that sells goods or/and services. In brief, customer retention can be explained as been essential to all sectors that are involved in production and selling of various goods and services. According to Ang and Buttle (2012), increased competition in the banking industry in the 21st Century has made it quite imperative for banks to adopt customer retention strategies in their retail banking.

Purpose of customer retentionThe fundamental purpose of customer retention is to retain the existing customers. As such, any organization involved in retail banking must focus on maintaining the current customer base, regardless of whatever tactics or strategies it uses to maximize profits. As Ang and Buttle (2012) explain, competition in the banking industry has intensified over the years while the target markets in many parts of the world have become stagnant. Ang and Buttle, (2012) further explain that growth in GNP in most countries has been increasing at a slow rate while the rate of population growth been on the increase. At the same time, increased regulations have made it easy for customers to move from one bank to another. In the Australian, for instance, the Federal government has come up with measures which allow for easy transfer of consumer mortgages and deposits from one bank to another (Henry, 2013). This implies that the ‘value of a customer’ has increased which has resulted to the increased need for retaining existing customers. Despite the increased need for customer retention, the results of a Global Retail Banking Voice of the Customer Survey carried out by Capgemini in May 2013 indicated that more than 50 percent of retail banking customers surveyed had plans to leave their primary banks (Henry, 2013). This implies that there is need for banks around the world to pay greater attention to retention of retail customers.

Benefits of customer retentionThere are numerous benefits of customer retention. To start with, customer retention is positively related to repurchasing. A study carried out by Hazra (2013) on Indian banking sector proved that the stronger the relationship between a customer and a bank, the more the customer will purchase the retail banking products and services from the bank. Another benefit of customer retention relates to customer’s cross-selling behaviour. As Marple and Zimmerman (2006) explain, retained customers are more likely to purchase other retail banking products and services from the same bank. Moreover, Marple and Zimmerman (2006) argue that the ‘value of a customer’ to a firm increases with time. The cost for support and liaison reduces, whereas turnover increases. Thus, it can be argued that the longer the customer remains in a close relationship with a bank, the more profitable the bank becomes.

It is well documented that the cost of attracting a new customer is 5 to 6 times more than the cost of retaining an existing one (Kotler, 2011). During customer acquisition, a bank may engage in an aggressive marketing campaign through the use of sales personnel who are often highly compensated. It is common for banks to place advertisements in the media to lure new customers that are quite expensive in some cases. As well, banks often incur expenses related to paperwork when recruiting new customer. Such high expenses are not present during the process of customer retention. In extreme cases, a bank may need to lower its price as a strategy to lure new customers. The process of customer retention often involves strategies that are relatively less costly, such as direct mail and phone calls (Hazra (2013).

In addition, the return on investment is much higher for investments meant to retain an existing customer than in attracting a new one. As Hazra (2013) mentions, it takes much more time, expenses and effort for a bank to convert new customers into loyal ones than it is required for the existing ones. In addition, it takes many new customers to replace the revenue lost when an existing customer defects. It even takes many more new customers to replace profits that are generated by an old customer. Lastly, a satisfied customer refers other customers to a firm while a defecting one tells more than eight customers’ about his or her defection (Hazra (2013). Generally, these points explain the fact that the cost of attracting a new customer is much higher than the cost of retaining an existing one.

Where and how to retain a customerIn today’s highly competitive market, customer retention is an important issue that every bank has to consider. While competition and increased regulation by authorities are ever increasing, the only way a bank may stand out from the rest is by putting in place measures to retain their current customers and attract prospective ones. A bank has to use innovative ways that would guarantee a competitive advantage in the market. Essentially, every customer is important to a bank since customers considered not profitable today may be profitable tomorrow hence they should be retained and not ignored (Gounaris, 2005).

There are several measures that can be adopted by a bank in order to retain customers. One of the measures entails enhancing trust among customers since a research study in retail banking revealed that one of the best ways to retain customers in though cultivating trust (Gounaris, 2005). Customers in the banking sector invest significant fortunes of their income by depositing it in banks. Consequently, customers trust the bank with their valuables and money by assuming the bank is a sound financial institution that would not encourage unethical practices where some customers end up losing their valuables and cash. A study carried out by Liu et al (2012) on Indian banking sector showed that banks that develop and nurture customers’ trust develop long-term customer relations and in turn, the customers are relatively more committed to the banks. Importance of trust is also illustrated by Barclays bank which acts with high level of integrity in order to achieve and retain trust of customers. Trust and commitment are interrelated in that they both portray a bond between the customer and the bank in reducing any uncertainty to the customer, which is a way of increasing service value to both the parties (Gounaris, 2005).

A study carried out by Amin et al (2011) on Iranian banks showed transparency as another important factor that determines customer retention in retail banking. The study showed that banks that established high level of transparency in actions and in communication had developed a relatively good public image and were more successful. Barclays bank strives to enhance transparency through accurately informing customers regarding all charges and benefits that are associated with their deposits or loans. As Anani (2010) explain, there are some cases where financial intuitions have hidden costs that a customer may not be aware of, but is charged after a service is offered. Such hidden charges indicate lack of transparency in the bank, and may discourage customers from doing business with the bank.

