Reinventing Retail Banking Series

Rebuilding the Relationship Bank Delivering a complete customer experience

Produced by the Deloitte Center for Banking Solutions

Reinventing Retail Banking The traditional retail bank is at an inflection point. The needs and expectations of customers are changing as quickly as the competitive landscape. Customers are demanding seamless, multi-channel sales and service experiences and not consistently receiving them. Simultaneously, other financial institutions and non-traditional players are looking for opportunities to invade this space or to redefine it through disruptive innovation. The result is forcing banks to examine a more balanced, integrated approach to the customer experience and growth. In this series, entitled Reinventing Retail Banking, the Deloitte Center for Banking Solutions looks at how banks must move beyond simply meeting their profit and growth goals to delivering more completely on the customer experience. Specifically, these articles will focus on: understanding customers needs; identifying emerging and profitable customer segments and strategies to attract them; creating the multi-channel banking experience; and refining branch layout, design and utilization to increase customer loyalty. Together, these reports provide financial institutions with a roadmap for navigating the increasingly complex challenges that new customers and market conditions are creating, as well as understanding the lessons learned from other industries that have successfully crossed the bridge to the future. In this report, we analyze the needs, preferences, and satisfaction of customers in banking in comparison to the retail and wireless industries and provide perspective on how to improve the customer experience.

As used in this document, Deloitte means Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

Rebuilding the Relationship Bank Delivering a complete customer experience

Foreword

The banking industry is undergoing a period of unprecedented turmoil in the financial markets and the broader economy. With investors more risk averse, the reliance on ever-more complex products to fuel profits has come to an end. As a result, senior management is now considering the business models that will likely be needed to prosper in the new environment, and recognizing the need to go back to basics. They are renewing their focus on the importance of developing strong relationships with retail customers, who provide from half to three-quarters of the net operating revenues in large banks.1 While many banks have recently made progress in upgrading customer service, some still have work to do to forge strong, long-term customer relationships. To aid in this effort, the Deloitte Center for Banking Solutions offers the present report of the findings of our examination of the quality of bank customer relationships and some thoughts on what might be required to rebuild the relationship bank. The conclusions are based on our survey of more than 2,000 U.S. consumers, as well as on Deloittes client experience in working with many banking institutions of all sizes. To identify innovative approaches that banks should consider in strengthening customer relationships, we also examined companies in other industries that are highly rated for providing a high-quality customer experience. We trust that the present report will be helpful as you refocus your banks approach to building profitable customer relationships.

Sincerely,

Don Ogilvie Independent Chairman Deloitte Center for Banking Solutions May 2009

Deloitte Center for Banking Solutions

Rebuilding the Relationship Bank Delivering a complete customer experience

Key findings

Many banks have made substantial progress in improving customer satisfaction. Yet, as a number of banks have grown in scale and complexity, some have become more focused on products, leaving their customer relationships in need of a major overhaul. At a time when current business models are threatened, banks may face a significant challenge to get back to basics and rebuild their business models around customer relationships. The main findings of our research support this proposition. Banks need to build stronger customer relationships Fifty-seven percent of the consumers surveyed were very satisfied with their primary banking relationship. (See Exhibit 1.) However, only 36% of those surveyed were very satisfied with their primary bank when it came to understanding their financial needs and recommending appropriate products and services. (See Exhibit 2.) More than 80% of respondents who experienced a major life event over the last year were not contacted by their bank. However, 70% of those who were contacted liked the experience. Most respondents considered the bank where they had their checking account as their primary bank, but they often had more complex products with other financial providers. Only seven percent of respondents reported they had investments with their primary bank, while 33% had investments with other banks. Banks lag behind Customer Experience Leaders Seventy-four percent of those surveyed were very satisfied with their buying experience from a Customer Experience Leader, slightly higher than the 68% who were very satisfied with their last experience purchasing a banking product. However, consumers were more likely to buy their next product from the same Customer Experience Leader than from the same bank.

Almost half of the consumers surveyed reported they were extremely likely to buy their next product or service from the same Customer Experience Leader. Yet, only one-third reported they were extremely likely to buy again from the same bank. (See Exhibit 3.) For those who bought online, 53% reported they were extremely likely to buy again from the same Customer Experience Leader, compared to just 30% who were extremely likely to buy from the same bank. Many customers favor one-stop shopping with larger banks Approximately half the consumers surveyed preferred one-stop shopping, citing convenience, being treated as a valued customer, and preferred pricing as their reasons. Yet, despite their stated preference for one-stop shopping, 73% of consumers surveyed had relationships with two or more banks in addition to their primary banking relationship. This was particularly true for wealthier customers. Roughly half of the consumers surveyed preferred dealing with a large national or regional bank, with only 22% preferring a small, local or community institution. Banks have done better with their branch and telephone channels than online Banks and Customer Experience Leaders received similar ratings for the branch/store and telephone channel experiences. In fact, bank staff was rated as being more knowledgeable. Yet, Customer Experience Leaders generally outperformed banks in the online channel.

