By Bob Souster

For many years, banking organisations placed great importance on signing up new customers. The conventional wisdom in marketing suggested that once a person became a customer they would probably stay for life, and in doing so influence others, such as their family and friends, to bank with the same institution. To a large extent this remains true: people do not instinctively shop around for banking products and services in the same way as they might for fast-moving consumer goods and gadgets, nor are they as susceptible to fads and fashions. It takes some effort to persuade a person to switch their bank account from one provider to another.

Customer inertia breeds complacency. Satisfied that many existing customers are here to stay, it is too easy to assume that resources should be focused on attracting new ones. This serves a purpose, as there is much benefit to society in persuading those who do not avail themselves of banking services to do so, yet it is important to accept that banks owe ongoing obligations to their existing customer base. This article argues that this is becoming a more difficult task and will become more difficult as time passes.

Banks owe obligations to their stakeholders: those who are affected by and can affect the bank. These include customers, shareholders, suppliers, the community and even the physical environment. Yet, to paraphrase the famous author George Orwell, “All are equal, but some are more equal than others”. Mindful of the deficiencies exposed by the global financial crisis, many regulators responded by insisting that customers must be prioritised. This is strongly reflected in Bank Negara Malaysia’s document, Fair Treatment of Financial Consumers, which sets down the outcomes that should be pursued by providers of financial services. In short, customer interests should lie at the heart of everything that a bank does, not just when the customer arrives but throughout the relationship. Increasingly, doing the right thing is doing what is right for customers.

This is no easy task. It was once accepted that customer needs could be predicted by extrapolating a typical customer life cycle. Young customers would need a current account and access to modest levels of credit. Over time, they would then need personal loans, mortgages and investment products. Going into their senior years, customers might need to plan their lives around retirement and inheritance. It is no longer straightforward, if indeed it ever was.

Consider some trends.

+ The perception of the typical family has changed:

Society has become more diverse. Marketers used to write of a typical family of “two adults and 2.2 children”, representing an average family living an average life in average circumstances. This no longer applies. Faced with financial pressures, young people may defer their aspirations of home ownership and even defer their plans to have a family at all.

+ The ‘job for life’ has long gone:

While it was once possible to join a company in a modest job for a modest salary and progress over a period of 40 years until receiving the gold watch given by a grateful company upon retirement, few people can now guarantee that they will stay with a company as a lifetime commitment. The labour market is now more fluid and most employees now accept that they may have to move to achieve their career aspirations. Many leave the employment market altogether to become individual entrepreneurs, capitalising on their own creativity and ingenuity instead of making others rich. Some succeed spectacularly, while others fail in equal measure.

+ Models of rational behaviour do not always apply:

Economic theory suggests that consumers will base their choices on price, income and personal tastes and preferences. Yet demand for products and services will often be determined by a wide range of influences, including subjective bias, rules of thumb and the advice of peers. How many people choose a bank based on the bank chosen by their parents or friends, without exploring the options available to them? In the past, it has been possible for banks to capitalise on this as a ready source of new business. It is also a reason why some less efficient banking organisations have been able to recruit new customers over long periods of time despite the existence of competitors with better products and services.

Customer inertia also plays a part. For example, in return for financial assistance by the UK government after the global financial crisis, Royal Bank of Scotland plc agreed to encourage its business customers in England and Wales to switch to alternative banks, yet many did not do so even when offered incentives of up to GBP2,000. Busy customers may not be inclined to shop around, as time costs money. Banking products are difficult to compare and are sometimes complex, and these factors can inhibit consumer decisions.

These market imperfections are not unique. Information asymmetry and behavioural economics apply in all industries, not just banking, but they have to be understood.

+ The role of technology:

In recent years, a new breed of player has emerged in the world of banking and finance. Heralded generically as ‘fintech’, these are a diverse set of organisations whose capability lie in the management of big data and applications of advanced communication technologies. Their core competence is lifestyle management, based on analytical capabilities that are highly responsive to changing customer needs. Such is the threat of fintech that many banks have now developed their own fintech models, or in some cases partnered with companies with fintech specialisms, in order to build new business models.

Yet at the same time, technological advancement creates new problems. Not all customers are technologically literate, and some who believe that they can cope with new ways of conducting their financial affairs may fall victim to criminals and scammers who seek to deprive them of their wealth.

Implications

The only constant in a period of rapid change is change itself. The survival and prosperity of any business depends on its ability to change with the shifting demands of society. This implies a need for a holistic approach to customers and a proactive approach to existing and new customers.

Banks are faced with enormous challenges. While the coronavirus pandemic may have hastened the migration towards online banking and away from personal transactions, they should also be conscious of threats such as the dilution of traditional sources of funding (due to low interest rates), changes in demand for conventional credit products and (eventually) the development of digital currencies managed by central banks.

This writer was once asked to write a book on marketing and the commission was politely declined. The reason given was that marketing is about asking what customers want, delivering what customers want and then repeating the exercise continuously over time, so to extend this simple concept over 300 pages was disingenuous.

Doing the right thing for customers is not as easy as it seems, but organisations that are able to adapt to these new realities are those that will continue to prosper.

Robert (Bob) Souster is a Partner in Spruce Lodge Training, a consultancy firm based in Northampton, England. He lectures on economics, corporate and business law, management, corporate governance and ethics. He is the Module Director for ‘Professionalism, Regulation and Ethics’, a core module of the Chartered Banker MBA programme at Bangor University, Wales.