Customer satisfaction is another major factor that leads to customer retention. A satisfied customer will more likely develop loyalty to a bank, which is one of the pillars of customer retention (Kumar, 2010). Customer satisfaction involves ensuring that a customer gets quality services and enough support from the bank to solve a problem or in the event of depositing their money. According to Kotler (2011), satisfaction is achieved through effective customer relationship management (CRM). For instance, Barclays enhances customer satisfaction through CRM strategy that targets personnel services at bank branches, internet banking, mobile banking, use of ATM cards, use of credit and debit cards for transactions and subscription for alternative channels (Barclays, 2013). The bank has also developed Electra loyalty program that provides rewards to customers through various channels. However, questions have been raised regarding the effectiveness of Barclay’s customer feedback system which is also crucial in enhancing customer satisfaction (Henry, 2013).

Customer closeness in some cases is critical in enhancing customer retention, though the issue may be a bit tricky in commercial services. Importance of closeness is well illustrated in the study conducted by Amin et al (2011). The study found that relationship closeness enhances customer retention where the relationship between a bank and a customer goes beyond the usual commercial relationship to a friendship. For instance, when dealing with regular clients, there is need to go beyond offering commercial services to developing it into a friendship relationship where the bank and the client may discuss on a mutual friendship basis. However, as Amin et al (2011) found out, some clients may take advantage of such closeness for unethical purposes.

When to retain customers and consequent follow-up As indicated earlier, it may cost many times more getting new customers than retaining the existing ones. This means that each day is a perfect time to retain customers, through consistent high quality services that create value to the customer. However, there are particular cases when a bank has to be more committed towards customer retention.

A particular case when customer retention is required than ever is in banking innovations. Due to increased competitions, banks come up with igneous ways to ensure they retain their customers. This may be achieved through offering high technological services that enable customers to undertake self-services. There is need for innovation in offering personalized services to customers, which is a typical way of retaining them. While ATMs are a conventional way of ensuring personalized banking, banks have to ensure they innovate in providing e-banking services and mobile banking services (Durkin, Crowe & O’Donnel, 2008). With development of new service by competitors, the bank faces a risk of losing its customers to such innovative banks. The best way to ensure a bank retains customers at such a time is through innovations. An example is in mobile banking where a customer can transfer or deposit money into their accounts from their mobile banking, which gives customers a sense of control in the banking services.

Another time to retain customers is for the bank to come up with attractive services that will hook customers to the bank and ensure they are retained (Capgemini, 2012). Customers will more likely be willing to operate with a service provider that thrills them with incredible services, and who goes an extra mile to do what other banks do not bother to do. For instance, a bank that reaches to the special classes in the society such as students or the poor, and introduces friendly services that will benefit these and others neglected by bigger banks has a higher chance of attracting and retaining more customers than its competitors (Anani, 2010). Therefore, a bank that offers differentiated services will have a high chance of attracting and retaining customers.

A research by banes & Company (2010) noted that customer follow-up is a critical issue that offers banks a milestone over their competitors. One of the best ways for retail banks to ensure they retain customers is through follow-up by asking customers for their opinions through suggestion boxes. Loyalty leaders will delve deeper into understanding why customers hold a specific view regarding the bank, and will try to design their services to comply with customer’s demands where possible (Banes & Company, 2010). Moreover, the research revealed that customers follow-up in case of complaints goes a long way to in making satisfied customers. When a customer registers a complaint to the bank, the complaints have to be followed, solved and the loyalty manager has to call the individual customer(s) to ensure they are satisfied by the solution offered. Moreover, there has to be a follow-up after the bank puts in place new systems where customers are asked about their experience with the services, which forms a solid basis on which a bank can make corrections or improvements towards articulating the needs of customers.

ConclusionIn conclusion, customer retention is one of the most effective strategies for enhancing the growth of retail banking. The purpose of the strategy is to enhance customer satisfaction and hence, prevent them from diverging to competitors. Among other benefits, customer retention saves costs associated with acquiring a new customer to replace one that has left a company. Some costs such as the use of sales personnel to carry out direct marketing of a retail banking products and services, which may be quite high, are not required in customer retention process. Customer retention helps to save such costs, hence increasing profitability of a bank. In retail banking, customer retention can achieved through cultivation of trust between a bank and customers, effective customer satisfaction strategies, embracing transparency and developing a close relationship with customers. Strategies to maintain customers should be employed continuously, every day. However, more emphasis should be put when a bank innovate new products and services and when engaging in more aggressive marketing campaign. Finally, customer follow up is also important to the process of customer retention as facilitates acknowledgement of in-depth needs of consumers. The information gathered during follow up is used in designing products and services as per customer’s needs.

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