Deloitte Center for Banking Solutions

Rebuilding the Relationship Bank Delivering a complete customer experience

Executive summary

The recent upheaval of the financial markets has raised awareness that banks may need to focus more on building profitable, long-term customer relationships to raise margins and reduce risk. Building such relationships begins with customer service, where banks have made important strides in recent years. To create strong, sustainable relationships, however, institutions may need to cultivate deep knowledge of their customers and build a more customer-centric business model to better deliver a total customer experience. A consumer survey of more than 2,000 consumers by the Deloitte Center for Banking Solutions suggests that to achieve this, work remains to be done. Only 57% of the consumers surveyed indicated they were very satisfied with their primary banking relationship. In addition, only 36% of them were very satisfied with their primary bank when it came to understanding their financial needs, and recommending appropriate products and services. For example, just 18% of consumers who had experienced a major life event in the last year such as marriage, having a child, or retirement were contacted by their bank regarding their changing financial situation. Customer Experience Leaders Companies from retail and other industries that deliver a superior customer experience can serve as a model for banks. Survey respondents rated their "Customer Experience Leader" relationships highly and reported they were more likely to engage in repeat buying with them. (Please see the sidebar, "Customer Experience Leaders" for a list of companies recognized for providing an excellent customer experience.) Nearly half of surveyed consumers reported they were extremely likely to return to a Customer Experience Leader for their next similar purchase, while only one-third were extremely likely to return to their bank for their next financial purchase. This disparity between Customer Experience Leaders and banks is even greater when customers used the online channel, indicating that the banking customer experience is inconsistent across channels. Refocusing on the customer may require fundamental changes to the way banks operate. Banks should consider three fundamental actions to strengthen their customer relationships:

reate a customer-relationship business model. C A customer-relationship business model should create a single organizational owner for a customer relationship, regardless of that customer's products or their channel preferences. Product-based silos within the organization may not be effective to strengthen customer relationships. In addition, the customer experience may need to be more consistent and connected across multiple channels. Develop and utilize deep customer knowledge. Financial services institutions may have more information about their customers than companies in almost any other industry. However, it appears to be rare for banks to use this information to deepen their customer relationships. Micro-segmentation can help pinpoint customer preferences and styles. A customer-value metric may enable banks to identify the customers and segments that deserve the most investment. Paying more attention to triggers and major life events may help banks to identify and anticipate their customers' needs.2 reate relationship-based services and pricing. C Banks can use their formidable pools of data to target customers with relationship-based services and pricing. By using insights into customer needs, banks can further deepen their relationships by creating valuable service offerings for their customers. Creating a relationship bank may require institutions to reduce product silos and integrate IT systems to achieve a more complete view of the customer relationship and its lifetime profitability. As the typical banking model shifts and institutions reduce leverage in response to the financial crisis, retail customer relationships have moved to center stage. Banks may need to go beyond the progress that they have made so far in improving customer service and sales to focus on customer retention and the entire customer relationship. The fortunes of banks in the coming years may increasingly depend on their ability to build strong, lasting customer relationships by enhancing the consumer experience.

Deloitte Center for Banking Solutions

Rebuilding the Relationship Bank Delivering a complete customer experience

A renewed focus on retail customer relationships

No longer able to depend on securitization and leverage to generate profits, banks should look for new ways to reignite growth.
A new financial services model is emerging from the credit crisis, creating an opportunity to review retail banking business models. Many banks may need to increase capital ratios.3 As a result, a number of financial institutions may have to rethink their business strategies and operating models to prosper in the new environment. No longer able to depend on securitization and leverage to generate profits, banks should look for new ways to reignite growth.4 In their efforts to reinvent their business models, banks may return to the central business of providing core banking products to retail customers. Retail banking activities have typically accounted for 50-75% of net operating revenue in large banks, and institutions will be looking to maximize the value of their retail banking franchises.5 Having expanded into ancillary businesses, financial institutions may now divest units not considered core to their business strategies. Banks are likely to focus more on their core customer-oriented activities and reduce risk by only providing credit to customers who have very strong credit histories or with whom they also have a deposit relationship. The emerging business model may place a premium on building strong customer relationships. Underpinning this approach will be the opportunity to rebuild customer trust, which may have been damaged by the financial crisis. The largest banks may also find that their increasing size will make it even more challenging for them to make the changes required to shift from a product-centric to a relationship-centric approach. Banks that have recently made acquisitions should also consider working actively to discourage their newly acquired customers from defecting to other institutions.

