Banks Shift Gears in

Drive for Top-Line Growth

Focus Turns to Customers
In the Financial Services Industry

Introduction
The battle of the banks is taking on new urgency. After spending the past few years fiddling with
their cost structures, leading banking organizations around the world are shifting their efforts toward
growth with an eye toward creating value.
Yet while their growth expectations are high, the markets are not cooperating. Low GDP (gross
domestic product) and inflation rates in almost every market mean tepid-to-moderate growth for
financial institutions. Adding to the challenge, more banks and financial institutions anticipate
internal or organic growth to play a leading role in bolstering their top lines. The latter is among the
key findings in an A.T. Kearney study conducted by Harris Interactive.
The findings reveal that for most financial services firms, a large percentage of growth will ideally
come from organic strategies, ranging from 71 percent in North America and 75 percent in Europe
to 88 percent in Asia (see figure 1 on page 2).1 And while acquisitions will continue to be part of their
growth agendas, most of these transactions will be aimed at filling geographic or capability gaps.
In what is essentially a zero-sum game in a mature industry, organic growth strategies depend on the
ability to develop customer insights and effectively translate those insights into effective operating
models. Nearly two-thirds of survey respondents say that ensuring a good customer experience at
every customer touch point is the most critical component of organic growth.
In this paper we highlight the study findings and discuss reasons why organic growth has become
a strategy of choice among global financial institutions. We explore why organic growth depends on
both acquiring new customers and retaining the loyalty of old customers, and outline how firms plan
to implement their organic growth strategies. Finally, we offer recommendations on specific ways to
link customer loyalty to improve operations and thereby create and deliver a differentiated customer
experience the foundation for organic growth.

Due to the small base size for Asia and Brazil, (12 and 18 executives, respectively) the findings for these regions provide directional insights only.


Banks Shift Gears in Drive for Top-Line Growth

The leaders in global banking have high aspirations when it comes to growth. Over the next
five years, global financial institutions expect
to increase their revenues by an average of 10
percent per year compounded annually, and
boost their profits by 11 percent on a compound basis, according to the survey findings
(see sidebar: Research Methodology). These aggressive projections exclude gains from acquisitions
or mergers.
This view is in sharp contrast to that of the
past five years when the global banking industry
experienced a 10 percent compound annual
growth rate in revenues, which includes the
accretive effects of mergers and acquisitions.
More than 75 percent of respondents expect
to increase value and profitability by growing

revenues a finding supported by Richard

Kovacevich, chairman of Wells Fargo, in an interview with American Banker. He called revenue
growth the single most important measure of
success in our industry now and for at least the
rest of this decade.
More than 90 percent of respondents say
increased profitability is a corporate goal, with
more than half calling it their most important
goal. Yet competitors in different geographic
regions report major differences in anticipated
growth rates for both revenue and profits.
Financial institutions in Europe and North
America expect an average revenue growth of
10 percent and 9 percent, respectively. Financial
institutions in Japan expect average revenue
growth of 8 percent, still a major increase from
the last troubled decade.

Figure 1: Plan for meeting revenue and profitability goals

Organic growth

Inorganic growth

50%

Dont know or
declined to answer

33%

1%

Both organic and

inorganic growth

1%

47%

59%

2%

65%

2%

0%

61%

75%

0%

37%

0%

33%

3%

25%

6%

0%

Ideal ratio of organic versus inorganic growth to meet companys goals

Organic

Inorganic

75%

25%

71%

29%

75%

25%

*Due to the small base size for Asia and Brazil, the findings for these regions provide directional insights only.
Sources: Harris Interactive and A.T. Kearney

..

88%

12%

76%

24%


Banks Shift Gears in Drive for Top-Line Growth

For profits, the pattern is similar with

minor differences between regions. For example,
North Americas expected rate of profit growth
is 10 percent and Europes is 12 percent.
These targets are ambitious given the historic and expected GDP growth rates of these
regions, not to mention the historic growth
rates of financial institutions even when acquisitions are included. How will banks achieve
their aggressive revenue growth and even more
aggressive profit targets?

Consolidation in the financial services industry
is both inevitable and expected (see sidebar:
Whos Buying Whom?). However, survey respondents say most of their growth will be organic.

