Banking Credit Union Customer Centric Transformations Customer Centricity Insurance Microfinance

How Customer-Centric Strategies Pay Off Financially

Committing to customer centricity will almost certainly require a financial institution to invest up-front to support the strategy – an investment that will pay off over several years. Prior to making the decision to begin a customer-centric transformation, it is important that CEO’s have a clear view of how the strategy will result in a stronger financial position for the firm. 

Unlike transactional based product strategies (you buy from me – I make money and you get immediate value), customer-centric strategies create firm value over time through an increase in customer commitment and trust that should result in higher and more consistent revenue streams (we build a strong relationship and over time that will be more valuable to both of us).

Building deeper relationships can require investments in brand, increased staff time from more consultative sales, employee recruitment and training, and increased service levels. Customer-centric strategies also often require significant customer facing technology improvements. Compounding financial pressures, firms moving to customer centric models may have temporary revenue dips as high-pressure sales tactics are dropped in favor of more consultative, needs based approaches. The strategic bet placed by organizations moving to customer-centric strategies is that by making these substantial investments, they will create higher and more sustainable firm financial value over time.

Customer Value Identification

While much has been said about measuring loyalty and engagement, the actually work of identifying how stronger customer commitment actually ends up with money in the bank is often where firms fall flat in their planning. Many FI’s intuitively believe that customer-centric models will be more sustainably profitable, yet CEO’s fail to push management to identify exactly where the profit will come from.

Over the last 20 years, we at RedPort have been working on customer centric transformations around the world and in our experience, the value financial institutions reap from customer-centric strategies is realized in the following ways:

  • Trusting relationships reduce product acquisition costs – Building deep and trusting relationships with the right customers pays-off over time as trusting customers are much less expensive to market and sell to. Compared to the cost of selling to a new or lightly commited customer, convincing somebody who already deeply trusts you to buy the next product is much cheaper and easier.
  • Strong relationships decrease consumer price sensitivity – Loyal customers don’t shop as much – and even if they do, they will buy your products at a slightly higher price as the built up trust adds value beyond product price.
  • Customer-centric companies enjoy higher average relationship balances – Happy customers bring more wallet share resulting in higher balances.
  • Customer-centric strategies may result in lower loan or claims losses – Customers that are emotionally committed to their financial institution may be more inclined to pay off loans first, or to think twice about a marginal claim that may impact their relationship.
  • Loyal customers tell their friends about the FI – Customers who trust their financial institution can be counted on to refer their family and friends (especially when you ask them to!) – creating new valuable customers who require little or no marketing spend to acquire.
  • Customer-centric companies experience less attrition – Deeply devoted customers are both emotionally and physically tied to the firm and will be much less likely to take their business elsewhere – maintaining an annuity stream throughout the customers’ extended lifecycle.
  • Customer-centric FI’s deep understanding of changing customer needs reduces competitive pressures – Customer centric companies that truly undertand, and that have the capacity to act on their customers changing needs can reduce or even negate competitive pressure. By anticipating customer needs and being there at the right moment, a deal may be done before competitors have a chance to pitch.
  • Customer-centric strategies can often build on their reservoir of trust to extend the scope of their business to new products and services – Once trust is gained, existing customers will often be much more open to trying additional products and services.
  • The annuity streams from customer centric companies can be more valuable at exit – Financial institutions with deep, lasting relationships become strong annuity streams that are often valued higher than transactional companies with similar revenues.

To illustrate these sources of value, we at RedPort often use a visual model that we call the “Customer Value Pool”. This model allows clients to visually picture how all of these value creating activities work together.

To understand our model, envision the “flow” of customers through your organization. New customers come in, buy products, cost money to serve and eventually leave – moving the level of the “value pool” up and down. During their tenure, customer-centric financial institutions have the opportunity to manage customer value at all stages and decide which levels to pull to maximize the pool.

Putting Numbers to Paper

After identifying the potential sources of value, firms that are serious about moving to customer centricity should conduct an assumption based modeling exercise to understand exactly which of these levers will create the most value in their particular situation.

The following simple example shows a firm with 50,000 target segment relationships that each have a yearly value of $1000. By thoughtfully developing realistic assumptions, firms can model the expected return from moving to a customer-centric business model.

Example: Midsized Bank

In this very simple example, our bank expects to create $161 in average customer value or $5.5 million in incremental annual “money in the bank” for their $2.5M investment in customer-centric capabilities.

Deciding to invest

We at RedPort strongly believe that for many financial institutions, a properly executed customer-centric strategy will provide them with the highest sustainable returns over time. However any strategy shift is risky and the decision to move to customer centricity is a firm wide (and probably board level) commitment. Before making this commitment, it is imperative that financial institutions have a clear understanding of exactly how they will add to the bottom line.

