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Tuesday, April 23, 2013

Banks Should Revamp Their Value Proposition

By Jon Hughes

This post is part of Gallup's ongoing series on the shifting landscape for financial institutions. It provides insights into channel optimization, emerging customer behaviors and preferences, product penetration and relationship growth, engaging the most critical affluent and business customers, and reshaping banks' overall value proposition.

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The world is tough for banks right now. But it’s not just interest rates, increased regulations, and tepid demand causing the problems. It is also that banks are struggling to fashion a value proposition that resonates with customers in today’s environment.

Many customers do not highly value their banks’ products and services. Gallup asked bank customers whether they agree or disagree that their primary bank provides an “excellent” overall value for the rates and fees they are charged -- nearly four in 10 either disagreed or were neutral. This finding, from Gallup’s 2012 Retail Banking Industry Survey, reveals that banks need to do a better job of helping their customers see the value in what they provide.

This is certainly a challenging task for banks at this time. New regulations are forcing some to consider new and often unpopular revenue sources, such as fees or service charges.

The challenge with these new revenue sources, of course, is that customers will only pay these fees if they believe that they are receiving something of value from the bank in return. This can become doubly difficult when banks decide to impose new fees or charges on offerings that were once “free” -- like checking accounts. By re-imposing fees for many of their checking accounts, banks not only have to justify the value of those accounts, they also have to overcome the customer’s aversion to losing a benefit they once had free of charge.

Here’s a real-world example. Several banks in late 2011 implemented new monthly debit card usage fees in response to the interchange-slashing Durbin amendment. Customers were extremely upset and made their opinions known via social media, customer surveys, and actual behavior like closing accounts. Before the end of 2011, every bank that implemented the fees that year had reversed them.

Though hard, by helping their customers see value in what they provide, banks will reap major rewards. Customers who strongly agree that their bank provides an excellent value are much more likely to exhibit a host of positive behaviors. Specifically, they are substantially more likely to open new accounts with their bank, increase balances at their bank, open an investing account, obtain financial planning, and recommend their bank to others.

Bank executives and industry analysts have many competing visions as to how banks might define or redefine the value they provide to customers, as they look for additional room to charge, or charge more, for bank products and services. These visions include everything from emphasizing the ubiquity and convenience of existing branch and ATM networks, to implementing fees on new product and service offerings with specific customer benefits, to focusing on areas of perceived differentiation like superior customer service.

While there is no silver bullet, there are broad guidelines banks should consider when talking with their customers about products, services, fees, and overall value:
  • Even though branches, ATMs, and call centers aren't going away any time soon, many customers do not find these traditional retail distribution networks to offer them much value.
  • Customers don't care about macroeconomic or regulatory reasons banks may give for new fees or charges; ideally, banks should link fees and charges to specific, meaningful customer benefits.
  • It is easier to impose fees and charges on new, rather than existing, products and services; if banks add fees and charges to existing products and services, they should associate these fees with new or enhanced benefits.
  • When customers think about the value they receive, they focus close to home, including the rewards they may or may not receive from their bank, their bank’s willingness to lend, and the rates associated with their various deposit and credit products.
  • Bank employees play a critical role in helping reinforce their bank's value proposition when they handle difficult conversations about fees or lending decisions with transparency, clarity, and options for the customer.
We'll have more to say about these guidelines in the coming weeks and months. It's an important time for banks, and the successful ones will be able to navigate this evolving value landscape smartly, nimbly, and with their customers’ needs in mind. 

Jon Hughes has specialized in financial services consulting for the past 15 years, working with many of the top 20 U.S. retail banks to design and implement large-scale performance management systems. Jon also serves on Gallup’s financial services practice research team, tasked with leading Gallup’s internal financial services research, analytics, insights and communication.


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