Deloitte Center for Banking Solutions

Rebuilding the Relationship Bank Delivering a complete customer experience

From delivering service to building relationships

Banks are making progress in upgrading customer service. In its 2008 Customer Experience Index, Forrester Research ranked 113 large U.S. firms across 12 industries on how well customers believed each company met their needs, was easy to do business with, and offered an enjoyable experience.6 The 10 major banks included in the report ranked fourth out of 12 industries, but they accounted for six of the seven most improved companies since the 2007 report. Yet, none of the 10 major banks examined were ranked among the top 25 companies for customer experience. As important as it is, improving the customer experience is not only about attracting new customers. It is also about retaining existing customers. TowerGroup estimates that providing a superior customer experience can reduce customer attrition in financial institutions by 30%, representing an estimated $360 billion in assets.7 Exhibit 1: Banking customer satisfaction
Base for satisfaction with primary bank = Relationship respondents Base for satisfaction with bank buying process = Buying process respondents

Although progress has been made to improve service, many banks may need to do a better job at building enduring customer relationships. In Deloittes survey, 68% of the consumers who purchased a banking product within the last 12 months reported they were very satisfied with the process. (See Exhibit 1.) However, when consumers were asked to rate their primary banking relationship overall, the percentage who were very satisfied dropped to 57%. This means that almost one-half of banking customers may be at risk. Exhibit 2: Satisfaction with primary banking relationship
Percentage very satisfied Base = Relationship respondents

Introduces innovative new products/services

26%

Promotions Understands my needs and recommends appropriate products/services Competitive prices, fees and interest rates Able to obtain information about new products/services

27%

36% 37% 43% 44% 44% 44%

80 70 60 50 40 31% 30 22% 20 10 0 8% 57% 68%

Can use cell phone to conduct transactions/access account information Wide selection of products/services Can understand features, fees and interest rates Knowledgeable staff Responsive customer service

50% 54%

Little or no sales pressure

60%

6%

Can access information about accounts/products Overall satisfaction 0 Source: Deloitte Center for Banking Solutions 10 20 30 40 50 57% 60

68%

Very satised

Somewhat satised

Neutral

Satisfaction with primary bank

Buying process bank

70

80

Source: Deloitte Center for Banking Solutions

Deloitte Center for Banking Solutions

Rebuilding the Relationship Bank Delivering a complete customer experience

Similarly, many of the attributes where consumers were most often very satisfied with their primary bank address aspects of customer service such as: access to information about products/services (68%), little or no sales pressure (60%), responsive customer service (54%), and knowledgeable staff (50%). (See Exhibit 2.) However, banks may need to go beyond simply providing good service to demonstrate that they understand the evolving financial needs of their customers. Many banks have focused their efforts at cross-selling products and achieving a larger share of wallet, which can indeed improve customer retention. However, a bundled customer and a relationship customer are not necessarily the same. Although both types of customers should display positive metrics for share of wallet,

customers who are satisfied with their relationship should exhibit even greater "stickiness," make more referrals, and potentially pose less risk to the institution. In fact, only 36% of the consumers surveyed were very satisfied that their primary bank understood their needs. One example is the challenge of managing a major life event such as getting married, having a child, nearing retirement or moving to a new home. Only 18% of the consumers surveyed who had experienced such an event within the last 12 months reported that their primary bank had contacted them to suggest appropriate products. Yet, 70% of those contacted by a bank liked it. Achieving this level of knowledge about the lives of customers can serve to build strong, lasting relationships.

Who are the Customer Experience Leaders? Survey respondents were asked about their experience when purchasing a product within the last 12 months from a list of companies that have been highly rated for providing a superior customer experience. These companies were identified by a variety of sources including the American Customer Satisfaction Index and Consumer Reports. Respondents were asked about their buying experiences with the following companies: Amazon.com Apple Banana Republic Barnes and Noble Best Buy Borders Costco Dell Computer Gap JCPenney Kohls Lands End LENOVO L.L.Bean, Inc. Macys Newegg.com Nordstrom Office Depot Overstock.com Target Southwest Airlines TomTom 1-800-Flowers