In fact, in North America, respondents consider

the ideal percentage of growth to come from
organic strategies to be about 71 percent. One
reason organic growth is increasingly important
to fulfilling top-line growth objectives is that
financial institutions are still integrating previous acquisitions. Some have become so large
that acquiring yet another company will not
grow scale meaningfully. Were too big to be
transformed anymore, explains Charles Prince,
CEO of Citibank, in an interview with American
Banker. The platform we have is a terrific one,
and we need to grow organic revenues off that
platform.
Deutsche Bank CEO Josef Ackermann told
AFX Asia News that there is little to be gained
from a merger with another bank. In terms of

Research Methodology
A.T. Kearney and Harris Interactive
set out to investigate the degree to
which companies in the financial
services industry had a strategy for
achieving top-line growth and what
approach they used or planned to
use to turn that strategy into reality.
We also wanted to explore how their
approach was implemented.
Selecting the participants: Firms
had to meet the following qualifications: In North America, a firm
had to be among the top 125 banks
in terms of assets, and among the
top 75 property and casualty or life
insurance companies in revenues. In
Europe, Asia and Brazil, participat-

ing firms had to be among the top 20

banks in their country, and among
the top 20 property and casualty
or life insurance companies. In all
countries, participants from investment banks and consumer finance
and asset management companies
were from the top 10 firms in their
countries. To qualify as a study participant, respondents had to be at
the director level (or equivalent) or
higher, and be involved in strategic
decision-making within the firm.
Participants: Study participants
included 162 senior executives at
leading banks and insurance companies (including consumer finance

*Quotes from CEOs in this paper were taken from various press articles.

..

firms, asset management companies

and investment banks) in numerous
countries: the United States, Canada,
United Kingdom, France, Germany,
Italy, the Netherlands, Switzerland,
Japan and Brazil. Of the 162 telephone interviews, 61 were with
executives in the United States and
Canada, 71 interviews were with
executives in the six European countries, 18 executives in Asia were
interviewed, and 12 executives in
Brazil.*
Timeline: The study took place
from September to December 2003;
follow-up questions were answered
in April 2004.


Banks Shift Gears in Drive for Top-Line Growth

revenues we are already number three in investment banking worldwide, he said. We would
not gain much from a merger and the overlaps
would be too big. We are focusing on organic
growth.
Another reason for focusing on organic
growth is that some institutions are close to
hitting regulatory caps. The Bank of AmericaFleetBoston deal, for example, has pushed the
combined institution to the regulatory limits.
In the United States, the limit is a 10 percent
share of deposits.
Finally, some banks are simply turning their
attention more fully toward their customers and
in so doing are meeting their growth aspirations.
For example, Commerce Bancorp has been
using organic growth to build up its top line
since 1973. In the past three years, Commerce
doubled its deposits and grew its branch network by 49 percent all without acquisitions.
In the next five years, Commerce plans to double
its branch network and increase deposits by 25
percent annually.
Then there is HSBC. The bank is an
entrenched, major competitor in 81 countries
globally, with 30 million retail customers, two
million small-to-medium enterprise customers
and 1,200 corporate multinational customers.
HSBC concentrates mainly on organic growth,
primarily by leveraging its international network
and by adopting a customer-driven marketing
approach organized around customer needs and
business segments. When it does acquire businesses, which is never ruled out, HSBC identifies targets based on their ability to extend the
banks global reach or to contribute revenues to
its existing businesses (see sidebar: Stretching
Your Growth Potential). Currently, HSBC is said
to be eyeing potential targets in China.

To achieve their ambitious organic growth goals,
survey respondents say their firms plan to employ
various customer management strategies (see
figure 2). Nearly two-thirds of respondents say
that ensuring a good customer experience at every
touch point is the most critical component of
organic growth.
Numerous studies prove that a good experience will drive customer acquisition and promote
customer retention, which in turn improves
profits. A 5 percent increase in customer retention can increase profits from 25 to 85 percent.
According to other A.T. Kearney research,
70 to 75 percent of customers who say they are
delighted with their financial institution also
say they definitely wont switch, will recommend the business to someone else, and will
consider buying other products from the financial organization. Meanwhile, almost 60 percent
of dissatisfied bank customers say they plan to
switch banks.
In a recent study performed by Bank
Administration Institute and MarkeTech Systems,
77 percent of a banks most profitable customers have been with the bank longer than five
years, whereas 50 percent of the least profitable
customers last four years or less.
Still, the average company loses one-third
of its customers every year. The top 20 U.S.
banks lose 12 to 15 percent of their customers
every year compared to leading U.S. banks that
lose only 7 percent annually, resulting in a solid
economic advantage.
This customer churn has a significant impact.
The churn-retention ratio has a direct impact on
expense ratios and on relative competitive cost
positions. Replacing customers increases the relative cost per new customer and redirects critical

..


Banks Shift Gears in Drive for Top-Line Growth

resources away from important growth initiatives.

