The answer to PSD II: Relationship Banking – How Banks can Finally Increase Product Penetration and Customer Loyalty!

March 12, 2018

Die Antwort auf PSDII: Hausbankmodell

With the rise of agile fintechs and the attack on data sovereignty with PSD II, the customer relationship is under threat. A new holistic, customer-oriented approach to price, product and sales management, called “relationship banking”, allows banks to sustainably increase product penetration and customer loyalty.

Only banks that have good relationships with their customers will be successful in the long run

There have been various approaches to improve cross-selling over the last few decades – lifecycle models, one-stop finance, and computer-based sales, just to name a few. Nonetheless, for the vast majority of banks, the average product penetration with customers lingers between two and three products per customer. Other than their main anchor product, e.g. a current account, most customers only have one additional product, such as a savings account or a credit card. Unfortunately, these products are the easiest to substitute, so there is a high risk of customer churn with PSD II– particularly when low interest rates lead to the introduction of new fees.

At the same time, it is generally known that most people have low product coverage in regard to insurances, investments, and retirement planning. While customers are aware that they are lacking certain products and that banks offer them in their portfolios, they remain reluctant to buy more products. Why is this?

  • Customers are overwhelmed by variety and complexity of products
  • Customers don’t understand their financial needs well enough
  • Customers initially only see costs and no gain, as the benefit only comes later
  • Customers see their financial provider as replaceable and want to remain flexible
  • Customers are negatively biased against the image of sleazy, pushy sales people
  • Sales forces are incentivised using profit targets but not customer goals

Holistic customer orientation using the “relationship banking” model makes it possible to overcome these obstacles and win customers for the long term. The goal is for customers to recognize their financial needs and actively request products. To achieve this, six success factors apply:

1. Structured and focused product offering in line with customer

Conventionally, banks have offered more than a hundred different products to their private and corporate customers, sometimes with only a handful of users per product. Portfolios should be systematically analysed and streamlined or extended as necessary, following a rigid inventory approach. Important for this holistic approach is having a clear focus on customer needs in order to create an offering that is both simple and comprehensive. This allows banks to differentiate themselves from the competition and ensure the customer feels well served.

2. Communication that focuses on customer needs and uses psychology

When speaking to the customer, simplicity and customer orientation are key. Our brains use two systems for thinking: system one is intuitive, simple, and fast; and system two is rational, complex, and slow (Daniel Kahneman “Thinking fast, thinking slow“ 2011). All too often, Banks target system two through detailed explanatory texts, scaring customers away. Simple communication using system-one thinking engages and excites people, e.g. by using pictures instead of text. Similarly, the choice of words should be customer-oriented. Simple stories focusing on customer needs help them recognise their own needs and find the right products in a playful way.

Abbildung 1: Beispiele für digitale Hausbank-Applikationen
Abbildung 1: Beispiele für digitale Hausbank-Applikationen
Figure 1: Examples of digital applications for relationship banking

3. A clear task and reward logic at the moment of sale

The guiding effect of discounts is unchallenged in the retail arena. Banks are also able to use this effect without the risk of a price war. The key here is not to reward customers for single purchases and instead to reward customers for reaching a certain level of product coverage. This enables banks to prevent short-term cherry-picking and avoid regulatory issues with prohibited purchase incentives. Moreover, this type of system rewards loyal customers fairly and provides incentives for them to increase their own product portfolios. One way to implement this kind of system would be to offer differentiated discounts on core products, such as current accounts, as customers are also more willing to accept price increases when they see a fair way to obtain a better price. Discounts with regional partners help to differentiate further from the local competition.

4. Unique benefits and rewards for differentiation

Corporate customers are considered particularly rational decision makers. In theory, small monetary incentives for higher product penetration should not influence their decision making. Surprisingly, the individuals making the decisions within these companies still succumb to psychological effects. The keyword here is status. By combining product penetration with status levels and rewards, customers are subconsciously given an incentive to increase product coverage. The effect is particularly strong if unique non-monetary rewards are applied. Offering tangible status cards and status-based events in addition to rewards is generally well received. Combined with an attractive, differentiated core product and exciting digital applications, the bank will win new customers and keep its existing ones.

5. Data-based individual communication on all channels

The banking industry is somewhat of an exception, as it continues to use surprisingly low-quality data and its deployment of data in sales is similarly limited. Forerunners in terms of data usage, such as Amazon, provide excellent examples of how customers can be motivated to buy – banks certainly have some catching up to do. Simply repeating the same messages, such as “only one more star for a higher status” or “other customers chose product x!”, on all channels (mobile, online, mail, and meetings with the financial advisors) generates an implicit desire to close these gaps. Customers are also triggered to reveal product they have with other providers and to switch them to the system provider, i.e the bank as the main gatekeeper of the customer relationship.

6. Customer-oriented data-based sales management

Motivating customers to buy makes the sales process easier, as it involves “pull” rather than “push”. Too often, sales goals are focused on short-term profit and activity-based goals have no effect on long-term profit. Shifting focus to the customer secures long-term success. With goals that increase customer provision (e.g. measured in status levels), the customer relationship improves. Acting in a way that is transparent to customers and perceived as being in their interest will enable sales teams to sell more, while primarily contacting high-potential customers will ensure sales time is used as effectively as possible. Finally, increasing data transparency and changing the weights of status-points for certain products optimize the way sales are monitored and managed.

Successful cross-selling through holistic customer focus

With the rise of agile fintechs and data transparency with PSD II, the focus of sales in the banking sector is changing and competition is becoming a much more pressing issue. Customers are now attracted to whoever provides the best customer experience. Banks have still an opportunity to leverage their sales power, databases, and existing customer relationships to take them to the next level. A holistic customer focus combined with effective, data-based sales and attractive, digital communication is key to improving cross-selling, strengthening customer relationships, and increasing profits.