Deloitte Center for Banking Solutions

Rebuilding the Relationship Bank Delivering a complete customer experience

Learning from the leaders

Companies with a record of providing a superior customer experience offer a good starting point for innovative practices that banks should consider as they work to strengthen customer relationships. In Deloittes survey, consumers were asked about their experience when purchasing products from companies that have been highly rated for their customer experience, which we have termed Customer Experience Leaders. (See the sidebar on page six Who are the Customer Service Leaders? for a list of these companies.) Retail companies in particular can provide important models for fostering strong customer relationships. The retail industry was ranked first for providing a positive customer experience by Forrester Research in its 2008 Customer Experience Index, capturing seven of the 10 highest ratings.8 When asked about their experience with buying products over the last 12 months, 74% of the consumers surveyed by Deloitte were very satisfied with the experience of buying from one of the Customer Experience Leaders, slightly higher than the 68% who were very satisfied with buying their last banking product. The gap was far higher for consumers who had purchased both products online 80% reported they were very satisfied with their experience of buying online from a Customer Experience Leader, compared to 66% who were very satisfied with

buying a banking product online. For the web sites of the Customer Experience Leaders, consumers were much more likely to be satisfied with their ability to find information easily, understand the product features and price, and complete the transaction. Beyond the quality of the buying experience, consumers were more loyal to the Customer Experience Leaders than they were to banks. Almost half of the consumers surveyed reported they were extremely likely to purchase the next similar product or service from the same Customer Experience Leader, compared to only one-third who reported they were extremely likely to return to the same bank for their next financial product. (See Exhibit 3.) Reflecting the greater satisfaction that consumers had with purchasing online from Customer Experience Leaders, 53% of those surveyed who had purchased online reported they were extremely likely to buy the next similar product or service from the same Customer Experience Leader compared to just 30% who expected to buy again from the same bank. (See Exhibit 3.) In the quest for customer knowledge and intimacy, banks should consider approaches that have been used successfully by companies in other industries, as well as by other financial services firms, to build loyalty and trust by providing an exceptional customer experience.

Exhibit 3: Likelihood of buying next product/service from same company Base = Buying process respondents All Channels
Banks 33%

Online
Banks 30% 30% 60%

33%

66%

Customer 48% Experience Leaders 0 20 Extremely likely 40

33% 60 Very likely 80

81% 100

Customer Experience 53% Leaders 0 20 Extremely likely 40

33% 60 Very likely 80

85% 100

Source: Deloitte Center for Banking Solutions

Deloitte Center for Banking Solutions

Rebuilding the Relationship Bank Delivering a complete customer experience

A framework for building enduring customer relationships

Although unintentional, some financial institutions may have lost focus on the central importance of the customer relationship. Banks have been organized by product lines and channels, which may even compete for the customers attention rather than supporting each other. A bank may know which products have been most successful but fail to realize that its most profitable customer groups are shrinking rather than growing. A bank may need to view each customer based on his or her entire relationship with the institution rather than from the perspective of a single channel or product. Similarly, if a customer researches a product at a branch but then decides to purchase it through the call center or online, the efforts of the branch employee to provide helpful advice and information should not be overlooked simply because the final sale occurred through a different channel. Transforming a bank into a relationship-centric institution may require fundamental changes across the enterprise. In this process, banks can benefit by considering the innovative approaches that have been employed by companies in other industries, as well as by financial services institutions to enhance the customer experience. Create a customer-relationship business model Banks have historically focused on cross-selling and customer relationship management (CRM) tools to improve their relationships with customers. Although these approaches have been useful up to a point, for the most part they have not contributed to a customer-focused business model. A customer-centric model typically has a single point of ownership for each customer relationship, regardless of the products in the customers portfolio or the channels the customer frequents. A Center of Excellence for product design can create products and bundles as a service to the relationship owners. Channels cease to align to products, and instead serve as mechanisms through which the relationship owners can reach customers. (See Exhibit 4.) Another aspect of a customer-relationship business model is clarity and consistency of the customer experience. Since almost all retail bank customers use multiple channels to interact with their bank, a relationship bank may need to design these channels to provide a consistent and integrated level of service. Many banks may market specific offers that are not available in all channels, provide a vastly different experience in a call center than a branch or may not provide visibility into customer interactions across all their channels. In addition to clarity and consistency, a relationship model may need to simplify product offerings and develop relational incentives rather than product-based incentives, especially in face-to-face customer interactions. Getting branch associates to sell new products may require one or more of three ingredients. First, the associates may need confidence that the product will be provisioned and fulfilled successfully. Second, the process may need to be more simplified, so associates can easily execute it. Third, team and individual incentives may be required to encourage sales and customer retention. Given the inherent challenges to this level of change, few banks have embraced such a complete approach. However, the United Services Automobile Association (USAA) is one financial institution that has succeeded by organizing around customers. A diversified financial services company serving U.S. military and government employees, USAA has re-aligned its organization and service model to fully support customer needs. The firm offers products that are easy to understand, it provides a high, consistent level of service, and it has designed a customer-experience model that supports a highly mobile military customer base. The net result has been increased profitability among the highest in the financial services industry and a strongly rated customer service model.9 (See USAA - A case study in customer advocacy on page nine.)

