Customers Switching Their Bank Accounts
Modern economy is a complex system, each element of which is closely related to another and plays an important role. One of the most important roles in the modern world is played by the banking system, which ensures effective development of economic relations and normal functioning of the economy as a whole. In fact, the main functions of banks imply the provision of the following services:
- Accumulation of free cash;
- Conduction of the investment resources to business entities and population in general;
- Emission of monetary resources into the economy.
Nowadays, it is impossible to imagine a harmoniously developed state without an extensive network of banks. Indeed, banks play the role of hearts in the modern world. They help ensure effective development and establishment of economic and political power of each state. Banks are supposed to be effective economic instruments in the hands of governments. They are an integral part of modern money exchange processes, and their activities are closely linked to the needs of economical reproduction. They are at the center of economic life, serving the interests of producers, linking with cash flow industry and commerce, agriculture, and population. Throughout the world, banks have considerable power and influence as they wield enormous money capital, flocking to them from businesses and companies, traders and farmers, and state and private individuals (DeGregor 2011). In essence, the banking system is the heart of economic organism of any country.
Money and credits give the public a considerable incentive to develop, generating a system of special relationships with a special order and a high degree of organization. With their help, humanity becomes richer. However, sometimes the inept handling of money and the inappropriate use of rules for their handling may inevitably cause negative effects. Banks help accumulate temporarily unused idle funds, reallocate resources as well as use them in the most effective way. Money and credits are supposed to be significant factors in the growth of social wealth. They can make nations more prosperous, managing the money and credits on the basis of clear rules as well as providing economic growth and development.
The abovementioned implies that banks have a specific purpose and perform a specific function. They are supposed to be the regulators of monetary relations that perform multiple operations being subject to economic laws as well as general and specific legal requirements.
However, the modern trend in the banking industry implies the tendency of clients to switch, i.e. change their bank accounts. The key drivers that stimulate current situation and support customer retention in the variety of banks are defined.
Bank Switch as the Global Phenomena
According to a recent report of the World Bank, more than 8 million customers in the USA moved to other banks because of the high level of dissatisfaction with their banks in 2012. The report noted that millions of customers who changed the bank, did not accept the level of service provided by the banks in general as well as the level of customer service provided by banks’ staff in particular. According to the report, in the past four years, the number of so-called ‘defectors’, i.e. people who changed their bank accounts, has almost doubled.
In 2008, the rate of customers who have changed their banks was only one out of ten, which is about 8 %. However, last year, the number of those who changed their bank increased to 18.3 %. Results of a recent survey showed that about 50 % of bank switching last year happened because costumers did not feel that they are valued by the bank and found that bank’s employees were not able to help them. Many respondents, i.e. 40 %, also claimed that they did not accept the quality of call-centers in their banks (Harvey 2012). The abovementioned factors were among the most important reasons that made customers to change their financial institutions.
Another report showed that banking customers, for example in the UK, are expecting a much less formal and more user-friendly approach in their banks. They do not want to be treated as one of majority. People claim that bank’s employees show too impersonal attitude when dealing with customers. However, bank employees argue that they are often unable to communicate with customers one-on-one because they cannot get the information about each of them. The representative of Coleman Parkes says that banks should be more careful as they cannot afford mistakes. He adds that serious mistakes and poor customer service are the main reasons for customers to consider the changing the bank.
The abovementioned tendency is caused by an ineffective treatment of customers. However, it should be mentioned that in the communication between companies and consumers there are special moments that in the long-term perspective define whether the company gains confidence and sympathy of customers or not. It is important to understand when it happens and teach employees to behave appropriately in crucial moments so that consumers have a positive perception about services delivered by the bank.
The success of this strategy primarily depends on the ability to interact with consumers, build relationships with them in long-term perspective and thereby increase sales and profits. Most of the banks invest heavily in loyalty programs and in the system of customer relationship management (CRM) as well as in the improvement of service quality. Nevertheless, most of their undertakings do not provide the desired results. According to a study Forrester Research, only 10 % of those surveyed executives and directors believe that results of their organizations after the implementation of CRM are in line with the forecasts or even surpass them. It is important to have a closer look at key drivers that led to such negative results.
Bank Switch Key Drivers
According to the abovementioned fact, in the bank industry, the relationships between consumers and bank employees often are not warm or sincere. This is the prime fact that leads wary or skeptical consumers to change their financial institutions and not turn into loyal fans of the brand. The banks that are known as the providers of an impeccable service are well aware that internal communication occurs in particular at emotional level. It means that loyalty of consumers can be won by a competent behavior of bank’s staff in unpleasant circumstances, i.e. when the client is upset by the loss of a credit card or he/she does not know how to manage their savings. The ability of the staff to find the right way out of the extraordinary situation depends on their ability to take into account emotional state of the consumers and to put client’s interests above their own and those of a corporation.
