October 2016

Will customer experience make or break banks?
“Customer satisfaction”, “customer experience”, “sentiment”, “loyalty”, “net promotor score” – any way you put it, the public perception challenge facing Australian banks is more complex, critically important and closely scrutinized than ever before. Much more is on the line than simply profitability, return on equity (ROE) or executive remuneration as highlighted by the House of Representatives Standing Committee on Economics Big Four banks inquiry.

Treasurer Scott Morrison asked the committee to hold annual public hearings with the four major banks, focusing on financial market developments, prudential regulation, funding costs, pricing decisions and their ongoing responses to major customer issues.

The timing of the inquiry is crucial, with Wells Fargo addressing its damaging ghost account scandal, Deutsche Bank straining under the weight of a US Justice Department fine following the investigation into residential mortgage-backed securities and RBS addressing serious misconduct concerns raised from the group’s post-GFC Global Restructuring Group (GRG).

Banks are responding actively, seeking to repair trust, improve transparency and return banking to the ranks of trustworthy professions such as doctors and teachers. It is estimated that Deutsche Bank, HSBC and JPMorgan cumulatively allocate over US$1 billion annually towards compliance and regulatory requirements. As a proportion of the total 175,000 Big Four employees, dedicated compliance staff are expanding rapidly towards 15 percent.

Chaired by David Coleman MP, the review emphasised the pressing need to clearly outline and communicate internal risk management and misconduct procedures. Additionally, these must be linked expressly to bank executives core remit in order to reinforce accountability. David Coleman stated that “the hearings provide an opportunity to scrutinise the banks on how they balance the needs of customers, shareholders and the broader community.”

A major query hung ominously over each hearing - what material outcomes will we see from this exercise? Is the likelihood of a Royal Commission diminished or supported? It appeared various measures had already been drafted by the government and these were essentially tested for suitability in the inquiry, such as a dedicated banking tribunal (as separate to the existing Financial Ombudsman Service currently dealing with customer complaints), mortgage ‘tracker’ accounts, increased competition and account portability.

Each Big Four CEO expressed contrition for ‘bad customer outcomes’ across their financial planning, wealth management, markets, insurance and credit card arms. Long term market share and revenue impacts linked to adverse customer experience are well understood...in the sense of ‘ignore at your peril’. Needless to say a ‘trust gap’ was acknowledged by Westpac CEO Brian Hartzer as opening up between banks, the community and customers.

To the dismay of Australian CFOs and corporate treasurers, endemic business banking dissatisfaction, particularly among small businesses, was not addressed in nearly enough depth or detail. Elevated business credit spreads relative to mortgage rates were highlighted however credit accessibility, administrative burdens, working capital constraints and several other key growth barriers were overlooked at a time when the government is under increasing pressure to progress the National Innovation and Science Agenda.
  East & Partners enhanced Business Banking Index (BBI), combining customer sentiment and proprietary segment-based credit demand ratios, reveals Micro businesses’ and SMEs’ hold an antagonistic relationship with their bank overall. Overall ratings for loyalty, satisfaction, empathy and advocacy are critically low at 11.6 and 14.8 respectively (where 10 = lowest to 100 = highest rating). Highly satisfied mid-market enterprises also display the highest credit appetite, operating a low DFDI ratio of 0.31 (depositing $31 for every $100 borrowed). In fact, one in ten small businesses now prefer not to deal with their bank at all according to E&P’s SME Transaction Banking program. This is a concerning new trend to be followed closely in upcoming rounds of research, highlighting small business owners overwhelming exasperation.

Methods applied to monitoring customer sentiment in many instances are inappropriate, inaccurate or misunderstood. In the age of ‘big data’, strategic decision makers are inundated with satisfaction statistics, survey results, primary research and analysis. Significant resources are applied to tracking historical trends, establishing current KPIs and forecasting future targets. Ultimately however they are not correctly ‘tuned’ to Australian businesses feedback and behavioural changes brought about by rapidly advancing digital technology and innovation. The problem is akin to capturing digital radio waves with a transistor radio.

The Net Promoter Score (NPS) has become a popular customer satisfaction monitor that tracks customer loyalty and is suggested to link closely with revenue growth. However, the NPS was criticised openly by the Parliamentary Inquiry, in particular Deputy Chair Matt Thistlethwaite MP, given many banks heavy reliance on this controversial metric. That criticism has been previously highlighted by a range of researchers including Morgan and Rego (2006) who said that the NPS performs worse than satisfaction. In their research paper they stated: “Our results indicate that average satisfaction scores have the greatest value in predicting future business performance…”

Although NPS operates effectively in other sectors, its focus on intent in banking and finance does not provide useful inferences because most firms fail to act upon these stated intentions. E&P’s BBI figures reinforce this fact, showing that the banking industry registers low or in fact negative advocacy. This factor also explains why the bank’s strong and well broadcasted retail banking satisfaction ratings do not necessarily transfer into commercial banking gratification. In many instances the same customer expresses high retail satisfaction but low business banking satisfaction.

The impact of technology is keenly felt by the banks and was referenced repeatedly in the inquiry. Digital innovation is driving bank and customer interfaces closer but also creating new ‘Fintech’ competitors. Commenting on 3Q 2016 results for Bank of America Merrill Lynch, CEO Brian Moynihan stated, “We delivered strong results this quarter by focusing on the quality of the relationships with our customers and clients. Our investments in innovation, including industry-leading digital banking capabilities, continue to transform how we serve our customers. This innovation across our businesses is benefiting customers and shareholders.”

In conjunction with regulators ASIC, APRA and the ACCC, the banks must incorporate business customers’ feedback more closely and take the initiative powerfully before the stretching ‘trust gap’ extends beyond the point of no return.

To find out more about how East & Partners can help, enquire now sian.d@east.com.au.
Correlation Analysis - Business Banking Sentiment and Credit Demand


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