Deloitte Center for Banking Solutions

Rebuilding the Relationship Bank Delivering a complete customer experience

USAA A case study in customer advocacy United Services Automobile Association (USAA) is a Fortune 500 company providing insurance, banking, and investment services to people and families that serve, or have served, in the U. S. military and other selected federal agencies. A mutually owned enterprise, USAA customers are members of the company, sharing in the profits. Historically, the company had been organized around products, with two divisions: auto and the multiple-line division, which handled all property insurance. There were also many smaller departments, which were often run by managers who did not communicate well with each other and fought perpetual turf battles. Little horizontal communication existed.10 Organized around customers Recognizing that its product-based organizational structure was not effective, the company decided to reorganize. Policy-writing and servicing employees were divided into five groups, with each group assigned responsibility for one-fifth of the members. These groups then competed with each other to raise the level of customer satisfaction, replacing product groups that had competed with each other for the attention of customers.

Targeted channel strategy USAA is a direct sales organization, relying on a fully integrated web site and on sales and marketing staff in its call centers. It employs professional financial advisors to provide free financial advice to ensure their members fully understand all their financial needs from basic banking and insurance services to savings and retirement needs. The company provides its members one-stop shopping, based on a lifetime financial plan. Customer-focused technology Given their military duties, members often have little time to contact the company about their financial needs. Instead, USAA has developed technology to address member needs quickly and completely either through its web site or call center. USAA has a CRM system that integrates all member contacts, product information, documents, and correspondence across all lines of business into a company-wide system that is summarized in a single browser-based launch screen.11 Results USAAs profitability is among the highest in the financial services industry. It is one of only two property and casualty insurance companies to receive the highest rating of all three major rating agencies.12

Deloitte Center for Banking Solutions

Rebuilding the Relationship Bank Delivering a complete customer experience

Exhibit 4: Organization of the relationship bank A relationship bank operates with a distinctly different operating model one that is more integrated, puts the customer first, and shares data and services. Current operating model Separation into silos Disparate customer experience Redundancies in services and infrastructure New operating model Organized around customers Consistent customer experience Cross-sell opportunities enabled ationalization of products, services, and infrastructure R

Mass market

High worth Channels CRM

Mass afuent

Small business Channels CRM Mass market Product development High worth

Bank Channels CRM Mass afuent Small business

Product development Shared services

Product development Shared services

Product development

Product development center of excellence

Shared services Transaction services Infrastructure backbone

Shared services

Transaction services

Transaction services Infrastructure backbone

Infrastructure backbone

Source: Deloitte Consulting LLP analysis

Develop and utilize deep customer knowledge Banks can strengthen relationships with their customers by developing a deeper understanding of their needs. As noted above, only 36% of the consumers surveyed by Deloitte were very satisfied that their primary bank understood their financial needs. Banks may need to decide which customers or customer segments are most important to them and develop an intimate knowledge of their preferences and financial requirements. Further, banks should attempt to understand the changing needs of their individual customers as they move through the various stages of life. Banks may need to be prepared to shift from

a relatively light-touch relationship to a deeper advisory model, as a customer confronts more complex financial decisions later in life. The irony of the need to develop customer knowledge is the fact that banks may readily have access to more information about their customers than firms in almost any other industry. While many banks have built sophisticated data warehouses to collect and analyze this information, far fewer have used this information to proactively understand customer behavior in order to make offerings that can expand and retain key relationships.

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Deloitte Center for Banking Solutions

Rebuilding the Relationship Bank Delivering a complete customer experience

Segment customers by lifestyle Customer segmentation is a well-known approach to understanding the needs and preferences of thousands, or millions, of customers. Sometimes segmenting a customer base by traditional demographic categories like age or income can have important implications for marketing and product development. For example, research by the Deloitte Center for Banking Solutions has found that Generation Y consumers (born between 1982 and 1995) are more likely to be skeptical of traditional marketing, comfortable with technology, and willing to switch banks in search of lower fees or better service.13 Further, members of Gen Y are just beginning their financial lives so forging a relationship today has the potential to create a customer for life. Apple has special appeal to Gen Y consumers. The Apple stores have an open plan, a pressure-free sales environment, and employees skilled in offering advice to tech-savvy younger consumers. The firm has also designed products that appeal to the Gen Y lifestyle: iPod Touch

offers the latest technology and its lightweight laptops are easy for students to carry between classes. Apples fun, hip marketing campaigns are consistent with their focus on younger consumers. As a result, Apple stores generate more sales per square foot than most other retail brands, including Tiffanys.14 Banks may also need to go beyond demographic variables to define segments based on an understanding of customer lifestyles. For example, marketing to a segment such as professional women is likely to incorporate different messages and product offerings than communicating to stay-at-home moms. Citigroup (Citi) has created a membership program, Women & Co, targeted to the growing segment of busy professional women who are the CFOs of their households. The program provides access to finance professionals, offers classes on financial issues, and hosts special events on financial themes. (See Women & Co Targeting women for financial services below.)