In fact, it can be said that managers do not know how to change the style of an established employee interaction with customers. Some of them have a mistaken belief that the nature of emotional perception, which American psychologist Daniel Goleman called emotional intelligence, is put in people from the moment of their birth or is formed during childhood and there is nothing one can do about it. Others make a mistake trying to predict spontaneous situations and draw up a detailed plan of action. Thus, they are deprived of the direct relationships with customers so that employees do not have an opportunity to express natural human sympathy. As a result, leaders themselves impede employees to behave appropriately and develop their emotional intelligence. If the banks learn how to develop and maintain high level of emotional intelligence of their employees, they can significantly increase their chances for the favorable outcome.
What is the relationship between emotional stress, unusual situations, and decisions of consumers to use services of the specific banks? According to McKinsey research conducted in Europe (Belgium, Germany, Italy) and the US, there exist definite points that determine the ratio of customers to use services of specific banks as well as the benefits, which are received by the banks if their employees behave properly in different situations. It implies assistance in those situations when the consumer is faced with a problem such as payments by check, a loan, or consultation on any other financial issue. Many banks mistakenly pay too much attention to routine operations but they cannot or do not consider it necessary to express themselves in the meaningful situations for clients. In fact, the relation between the level of emotional intelligence of ordinary employees and the amount of profit received is obvious. Over 85% of customers satisfied with the service usually buy more products offered by the bank or keep more money in it. As for the clients who were left with a negative impression after the communication with the bank, they usually reduce their investments by about 70 % or switch to another financial institution (Jeucken, 2013). However, people express their distrust not necessarily immediately or explicitly. They can gradually transfer their assets to other financial institutions. For example, the North American bank found clear correlation between customer loyalty and value creation when it started to search for the causes of significant differences in the performance of their offices. The gap between the best and the worst divisions, based on customer retention and proportion of customers’ investments into the bank divisions exceeded 50 % (Jeucken & Bouma 2012).
By conducting a survey, the bank revealed a distinctive feature of the top branches, i.e. the ability to correctly solve customers’ problems and the willingness to put their financial interests ahead of the purposes of the division. The growth of customer loyalty immediately led to an increase of investments into banks’ products. A similar picture is observed by studying European banks. Customers who are satisfied with banks’ services trust the bank 20 % more of their funds comparing to customers whose experience of interaction with the bank was negative (Rand 2012).
The outflow of deposits from customers increases pressure on the banking system of the region, threatening banks with a perspective to lose the key source of funding. For example, Spanish banks’ deposit base declined in the third quarter of 2012 by 48 billion Euros, or 2 % according to the data received from the Bank of Spain. The outflow of customer deposits simulates a commercial bank to increase borrowing from the large financial institutions such as European Central Bank (ECB). For instance, the abovementioned situation stimulated financial institutions of Spain to attract ECB loans of 247 billion Euros in a period of one week in the amount that exceeded the previous borrowing in 2011 (230.3 billion Euros). Meanwhile, banks in countries such as Portugal and Italy tend to retain their customers and attract the new ones by offering a record high rates on deposits. This makes banks’ own financial expenses on operations quite high. According to the Italian Central Bank, the average interest rate on deposits in the country rose by 2.6 % in September 2012 and almost doubled the rate offered at the beginning of the year. It means that banks are forced to be creative in their advertising campaigns and raise funds on deposits. In addition, concerns about financial condition of European countries and banks exacerbate the banking sector, and the access to capital markets is getting increasingly worse for banks. The abovementioned factors make large investors refuse to lend to European banks.
Nevertheless, the experts point out that banks are still stored with billions of dollars, so deterioration of the situation could become a threat to the banking sector. According to their estimates, in the next year European banks will have to repay bonds worth about 800 billion Euros. If banks are not able to refinance this debt either through placement of bonds or by raising funds on deposit, they will have to reduce the volume of lending, which is a negative signal for both regulators, i.e. the policymakers, and investors.
In order to retain their costumers, banks should perform according to the main principles of the client-bank interaction. In fact, under the principles of mutual relations with clients, there are understood basics of bank performance, i.e. the rules they should adhere to. These principles affect both sides, i.e. the customer and the bank itself. These principles include the following (Greenberg 2010):
- The principle of mutual interest. It involves maintenance of the relationship between the bank and the client on the basis of compromises and concessions made according to real possibilities of transaction participants.
- The principle of payment. It means that the bank is a commercial unit and the main motive of its activity is not only to provide services, but also make a profit. However, this principle should be implemented with consumer interests in mind.