Customer churn also degrades an organizations capacity to boost wallet share through crossselling activities. You cannot cross-sell financial
products if your customers are long gone. In the
United States, a retail banks customer profitability can range anywhere from US$150 per
year for a customer with two products to
US$1,000 per year for a customer who uses
nine or more products. While many of the
worlds leading financial powerhouses boast

more than 10 million customers each, most

have failed to significantly increase their overall
share of customers spending on other financial
products. For example, the cross-sell ratio of
financial products ranges from 3.3 products per
customer in France, 2.6 in Germany, 2.3 in the
United Kingdom and only 2.1 in the United
States, on average.
Clearly, the challenge for financial institutions is to retain and deepen the profitability of
their existing customer relationships.

Figure 2: Current customer management initiatives1

Strategies
Customer acquisition

85%

Cross-selling or
up-selling

85%

Customer retention

83%

Understanding
customer value

82%

91%

Understanding
customer differences

73%

79%

Predicting or
preventing churn

66%

Leveraging customer
knowledge

62%

74%

Developing
loyalty programs

58%

74%

Other 2%

82%

75%

82%

76%

59%

67%

77%

54%

79%

2%

82%

70%

88%

79%

88%

84%

98%

76%

76%

97%

Managing customer
profitability

Enablers

51%

65%

53%

41%

3%

1Among

survey respondents who believe customer management is extremely or very important to organic growth strategies.
to the small base size for Asia and Brazil, the findings for these regions provide directional insights only.
Sources: Harris Interactive and A.T. Kearney
2Due

..

65%

67%

67%

83%

92%

83%

67%

75%

75%

67%


Banks Shift Gears in Drive for Top-Line Growth

Whos Buying Whom?

As important as organic growth is,
the pace of mergers and acquisitions
in the financial institutions industry picked up significantly in 2003,
accounting for about one-third of
global M&A volume. The level of
activity is expected to remain relatively high in the next several years
as valuations become more interesting to sellers.
Based on related A.T. Kearney

research on industry consolidation,

the global banking industry is one of
the least consolidated industries in
the world, and is projected to consolidate at a brisk pace (see figure A).
We predict that global banking will
consolidate to the point where the top
three competitors will control more
than 30 percent of global market
sharea far cry from the 10 percent
or so the leaders claim today.

Why do firms choose M&A or

inorganic growth strategies? The
primary reasons include a desire to
improve competitive position, to target new customers and to avoid the
cost of lone business building. M&A
strategies also revolve around companies sticking to what they know
best. Citigroup, a market leader in
credit cards and sub-prime lending,
bought a credit-card portfolio from

Figure A: The four stages of industry consolidation

Industry
concentration
CR31

HHI2

100%

0.7
90%

Defense
Automotive controls
Replacement parts

80%
Maximum
70%

Shipbuilding
Sugar products

Insurance brokers
Soft drinks

60%
Meat packers
Cosmetics and toiletries

45%
40%
30%
20%

0.1

Confectionary goods
Grain, flour and cereal
Canners and processors
Automotive mfrs.
Dairy products

50%

Telecom

Diversified food
Logistics
Global multi-line insurance
Chemicals
Global life and health insurance
Original parts and accessories
Global property and casualty insurance
Electrical equipment

Minimum
10%

0.01

Global banking

0%

0
5

10

15

1CR3

= Market share of the three largest companies of the total market based on Value-Building Growth database (25,000 companies)
= Hirschman-Herfindahl Index corresponds to the sum of the squared market shares of all companies and is greater than 90%;
the axis logarithmically plotted.
Source: Graeme K. Deans, Fritz Kroeger and Stefan Zeisel, Winning the Merger Endgame, (McGraw-Hill, 2003)
2HHI

..

20


Banks Shift Gears in Drive for Top-Line Growth

Sears and a consumer-finance unit

from Washington Mutual. In our
survey, of the 76 financial institutions that are pursuing inorganic
growth strategies, almost two-thirds
plan to acquire primarily smaller or
niche financial services companies,
rather than larger institutions.
The pattern of consolidation is
a subject of great speculation. Our
research indicates that companies
stuck in a pattern of low growth in
both revenue and profit will remain

the most likely targets over the next

several years. These companies are in
the lower left quadrant of the valuebuilding growth matrix (see figure
B). Although no company remains
in any one quadrant for long, those
that lag their peers in both revenue
and value-building growth must
overcome key operational and strategic challenges.
From a geographic standpoint,
most companies focus their strategies
on their home regions. Of financial

institutions based in North America,

96 percent expect to acquire other
companies in their home region, 43
percent expect to make acquisitions
in Europe, 22 percent in Japan and
22 percent in Asia outside Japan.
In Europe, 76 percent of financial institutions plan to acquire other
European firms, with only 21 percent
pursuing Asian firms outside Japan,
and 10 percent pursuing acquisitions in North America.