Women & Co Targeting women for financial services According to a survey published by Women & Co, a membership service provided by Citicorp (Citi) that provides financial education and related resources for women, 63% of affluent women consider themselves the CFO of their households.15 As a group, women control 51% of U.S. wealth16 and own 20% of firms with revenues exceeding $1 million.17 They account for 80% of consumer purchasing decisions, and are more apt to pay household bills, make plans for college savings, and have primary responsibility for the financial care of aging parents.18 Several major financial institutions have launched programs targeted to women including Zions Bank, Cascade Bank, and the Royal Bank of Canada. One of

the most extensive programs is operated by Citi, which launched Women & Co five years ago. Women & Co brings together a network of financially minded women, and couples the power of education with the strength of a support system to help them achieve their financial goals. The membership program has its own dedicated web site, www.womenandco.com, which offers financial information and tools, invitations to seminars and networking events, and access to professionals in such areas as tax, law, child care, elder care, and real estate. Results According to Citi, Women & Co members tend to be "stickier" customers and use 15% more products from the bank even than its valued Citigold customers (those with $100,000 or more in assets with the bank).19

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Rebuilding the Relationship Bank Delivering a complete customer experience

A customer value score is at the heart of any effective customer relationship program. It can help a bank to determine the appropriate level of service, pricing, discounts, and channel usage.
More sophisticated segmentation can take into account factors such as the depth of the relationship, key financial needs, and lifestyle as indicated by their financial profile and buying habits. It can also incorporate such factors as customer profitability, long-term growth prospects, risk of attrition, and credit risk. Customer decision-making habits can also be identified by sophisticated segmentation. Careful customer segmentation by lifestyle and preferences can provide guidance to customer representatives on the most appropriate level of service, products, and pricing to offer to individual customers. A customer value metric is a critical building block in the effort to create a customer-relationship business model. Best Buy identifies which customer segments are most profitable for specific stores and then analyzes their demographics and sales information to characterize their preferences (such as price conscious or gadgetfriendly). The employees in each store are realigned to target the segments most important to that location. The store layout and lighting are modified to appeal to the target customer segments, store employees are educated on the topics that these customers are most likely to ask about, and store departments highlight products suited to these segments. For example, a store targeting young customers interested in the latest technology and gadgets may offer sections where they can try products like Dance Pad and have home theater experts available.20

Build a customer value metric Most banks have far more sophisticated metrics for products and lines of business than they do for customer relationships. What is needed is a metric that defines the overall value of the customers relationship based on the revenues and costs of the services provided, the channels used, and the overall risk of the relationship. A customer value score is at the heart of any effective customer relationship program. A customer value score can help a bank to determine the appropriate level of service, pricing, discounts and channel usage. It can also guide the allocation resources for the greatest return, pinpoint opportunities to achieve savings in processes, and align incentives with true customer value. Equally important, a customer value score can help the bank identify which customers to keep, which to let go, which products add value, which do not, which channels are the most effective in addressing customer needs, and which are superfluous. When building a customer value score, banks should consider four principles. ssign cost-of-capital to individual customers based A on risk-adjusted revenues. A customer value score starts by looking at the customer relationship in four areas: channels, products, risk, and post-sales support. Issues that will need to be examined include the number of customer interactions required to close, channel preferences, the frequency of order changes, and the type and frequency of post-sales support. egment customers by value. Banks should then S categorize customers by their value. The most valuable customers should usually receive more attention and service than less valuable customers. However, it is important to not only consider a customers current value, but also their expected lifetime profitability.