- The principle of rational activity. This is the prime principle of banking. However, it is related not only to the work of the bank, but also to consumers. The client refers to a bank as he/she wants to rationally organize his/her financial resources.
- The principle of liquidity. Liquidity as the ability to pay for obligations is equally important to the bank and the client. In their relations with each other, both parties expect to maintain their liquidity. The task of the bank is to maintain its own liquidity and to provide the liquidity to the client, supporting it with necessary means of payment.
- The principle of mutual obligation. It requires consideration of interests of the opposite side in the process of mutual agreements creation. In fact, the obligation in the relationship of the parties is important for any business entity or the person that hopes to succeed. This principle is closely connected with the principle of trust. It is more often associated with lending relationships, which are often treated as a relationship of trust between the lender and the borrower.
- The principle of responsibility. Banks and customers are responsible to each other in the event of default of the agreement.
- The principle of non-intervention. It means that the bank and the client are independent entities and they may require only thing which the agreement provides, but do not have the right to interfere with daily activities of each other. An exception is made only for those customers and banks that are shareholders, i.e. those who have shares in the capital, allowing them to monitor work of the other side.
- The principle of partnership. It means that the bank and the client are in relation to each other as partners. Every customer, regardless of their geographic location, determines which services of the bank to use. This equally applies to a bank that chooses its clients. The bank works for a client, promotes high quality services and assures competitiveness of its services as well as obtaining of the income sufficient for reproduction. In fact, provision of the client with income helps the bank implement its own and customers’ commercial interest by receiving compensation in the form of interest on loans or commission.
- The principle of contractual relationships. It means that banking activities such as credit, deposit, and settlement are issued by the contract. In a more general sense, from the point of view of the law, we can talk about the principle of lawfulness. The bank and its customers carry out their activities in compliance with statutory regulations.
- The principle of differentiation. It relates to individual customers. The nature of circulation of capital and the direction of customers cause uneven approach to their credit and settlement services as well as particular organization and management of the bank.
It is also possible to define ethical principles of interactions with the clients. Under the code of ethics of banking, the basics of professional ethics of banks’ activities imply the following (Dickie 2012):
- Understanding of civic and professional duty to society, the state and its the citizens;
- Recognition of the equality of the participants involved in the sphere of banking and respect of their rights and legitimate interests;
- Maximum transparency of the performance with the absolute reliability in maintenance of confidential information and information, which constitute the bank secrecy;
- Constant improvement of corporate governance and mutual control for the integrity of banking market participants;
- Provision of reasonable riskiness of banking operations;
- Full responsibility for the quality and results of the banking services;
- Opposition to the fair competition, unfair participants of banking industry and publicizing of the violations of the Code;
- Participation in the opposition to the receipt of the money obtained from crime and other illegal activities;
- Refusal to cooperate with corporations and individuals with inappropriate business and legal reputation.
For a long time, banks did not care about their image, placing their own objectives on the first place in advertising campaigns and marketing services with the idea that business exists solely to make a profit. Nowadays, the image can be defined as one of the main reasons for success or failure in business and public life. It is particularly important for large and well-known financial institutions such as banks. They are constantly monitored by the public and by the media. Therefore, the banks are constantly working with public opinion, using both their own PR units and engaging external agencies (Rand 2011). In fact, any large and influential bank must earn the trust of society and customers, in other words, to have a positive image. An increased competition in the market of financial services made the management of banks think about how they are perceived by a society. There is no secret that creation of the positive image helps the client to perceive the organization and services it provides as something different from other similar services and banks.
Regardless of the desires of both banks and professionals in the sphere of public relations, an image is an objective factor, which plays an important role in the evaluation of any social phenomenon or process. An image of the organization exists in the minds of people. If positive image is not maintained, there is no guarantee that it will be appropriate and beneficial to the bank. It means that formation of the positive image for the bank is the process more convenient and less time-consuming than the process of fixing unfavorable image which was formed spontaneously. This implies that effective costumer service is the key factor, which can help not only create the positive image and establish customer loyalty, but it can also help avoid costumers switching their accounts to other banks.
In fact, it is possible to outline the following facts (Rand 2011):
- Loyal customers can increase the profit of the bank by 25-85%;
- Loyalty of existing customers will cost from 5 to 11 times cheaper than the process of attraction of new customers;
- Satisfied customers are more likely to recommend the products and services of banks to their relatives and friends;
- Customer loyalty does not allow competitors to grab the share of the market;
- 94-96% of dissatisfied customers will switch to another bank, and 91% of them will never come back;
- Dissatisfied customer will tell about problems that emerged in his relations with the bank for at least 8-10 people;
- An increase in the customer loyalty by only 5% can provide increase in profits by 80-100%.