“I was most concerned to hear of the error that has occurred. Obviously on this occasion we have fallen far below the level of service we are striving to achieve and which you have every right to expect. Once again, may I please apologise, and should you require any further assistance, please do not hesitate to contact me.” Well, well, the times they are a-changing indeed. Can this rose-scented missive have come from the same Lloyds Bank that only a few years ago was charging upwards of £30 for letters reminding customers about unauthorised overdrafts? It seems that bankers are finally beginning to wake up to the realities of relationship banking, and they are trying to be nice to people. The need for this has been driven home by growing constraints on both sides of the cost:income ratio. Many banks are unable to grow revenues except via expensive acquisitions, while at the same time they have pared their costs back almost to the bone. “It is clear that customers are getting wealthier and they are looking for a much closer relationship with their banks,” says Philip Middleton, head of banking strategy at KPMG. “Financial affairs are becoming more complex as the welfare state is being withdrawn. Customers need to do more of their own financial planning, they are looking for advice, and their banks are not supplying it. Retail banks have the advantage of long-standing relationships with their customers, which they are failing to exploit. They need to become more customer-centric.” At the moment, banks can easily end up sending life assurance mail shots to widows, or unsecured lending propositions to customers with £50,000 in their current account, and this kind of incompetence only reinforces people’s generally-held dislike of banks. So the banks are under pressure to put together a system to build loyalty and meet customer expectations. A good marker for a bank’s success in this ambition might be when people at dinner parties talk about it in the same way they discuss Virgin Atlantic or Singapore Airlines. Customer relationships become more important as financial services companies grow and the distinctions between banks and insurance companies become less and less important. Lloyds TSB could be held up as an example of a bank that in the past five years, through its acquisitions of Cheltenham & Gloucester Building Society and TSB Group, has expanded into a multi-faceted financial services organisation – and it now derives less than a third of its UK retail financial services income from traditional banking. Yet the group is still struggling to put together its IT platforms to enable it to achieve the kind of efficiency in customer segmentation and product tailoring that it needs. “If a bank can develop a database on its core customers it can more successfully target their needs,” says Ben Dutton, financial services analyst at market research group Datamonitor. “Developing new business areas depends on getting close to the customer, but in this banks are still way behind retailers like Sainsbury’s, which have been more successful at building up customer loyalty.” IT providers have stepped into the picture, promising solutions that, at the push of a button, will enable a branch manager to determine a customer’s credit-worthiness, insurance requirements and preference in toothpaste flavours. For instance, IBM recently launched DecisionEdge, a tool for relationship marketing that targets areas such as customer acquisition, segmentation and retention. The system is designed to help banks confront the problems of customer attrition (up to 25% annually in the US market), shrinking margins and demanding, price-sensitive customers. Most of the international consultancies, such as KPMG, have put IT packages of their own on the market. These systems have helped to bring home the importance of electronically stored data, especially for small local and regional banks that can apply them to a generally homogeneous customer base. Whether a customer always has an outstanding balance on his credit card, or pays it off every month, can make a difference on what APR and overdraft limits a bank should be applying. Big international banks, such as Chase or Deutsche Bank, normally buy various packages, customise them, and integrate them into their world-wide networks. It is worth noting, however, that banks are not falling over each other in a rush to roll out the red carpet to all and sundry. Progress in customer segmentation has revealed that on average about 20% of a bank’s customers provide 80% of its profits. Most banks would love to rid themselves of the dross and are attempting to do so through tactics such as segmented pricing. “They are also concerned with catching the next 20% to 30% who have the potential to be profitable, and this is where the battle is being fought,” says Matthew Czepliewicz, banking analyst at Salomon Smith Barney. “The fact is that the UK has made great strides towards closing the gap on relationship banking, particularly when you compare today’s level of service with that of ten years ago.” With everybody piling into the more lucrative end of cross-selling, which is mainly insurance and mortgage lending, there is a growing overlap in the range of financial services products available. But if the UK banks allow themselves to fall behind in meeting customer expectations, there is nothing to stop foreign competitors encroaching on their market via telephone or Internet banking. Growing customer sophistication is breaking down prejudices about entrusting money to foreign institutions, and the importance of the branch network has been on the decline for more than a decade. Once customers are regularly banking through the telephone and Internet, as they are starting to do in some northern European countries, geographical boundaries no longer mean much in terms of customer loyalty. Jules Stewart is a freelance journalist.
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