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Rebuilding the Relationship Bank Delivering a complete customer experience

rice by customer segment. Different customer P segments may have different pricing sensitivities. By adjusting for this, banks can increase profitability and customer retention. ont forget intangibles. Banks should also consider D the value that a customer may provide if they are in a strategic growth area or if they promote the bank to their friends and colleagues. Understand the evolving needs of individual customers Beyond careful segmentation, the ultimate goal is to develop insights into the evolving financial needs of individual customers. By analyzing customer data, banks can develop a profile of individual customer relationships and pinpoint likely changes in their financial situations. Predictive-analytic tools can also be used to reveal customer needs and behavior patterns that would otherwise remain unnoticed. These tools can be used to help identify customer segments that would be most likely to respond to specific marketing initiatives and cross-selling opportunities, as well as predict how customer needs are likely to evolve over time. Before banks can use customer information effectively, however, the first hurdle for many institutions will be to integrate customer information across product lines. Integrating disparate systems into a single data warehouse has proven challenging due to problems with data quality and inconsistent definitions. Retailers generally have greater success in this area. 1-800Flowers, for example, leverages its customer information to target marketing appeals to specific customers. When a customer places an order online or by phone, the company gathers demographic and behavioral information that is integrated across the firm. It then uses this information to recommend specific products, such as reminding customers about products that they bought at the same time last year, which may have been to celebrate a birthday or anniversary.21

By considering the entire customer relationship, banks can develop relationship-based pricing models that take into account such factors as customer profitability, depth of the relationship, transaction history, growth prospects, and risk profile.
For banks, one key use of customer information is to help identify when customers are experiencing a major life event such as such as getting married or approaching retirement age. Such major events often lead to important changes in financial needs as individuals save more, try to finance major purchases, or change their investment portfolio allocation. The Bank of Nova Scotia (Scotiabank) regularly monitors customer activity and contacts individual customers with large transactions that may indicate important life events. For example, a large deposit may be due to the fact that a customer has received an inheritance, is about to be married, or has experienced some other major life event. In these cases, a bank representative will contact the customer to confirm that an important event has occurred and understand its nature. Where appropriate, the bank representative will act quickly to recommend products that would be useful to meet their new financial situation. These targeted contacts are one of the reasons that Scotiabank is rated highly for customer service.22 Create relationship-based services and pricing If banks develop deeper customer knowledge, they can use these insights to target their most profitable customers. They may also have the opportunity to offer services and pricing that reflect the customers risk profile and profit potential, and to do so more accurately than their competitors. More desirable customers may perceive more value from such a customized approach than from the generic approach used by most institutions. The result could likely be deeper customer relationships.

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Rebuilding the Relationship Bank Delivering a complete customer experience

Banks may want to look more creatively at pricing and moving away from a flat-rate, one-size-fits-all approach. As they come to understand their customers more clearly, they may want to use these insights in their pricing models. By considering the entire customer relationship, banks can develop relationship-based pricing models that take into account such factors as customer profitability, depth of the relationship (i.e., the number of other products held and the amount of assets with the institution), transaction history, growth prospects, and risk profile. This information can also be used to decide whether to waive fees and the appropriate level of service to provide. Banks can also use customer knowledge to identify and align with customer segments and preferences. Customers in different stages of life or with different preferences have distinctive needs, and banks might design products, or bundles of products, that provide more value to specific customer groups. The product development process could incorporate customer insights through a variety of means, from traditional market research to newer forms such as social networking sites. Success in this area can build on itself, as banks stand to gain even more knowledge, produce better pricing and offerings, and generate more customer loyalty.

Fidelity has customized its products to appeal to the needs of customers in different life stages. Among its product offerings are income replacement for baby boomers nearing retirement, college savings plans for new parents, and high yield savings accounts for individuals just beginning their careers.23 Customized products and pricing can also introduce complexity to sales and service processes, particularly for branch associates. Banks that offer customized products may want to consider investing in technology and training to reduce or manage this complexity. Alternatively, banks may choose to introduce customized options only for profitable, well-understood customer segments. Employing relationship-based pricing can be especially powerful since the ability to obtain preferred pricing is one of the principal reasons that customers choose to consolidate accounts. Prior to its being acquired in 2008, Cleveland-based National City Bank began customizing fee structures based on a customers individual characteristics. In little more than one year after introducing relationshipbased pricing, the number of households with only a single product at the bank dropped by 70%.24

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Rebuilding the Relationship Bank Delivering a complete customer experience

Conclusion

Recent turbulence in the financial markets has changed the way banks view profitability. Banks may need to rethink their business strategies and operating models to ensure prosperity in this new environment. A number of banks may need to strengthen relationships with retail customers. Many banks may need to rebuild a relationship bank that is organized around customer relationships rather than products and channels. A key piece of this approach may involve a customer value metric that quantifies a customers short-term and long-term profitability. Understanding the changing financial needs of individual customers may help banks to create

customized solutions. Throughout this effort, banks should carefully consider innovative approaches to building strong customer relationships from companies both in financial services and in other industries. Banks may need to rediscover the fundamental importance of customer relationships while taking advantage of new opportunities to achieve an unprecedented level of customer intimacy.