Figure B: Value-building growth performance in the global banking industry

19992003 *

40%

35%

Need to focus on cost

reduction to improve
ROI

30%

Royal Bank of Scotland

Focus on maintaining
current competitive
advantages

National Commerce

25%

Commerce Bancorp

Danske Bank
US Bancorp

20%
UBS

15%
10%
5%
0%
5%
10%

Fifth Third Bancorp

Commonwealth Bank of Australia
BB&T
Barclays
HSBC
Wells Fargo
KBC Bank
United
JP Morgan Chase
Overseas
Washington Mutual
Westpac
Lloyds
Greenpoint Financial
Citigroup
American Express ABN
Wachovia Bank of Nova Scotia
Amro
National Bank of Canada
Standard Charter
Deutsche Bank
Comerica
Bank of America

SunTrust Banks
Bank of Montreal

PNC Financial Services

Bank One
Need fundamental

Amsouth
restructuring; focus on
Credit Suisse
FleetBoston
Need to focus on revenue
top-line growth and cost
and growth-oriented
reductions to improve
Hang Seng Bank
investments
ROI
ING

15%
30%

20%

10%

0%

10%

20%

(market cap CAGR)

*Market capitalization growth adjusted for change in equity. Industry average based on a sample of top global banks.
Source: A.T. Kearney

..

30%

40%


Banks Shift Gears in Drive for Top-Line Growth

Creating and sustaining a good customer experience has proved to be a challenge. With companies reporting an average success rate of 6.6
on a 10-point scale at implementing customer
management strategies, there is still much work
to be done (see figure 3).
Many financial institutions fail to systematically translate customer requirements and
insights into a clear set of operational imperatives. Although executives say they understand
the respective costs and benefits of customer
churn and retention, few develop deep insights
into the reasons for them. Without knowing
why customers stay or go, it is impossible to
develop strategies to maximize customer loyalty
and profitability.

In theory, the answer is easy: Financial institutions need to understand what truly makes
customers happy or unhappy and then focus
their efforts in those areas. However, they face
an array of challenges, including a lack of data
on just what critical aspects of the customer
experience delight or dismay customers and
what thresholds of performance significantly
improve or hurt customer loyalty. Other challenges include performance measures that dont
match customer priorities and an insufficient
link between improvement initiatives and their
impact on the top and bottom lines.
Although we often talk about enhancing
customer satisfaction, much more can be
accomplished by increasing customer loyalty.
Satisfaction, in essence, relates to how customers

Figure 3: Implementation and success rates of customer management strategies

Companies that have implemented these strategies

Customer
management

77%
6.6

6.7

6.9

Acquisitions

57%

6.1

72%
7.0

83%
6.8

7.0

83%

36%

1Average

..

92%
8.3

22%
5.1

score is based on a 10-point scale in which 10 is extremely successful and 1 is not at all successful.
to the small base size for Asia and Brazil, the findings for these regions provide directional insights only.
Sources: Harris Interactive and A.T. Kearney
2Due

100%
7.3

6.5

5.6

100%
8.0

47%

6.8
47%

89%

69%
6.4

100%
8.3

6.7

61%

58%

89%

64%
6.8

6.3

6.4

77%

70%
6.4

73%
6.5

6.4

Market
approach

74%

75%

Brand
management

6.3

Product
management

Success rate with implementing these strategies 1

25%
5.4

[Revenue growth is] the single most

important measure of success in our
industry now and for at least the rest
of this decade.
Richard Kovacevich, Chairman, Wells Fargo
American Banker, January 2004


Banks Shift Gears in Drive for Top-Line Growth

perceive performance. Most customer satisfaction programs create and monitor an aggregate
customer satisfaction index. Such indices are
applauded when they go up even though
they only confirm that a company is spending
money effectively, not that it is doing so efficiently. When the satisfaction indices go down,
there are few clues as to why or about what
actions a company should take.
In gauging loyalty, by comparison, bank
managers must look beyond their customers
perceptions to focus on actual behaviors. Does
the customer intend to stay or switch to another
bank (retention)? Does the customer consider
using additional financial products or services
(cross-sell and up-sell)? Is the customer willing
to recommend the bank to family and friends
(advocacy)? By measuring customer intentions
and actual behaviors, managers can quantify
their impact, which in turn can be used to
prioritize resources, investments and improvement initiatives.
Of course, focusing on customers stated
loyalty is not enough. What matters is what
customers actually do, not what they say they
will do. Thus, it is important to quantify the
link back to real revenue and profitability. By
conducting analyses over periods of time, banks
can quantify, validate and calibrate between
changes in the stated loyalty and changes in their
market share (relative to the share of capacity in
that product and region). Further, banks need to
clearly and consistently define the key customer
loyalty-related metrics, such as retention, churn,
cross-selling and diminishment.
Only a few financial institutions have active
loyalty programs. U.S. Bancorp has a rewardsbased strategy that is broader than most. Under
its checking that pays program, the banks