Steve Hodgson is Managing Partner and President of RedPort International, LLC

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Banking Credit Union Customer Centric Transformations Customer Centricity Insurance Microfinance

Five Reasons Customer Centricity Fails

Since 1995 the Partners at RedPort have been working on Customer Centric business models in financial institutions across the globe. From the biggest banks and insurers like US Bank and USAA, to mid-sized credit unions, MFI’s and consumer lenders – we have seen countless customer centricity efforts – many which were successful – and some that were not .
In our experience, when customer centric efforts fail, they fail for one of 5 predictable reasons:

1. The FI doesn’t make a hard choice on “which customers” it is centered around

2. The company does not organize around these customers

3. The company doesn’t have the P&L mindset to manage customers as the profit center

4. Technology doesn’t support customer centricity

5. The company doesn’t measure customer profitability accurately

Segment Choices: Many customer-centricity efforts start with good intentions. Management, realizing the limits of product or channel centric models decides to migrate the FI to customer centricity. However, centering strategy around customers demands a sober choice of which customer groups the company will serve – and which groups they will not. These choices can be bound by demographic or psychographic traits, profit potential, geography or other factors – but choices have to be made or the company ends up trying to be all things to all segments – and invariably fails. (When we evaluate FI’s we ask for detailed descriptions of target customer segments. Truly customer-centric organizations can answer this at all levels of the organization.)

Organizational Alignment:  Other FI’s fail to organize their structure and incentives around customers. Many supposedly customer-centric companies continue to be organized by product (especially big insurers and banks), or channel. Additionally, the incentive plans of these FI’s often are based on product goals vs. goals that have to do with customer satisfaction, revenue penetration of customer segments or other customer oriented goals. (Clear sign – if your product managers control the P&L’s you are not customer centric!)

Product or Channel P&L Mindset: One of the first things we look at when we audit an FI is how they measure themselves. If the monthly management reports are product oriented (how much did we make on the P&C business?), or channel oriented (how much did we make in our direct channel?) we can be sure that the FI is not truly managing around customer segments. Committed customer centric companies measure their success on customer metrics like customer satisfaction, profit per customer and potential value of the customer pool. (Our trick is to ask “how is the business doing”?  If the answer is “we beat our mortgage goals”, or “combined ratios are too high”, we know the FI is managing products first. If instead we hear “customer satisfaction is up”, or “we increased customer profitability 10% last year” we know the company is managing customers first.)

Product Centric Technology: The technology stacks of many FI’s are built “product up” vs.  “customer segment down”. This is especially prevalent when the scope of the FI’s offerings span traditional product categories.  Banks often use different systems to support deposits, consumer lending, mortgages and plastic. Insurers often have different systems for their P&C, Life and Health businesses.

Truly customer-centric companies have IT infrastructures that enable management of customers first. World-class customer-centric IT stacks are much more than disparate CRM systems and data warehouses tied to core product admins systems. Instead customer-centric architectures are purposely designed to enable both seamless customer interactions that cross channels and product lines, AND enable the FI to manage customer data and insights in a holistic way.

Customer Profitability: Finally, we see supposedly customer-centric FI’s that do not have a clue about the profitability of individual customers or customer segments. FI’s that are committed to customer centricity must prioritize developing accurate, granular and flexible customer profitability systems – enabling them to manage all of the levers of value including measuring the impact of channel migration, qualifying the value of increased satisfaction, accurately measuring increases in product usage.

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Customer Experience 2020: The Emergence of the Autonomous Financial Institution

In the age of self-driving cars, additive “3D” manufacturing processes, and self-flying delivery drones – how can Financial Institutions capture similar opportunities enabled by continual advances in sensors, artificial intelligence and autonomous process automation?

Financial institutions need deep analytics solutions that:

1.  Start by allowing the definition of the desired business goal like growing market share, decreasing customer churn, increasing profitability – or even simultaneous combinations of these strategies.

2.  Use Artificial Intelligence in a self-learning mode, to continually optimize to the desired goal.

3.  Combine Machine Learning and AI algorithms with effective data management – all linked with opti-channel delivery channels. This gives FI’s the ability to execute sophisticated, automated marketing and customer management programs, with few manual processes and minimal human intervention.

4.  Take advantage of more and more value-creating opportunities (sales, marketing, financially accretive service interactions), to be more responsive to changes in the market place, and to significantly reduce marketing expenditures.

To achieve Customer Experience 2020, FIs need to:

  1. Develop insights faster and be smarter about prioritizing their customer interactions to achieve their financial and other goals…
  2. Act on those insights right away and be more responsive to changes in the marketplace – beating competitors to market opportunities…
  3. Automatically learn from the insights and be more efficient and operate more effectively at the lowest possible cost levels…

To learn more about Customer Experience 2020 and automated FI’s download our full white paper on our main website.

To learn about RedPort’s deep learning analytics technologies click the links below:

SmartBanker: Self-Learning analytics and marketing platform for banks, credit unions and consumer lenders.

SmartInsurer: Self-Learning analytics and marketing platform for insurance providers.