Deloitte Center for Banking Solutions

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Rebuilding the Relationship Bank Delivering a complete customer experience

About the survey The Deloitte Center for Banking Solutions surveyed 2,138 U.S. adults in July 2008 on their attitudes and experiences with their banks. The survey was conducted online for Deloitte by Bayer Consulting. In the survey, 507 respondents were asked about their relationship with the institution with which they have their primary banking relationship (relationship respondents) and 1,631 respondents were asked about their experience when buying a banking product within the last 12 months (buying process respondents). Among those who were asked about their buying experience, 590 had purchased in a branch, 538 had purchased online, and 503 had purchased by telephone. Buying process respondents were also asked about their last experience using the same channel when buying from a list of companies that have been rated highly for providing a high-quality customer experience.

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Rebuilding the Relationship Bank Delivering a complete customer experience

Authors
Laura Breslaw Executive Director Deloitte Center for Banking Solutions lbreslaw@deloitte.com +1 212 436 5024 Amit Chaudhary Senior Manager Deloitte Consulting LLP achaudhary@deloitte.com +1 312 486 3733 David Cox Director of Research Deloitte Center for Banking Solutions dcox@deloitte.com +1 212 436 5805 Matt David Principal Deloitte Consulting LLP mdavid@deloitte.com +1 404 631 2068

Industry Leadership
Jim Reichbach Vice Chairman U.S. Financial Services Deloitte LLP jreichbach@deloitte.com +1 212 436 5730

About the Center

The Deloitte Center for Banking Solutions provides insight and strategies to solve complex issues that affect the competitiveness of banks operating in the United States. These issues are often not resolved in day-to-day commercial transactions. They require multi-dimensional solutions from a combination of business disciplines to provide actionable strategies that will dramatically alter business performance. The Center focuses on three core themes: public policy, operational excellence, and growth. To learn more about the Deloitte Center for Banking Solutions, its projects and events, please visit www.deloitte.com/us/bankingsolutions. To receive publications produced by the Center, click on Complimentary Subscriptions.

Deloitte Center for Banking Solutions

Don Ogilvie Independent Chairman Deloitte Center for Banking Solutions dogilvie@deloitte.com

Endnotes
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Timothy Clark, et al., The Role of Retail Banking in the U.S. Banking Industry: Risk, Return, and Industry Structure, FRBNY Economic Policy Review, Vol. 12, No. 3, December 2007. The provisions of the Gramm-Leach-Bliley Act and/or other laws and regulations may apply to the use of customer information, and it may be appropriate to consult with legal counsel before making use of such information. Alan Greenspan: Banks need higher capital ratios, Wall Street Journal, March 2009. HSBC chairman says high leverage is no longer acceptable, Bloomberg, May 2008. Bruce D. Temkin, The Customer Experience Index, 2008, Forrester Research Inc., December 2008.

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Timothy Clark, et al., The Role of Retail Banking in the U.S. Banking Industry: Risk, Return, and Industry Structure, FRBNY Economic Policy Review, Vol. 12, No. 3, December 2007. ancy Feig, Customer Management: Growing is KnowingThe best way for banks to maximize organic growth is to personalize the customer experience, Bank Systems & N Technology, October 2007. Bruce D. Temkin, The Customer Experience Index, 2008, Forrester Research Inc., December 2008. USAA Tops BusinessWeek's 'Customer Service Champs' List for Second Consecutive Year, Reuters, February 2008. Thomas Teal, Service Comes First: An Interview with USAA's Robert F. McDermott, Harvard Business Review, 1991. Greg MacSweeney, Serving Those Who Serve, Insurance & Technology, July 2003. USAA Fact Sheet. Catalysts for Change: The Implications of Generation Y Consumers for Retail Banks, Deloitte Center for Banking Solutions, 2008. Philip Elmer-DeWitt, Report: Apple Stores Outperform Best Buy, Saks and Tiffany, Fortune, January 2008. Women and Affluence 2008: A Generational Study, Women & Co, Citigroup, 2008. Women Customers: More than a niche segment, BAI, November 2007. Center for Womens Business Research web site, December 2008, http://www.nfwbo.org. Why Women Buy: Industry Experts Reveal What Drives the Purchasing Decisions of Women, Reuters, April 2008. Women & Co web site, March 2009. https://www.citibank.com/womenandco/pages/index.jsp Matthew Boyle, Best Buys Giant Gamble, Fortune, March 2006. Mila DAntonio, Courting Customers, 1to1Magazine, August 2006. Richard Lee and Jonathan Huth, Scotiabank Delights Customers with CRM Solution, TDWI Partners, November 2003. Fidelity web site May 2009, www.fidelity.com. John Adams, Relationship Pricing, Bank Technology News, February 2008.

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