debit-card holders can choose one of four rewards:

cash rebates, airline miles, points to purchase
merchandise and gift certificates, or entry in a
drawing to win a Harley Davidson motorcycle.
The bank expects to spend US$30 million on
the program by the end of 2004. Pat Wesner,
executive vice president of retail banking for
U.S. Bancorp, says the program is part of an
ongoing effort to customize and personalize the
companys demand deposit account offerings
to fit the needs of different customers.
Still, excluding credit-card programs, 87
percent of banks do not reward customers for
their checking, savings, debit, online, trust,
investment, or other business, according to
findings in a Maritz Loyalty survey. Also, the
survey found that 57 percent of customers
would consider changing their primary bank if
offered a rewards program tied to these different
banking services.
To increase customer loyalty, financial institutions need to put customersand not their
products or channels at the center of their
strategies. They need to look holistically at all
aspects of their business and adopt a customercentric mindset and capabilities: compelling
customer value propositions, consistent and
superior customer interfaces, and efficient and
effective fulfillment.
Traditionally, a banks customer loyalty efforts
focus on how employees perform in relation to
a customers experience. Was the bank representative knowledgeable? Was she courteous? Was he
responsive? These are good questions to ask in
an average customer-evaluation survey, but they
are not the right questions to gauge whether or
not your customers are, or will remain, loyal.
Instead, customer loyalty can be measured by
evaluating five factors: brand image, relationship,

..


Banks Shift Gears in Drive for Top-Line Growth

product performance, service performance and

price (see figure 4). Given the interdependencies
inherent in customer relationships, it is important to look at all five elements as they relate
to each other. For example, a customer who is
disappointed with a home insurance policy
(product) is not likely to be around long enough
to build a more valuable mortgage relationship.
A bank that provides customers with free online
bill payment services will cut into its profits, but
also improve customer relationships and retention; retaining customers can increase loan and
deposit balances by 30 to 40 percent and profitability by 20 percent.
In the United States, Wells Fargo is among
the banks taking these lessons to heart. Wells
Fargo provides better service and better deals to
customers who do more business with the bank.

As a result, the bank has increased revenue by

12 percent, and earnings per share have risen by
17 percent on a compound annual growth rate
over the past decade. Also, 12 percent of Wells
Fargos 15 million customers use more than
eight products and 35 percent of its customers
have more than four products.

Financial institutions have made significant
operational improvements, but few have based
these improvements on creating a differentiated
customer experience. Historically, management
teams have had a well-developed set of principles and tools to help them address their organizations cost structures. In contrast, far fewer
tools have been developed to help grow the
top line, and thus executives believe it cannot

Figure 4: The interdependencies in customer loyalty

Brand image

Relationship

Product performance

Service performance
(people, process, policy, channel)

External influences
Market dynamics
Switching costs, barriers
and inducements
Lifestyle changes

Attitude
(intends to be loyal)

Actions
(is loyal)

Customer populations
Non-customers
Lost prospects
Current customers
Defections

Price

Source: A.T. Kearney

..

Enhanced
business performance
and value
Customer loyalty
Customer retention
Share of wallet or
cross-sell
Advocacy
Operational excellence
Cycle time
Quality
Productivity
Cost management


Banks Shift Gears in Drive for Top-Line Growth

be approached as methodically. Our experience shows otherwise: Disciplined organic

growth requires strengthening the explicit links
between operational improvements and the total
customer experience. The process begins with
a deep understanding of what customers value.

In other words, you have to hear the voice of

the customer.
Examples of firms that consistently deliver
a differentiated customer experience are well
known. Southwest Airlines heard its customers
loud and clear. The budget carrier does not offer

Stretching Your Growth Potential

Excerpt from Stretch! How Great
Companies Grow In Good Times
And Bad by Graeme K. Deans and
Fritz Kroeger (John Wiley & Sons,
2004)
Many companies assume that growth
opportunities are determined primarily by external factors such as the
market, competitors or technology.
Yet some companies, Starbucks for
example, manage to sustain consistent growth, even in a fiercely competitive industry selling a commodity
product. How do they do it?
Over the past three years,
A.T. Kearney has conducted numerous studies on corporate growth over
both the short and long term. Using
a database that encompasses 98 percent of the world market capitalization, we examined 29,000 firms
over 14 years in addition to interviewing numerous CEOs. The results
of our research led us to create a
four-step model that provides a clear
path to growth:
Operations: Cleaning house.
Every company has an opportunity
to increase operational efficiency some-

where. The main objective is to

ensure that your business is a low-cost
competitor and a leader in both
product and service quality. These are
the bare minimum prerequisites for
growth. Think of GE Capital, the
most cost-effective player in almost
any line of business it competes in,
and youll get the picture.
Organization: Structuring for
success. With the operational foundation set, the next step is to create a
solid, high-performing organizational
structure. Organization-oriented
growth improvements can account
for another 25 percent of a companys future growth potential, but
they are more difficult to implement.
Still, Goldman Sachs has it figured
out. The firm has quickly changed
its business model numerous times to
capitalize on new market opportunities, moving from risk arbitrage to
dot.com IPOs to M&A advisors to
specialist and market making trading
to proprietary trading and beyond
and succeeding every time.
Strategy: Pulling the growth
levers. When executives think about
the role of strategy in growth, they

..

often think of a big breakthrough

that will transform the industry and
result in skyrocketing sales. But our
research suggests that rather than
look for a dramatic change, executives should take a holistic view of
their strategies and find specific
growth opportunities within that
arena. For example, HSBC has
patiently pursued a global acquisition strategy in its core business,
waiting for the right deals at reasonable prices.
Stretch: Searching for breakthroughs. The first three stages of
the stretch growth model are fairly
discrete and easy to visualize, if
not implement. The fourth step, the
stretch growth stage, is more creative. Stretch opportunities have the
potential to create breakthrough
growth and transform your business.
Most financial institutions havent
yet arrived at this ideal. But once
they capitalize on global branding,
economies of scale, and technology
leverage opportunities, they will
realize the benefits companies such
as Nestl, Toyota and Johnson &
Johnson enjoy.


Banks Shift Gears in Drive for Top-Line Growth

assigned seats, meals or in-flight movies, but it

delivers what it promises: on-time departures and
low fares. Its efforts consistently earn it a top spot
in the American Customer Satisfaction Index.
Ritz-Carlton hotels grabbed top honors in J.D.
Powers 2003 North American Hotel Guest
Satisfaction Index. One way the hotel increases
customer loyalty is by giving every employee
from maid to hotel managera blank check
to address any guests complaint on the spot.
All differentiated customer experiences
begin with a deep understanding of customer
requirements by distinct customer segment.
This understanding must then be translated to
operational excellence. In our experience, there
are three ways to do so:
Create meaningful customer insights
Top companies design and implement a formal
program that lets them know what is important to
their customers. They obtain customer insights,
sometimes called critical-to-customer attributes,
which encompass all dimensions of the customer
experience: brand image, relationship, product
and service performance, and price. The service
dimension is further broken down into attributes
that apply to all customer touch points including
people, processes, policies and channels.
Equally important, there must be multiple
ways to view these customer insights. If bank
executives want to know what customers truly
value about their products, they should be able to
view their customer insights either by customer
segment or by geographic region, depending on
their needs.
In addition, an analysis of customer insights
should be applied to all customer populations,
including non-customers (these are customers
who belong to competitors), lost prospects,

current customers and defections, as figure 4

also shows. Many companies make the mistake
of learning only from past customers, those who
are about to leave or who have already left.
Although it is important to respond when
customer loss is imminent, late-stage efforts to
stop departing customers is akin to waiting
until something really hurts before calling the
doctor. By then, things may have progressed to
the point where there are few options, the remedies are more drastic and recovery is less favorable. In customer retention, a better approach
is to gain a full appreciation of what current
customers value. To focus only on managing the
crisis is to miss the bigger picture.
Ensure the customer insights can be acted upon
Once executives know what attributes customers
value, they must assess their operations to do two
things: Determine if the bank has the ability to
fulfill the need and identify performance gaps.
A good assessment will depend on solid customer
research that provides quantitative thresholds
of performance. The firm can then take the
critical-to-customer attributes and quantitative
thresholds, and link them to the root causes of
poor operational performance. In this way, there
is transparency into various processes, allowing
the bank to focus resources and efforts where
they will have the biggest impact.
Align the organization and act on insights
How should managers use these new insights to
drive customer loyalty? The first step is to prioritize resources, investments and improvements,
shifting spending from lower- to higher-impact
activities in short, focus on activities that are
important to the customer and that confer competitive advantage.

..

BofAs two key strategies continue

to be the customer and the customer.
Our strategy is to attract more customers, retain more of those we have, and
deepen relationships with both groups.
Ken Lewis, CEO, Bank of America
The Banker, January 2004


Banks Shift Gears in Drive for Top-Line Growth

Fully capitalizing on these insights over time

requires generating a continuous flow of such
ideas, moving from analysis of past customer
behavior to experimenting with and predicting
future customer behavior. This, in turn, requires
institutionalizing a culture of continuously testing customer responses and then using lessons
learned to take actions that bolster the economics of the business as a whole. The organizations
understanding of how to treat customers should
continue to grow and reveal a stream of new
ways to generate economic value.
Even the best-designed programs cannot
succeed without commitment and buy-in from
key stakeholders and leaders of business units,
product lines, geographic regions, channels and
customer segments that are strategically important to the company. Top banks tie employee
incentives to achieving customer loyalty metrics.
Many institutions are revising their incentive
plans to reward people for building and preserving customer relationships, as opposed to
pushing products.
At the same time, banks must understand
the differential value within the customer base
and invest in customers accordingly. Determining
differential value requires incorporating both
the revenue stream from the customer and all
costs associated with the customer. For example,
the assessment must include costs related to
customer acquisition, marketing and promotion, customer service contacts (frequency and
duration), billing, collections and bad debts.
Armed with a clear picture of its differential
customer value, the bank then manages the
value delivering only what is important to
a customer or customer segment. Preferably,
the bank continues to build loyalty of valuable customers and redirect some efforts and

resources to make less-valuable customers more

profitable.
:

For an example of how banks can learn more
about what their customers truly value, consider
a consumer loan origination process in the
context of the three ways to build operational
excellence.
Know what your customers care about
The consumer loan origination process offers
customers a variety of attributesa competitive interest rate, accuracy of closing costs or
a good-faith estimate, length of time from
application to approval, a relationship manager,
a convenient closing, the list goes on. Some
of these attributes will influence a customers
choice on whether to join or stay with a bank
more than others. In our experience, the most
important attributes for lost prospects (customers
who considered one bank but then chose another)
are price and product features. For current
customers, the length of time from application
to approval outweighs all other attributes.
In our case example, the bank was able to
statistically quantify how customer satisfaction
with attributes of the loan origination process
influenced overall loyalty (see figure 5 on page
16). For example, if providing customers with
a variety of loan options has little effect on
whether they stay with the bank, what is the
return on investment in providing more loan
options? By combining this analysis with the
banks relative performance in providing each
attribute, the bank was able to identify improvement areas where cutting costs would not
affect customer behavior and areas where

..


Banks Shift Gears in Drive for Top-Line Growth

incremental investments would have the biggest

business impact.
Act on customer needs
Knowing that customers want approval quickly
is not enough. You have to define what quickly
means to the customer. In our case example,
further digging revealed that if customers
waited more than five days to get a loan application approved, there was a dramatic drop in
customer satisfaction. Knowing that five days
was too long, the bank performed an operational
assessment to determine how long each approval
step takes, from application to preapproval to
appraisal (if applicable) to underwriting. The

bank measured other processes as well, including the number of loans processed per full-time
employee and the amount of time a loan
application spends in the queue waiting to be
handed off to the next process. The bank used
the information to prioritize its spending across
the different aspects of its services.
Bank executives soon discovered that they
had been too focused on organizational functions: The product people understood priorities
in product features and the closing people
understood the priorities in closing processes.
But no one could make objective trade-offs
among these areas to prioritize spending. By
linking critical-to-customer attributes to the

Figure 5: Gauging loyalty in the consumer loan origination process

--

(score and importance)

Application
and approval

40%

Relationship
manager

30%

Closing

20%

Service
Service
Service
Service
Product
Price
Price
Service
Product

Length of time from application to approval

Accuracy of good-faith estimate
Ease of completing application
Amount of supporting documentation
Variety of loan options
Reasonableness of application and document fees
Competitiveness of interest rates offered
Accuracy of payment calculation
Variety of payment options

Service
Service
Service
Service
Service

Ability to answer questions

Courtesy and friendliness
Informed of progress of loan application
Ease of contact
Responsiveness

Service
Service
Service

Accuracy of closing documentation

Convenience of closing
Reasonableness of any last-minute requests
for information and payment
Length of time from approval to closing
Ease of understanding closing documents

Service
Service
Brand image

10%

(importance to customer) (performance gap*)

Key attributes of brand promise

(speed, price, friendliness, value, convenience, respect)

*Performance gap refers to comparison to competitor or to current best-in-class customer base

Source: A.T. Kearney

..


Banks Shift Gears in Drive for Top-Line Growth

banks operational capabilities executives were

able to pull the correct operational levers
those that would improve the customer experience and drive customer loyalty (see figure 6).
Translate insight into financial benefit
Establishing measurements and making operational improvements is only half the chal-

lenge. These actions have to be translated into

a financial benefit. The bank discovered that
approving loans within five days and addressing
other areas of customer value (such as keeping
the customer informed about the loan progress)
could improve customer retention by 3 percent. The bank could also retain 1,500 to 3,600
more customers per year and increase loan

Figure 6: Linking customer loyalty to operational excellence

Percent of responses

80

Satisfaction
breakpoint: 5

60
40
20
0

05

510

1015

1530

30+

10
9
8
7
6
5
4
3
2
1
0

Days

Credit needs
analysis

Application
submission

Application
processing

Credit analysis

Adjudication

Operational improvements in critical-to-customer attributes

Time from application to approval
Keeping customers informed of the progress of their applications

Preparation of
closing documents

Closing

Funding

Booking

Operational improvements in critical-to-customer attributes

Timeliness
Closing fees match good faith estimate
Convenience

Source: A.T. Kearney

..

Service
(ongoing)

Pricing and
negotiation

Customer satisfaction rating

(110 scale)

Mean rating
Count

100


Banks Shift Gears in Drive for Top-Line Growth

balances by US$75 to US$540 million per

year (see figure 7).
By increasing customer satisfaction and
meeting customer-directed performance thresholds in each of its critical-to-customer attributes,
the bank was able to estimate where it could
achieve a revenue impact, and then shift its
investments to activities that would affect customer behavior.
This link is more difficult to measure in

the financial services industry than in other

sectors because the repurchase cycle can be long
(such as with mortgages, for example). However,
in cases with a shorter repurchase interval, it is
possible to directly quantify the revenue impact.
For example, a bank could quantify the increase
in like-for-like sales that result from measurable
improvements to the customer experience.
Further analysis reveals that the optimal
level of customer satisfaction (for each aspect of

Figure 7: Impact of customer satisfaction on loyalty

Wont switch (retention)

Will recommend (advocacy)
Will consider repurchase or other products and services (cross-sell)

Percent of customer responses

100
90
80

70%

70
40%

50
40
30

26%

46%

44%
26%

20%

75%

56%

54%

60

75%

32%

20
10
Disappointed (15)

Indifferent (67)

Pleased (89)

Delighted (10)

Incremental
improvement
in retention1

Incremental
customers
retained per year2

Incremental balance
retained per year
(in US$ millions)3

Length of time from application to approval

1.9%

1900

$95285

How well relationship manager kept customer informed of loan progress

3.6%

3600

$180540

Ease of contacting relationship manager

2.4%

2400

$120360

Accuracy of good faith estimate (for mortgages)

1.5%

1500

$75225

Accuracy of closing documentation

2.3%

2300

$115345

Critical-to-customer attribute

Notes: 1 Represents incremental stated loyalty when operational performance is improved to consistently meet breakpoint
2
Based on estimate of 100,000 loan originations per year and an average loan balance of US$50,000 to 150,000 for loans funded
3
Potential customers are not added for all attributes to avoid double counting.

..


Banks Shift Gears in Drive for Top-Line Growth

service) will differ depending on the customer

segment and the geographic region. In these
situations, companies may want to opt for a series
of operational improvements, some more structural and policy-driven than others. For example,
the bank in our example introduced electronic
applications, changed its underwriting guidelines
to meet customer profiles, and instituted a fasttrack process to expedite cycle time. Other
improvements included low-cost quick wins

such as staying in touch with customers and

managing their expectations.
Clearly, in institutionalizing a customercentric mindset the bank earned significant
rewards. But the effort was not a sure bet.
It required operational coordination and cooperation among functions and depended on
developing new working approaches, tools and
skills to support the increased complexity of
decision-making based on economic value.

..

Conclusion
The global banking landscape will remain extremely competitive and fast-paced in the coming years,
in large part due to the structural realities of low growth and inflation. Given these realities, of all
the issues banks are addressing, organic growth through improved customer management tops most
CEO agendas.
Can a financial institution use organic growth to outgrow its peers? Of course. But it requires
methodically cultivating loyalty in customers. Customer loyalty is about a dialogue; about listening
attentively and then responding with insights, products and services that are both personally and
financially appropriate. Success in customer loyalty rests not on piecemeal tactics, but rather on the
quality of interaction over the life of the relationship.

A.T. Kearney is an innovative, corporate-focused management consulting firm

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established in 1926 to provide management advice concerning issues on the
CEOs agenda. Today, we serve the largest global clients in all major industries.
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